A Primer on Insurance Products
by Peter Katt
This column provides practical commentary on insurance products, issues and planning that I frequently encounter. I hope you can use it as a quick check to see whether the insurance or proposals you encounter make sense.
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Long-Term Care Insurance
Long-term care insurance is a risk management asset designed to protect against the costs of needing care during old age. However, these policies do not cover medical or critical care situations. Long-term care workers assist insureds with the difficulties of daily living activities. Many plans pay a stipend, so it doesn’t matter whether the care is received in an institutional or home setting.
Under the right circumstances, long-term care insurance is a bargain—but there are some cautionary issues to be aware of. Long-term care premiums have risen considerably, and may continue to rise, causing long-term care owners to terminate their policies. A number of companies have left this market and more will. I believe companies didn’t think through long-term care insurance very well and now regret opening up this market. As a result, getting claim approvals could be tough, which is what happened with disability income insurance in the 1980s and 1990s.
I have found that some clients have a special fear of personally funding long-term care and are motivated to buy it regardless of cautions. Clients without these fears generally don’t buy long-term care insurance.
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Discussion
I would like comments on a reasonably new product called indexed annuities. The annuity is held for a fixed period, one is guaranteed to not lose principal, you will earn approx. 3 to 4%/yr(depending on the index), the money is held for 10 yrs and there is a penalty for early withdrawal.
posted 8 months ago by David Simmons from North Carolina
Ditto to David Simmons comment. I also would like to hear Mr. Katt's take on "Hybrid" Indexed Annuities. I have looked at a couple which seem to have merit for at least a portion of one's retirement savings. However, its hard to know what you don't know.... if you know what I mean. :)
posted 8 months ago by Alan Thelen from Michigan
Are you saying that the "risk needle" is higher for guaranteed universal life products because of a greater risk of carrier insolvency or because these products have lower cash values? Term products also have no cash value. Carriers generally offer an array of products of which guaranteed products are but one type. If a carrier were to go into receivorship, wouldn't it impact all the policyholders of that company (both guaranteed and non-guaranteed alike)? I would think that policyholders with guaranteed contracts would fair better in receivorship than those with non-guaranteed elements. Has there been any real experience with this?
posted 6 months ago by Craig Wilkey from Virginia
Disability insurance - why would it be key to forego the tax deduction? Wouldn't a person be in a much higher tax bracket prior to the disability? The chances of being disabled for most people is relatively small. Why not take the tax break now rather than pay tax now and probably never recover it? In addition, the disability will likely entail deductible out of pocket medical related costs and home care, so the tax burden will be far less than pre-disability.
posted 2 months ago by J Altenburg from New Jersey
Another helpful article on insurance would be to cover the topics of 1)modified endowment contracts and 2) Whole Life policies with adjustable term protection.
posted 2 months ago by M Pierce from Nebraska
I like whole life insurance. I have several policies performing very well.
posted 2 months ago by Gerald Bauer from Ohio
Katt gives a categorical imperative in his last two paragraphs concerning life settlements; he is just plain dead set against them. Too bad he doesn't advance the slightest reason for his prejudice other than claiming his clients find them "quite distasteful". He apparently doesn't realize that making money is sometimes exactly that but enterprising individuals do it any way they can.
posted 2 months ago by Tristan Argenti from Arkansas
I have an variable annuuity balance that has a significant untaxed gain and I don't plan on annuitizing the balance. Are there any alternatives to minimize the tax effects of my variable annuity.
posted 2 months ago by George Ross from Virginia
George-
Have you looked at a 1035 exchange? You can transfer the balance of your annuity to another annuity or life insurance contract. One option is single premium whole life, if you don't have any need for the cash value immediately. If you would like to use the cash value, a 7 pay policy with a lump-sum premium may be an option. Check with lawyer, accountant, etc of course.
posted about 1 month ago by John K from Kansas
*correction
Annuities can't be exchanged for life insurance, only new annuities or long term care.
posted about 1 month ago by John K from Kansas
In discussions of the tax consequences of annuities I wonder if the simplified method of computing the tax listed in the IRS brocure is used by those concerned. It seems to reduce the taxabe portion quite a bit.
posted about 1 month ago by G Muren from Connecticut
I would like to see a current analysis of what is happening in the area of Long Term Care. Lots of changes have occurred since you last discussed this area of insurance in any detail.
posted 25 days ago by Paul Campanella from Virginia
