What is this client receiving for the extra premium? No cap on the prescription drug benefit (her cap is $2000), and removal of the lifetime policy limit (her lifetime limit is $5,000,000).

Obviously this is a non-starter, and as health care reform continues to become implemented, it is most certain that premium costs will continue to rise.

Our office recently placed an indemnity (cash benefit) LTC policy with a C-Corporation with the first class problem of being successful. Always looking for legal ways to reduce gross profit, the two principles purchased LTC for themselves, 2 employees (one with a spouse) , and a policy for their mother for a total of 5 contracts. The plan purchased featured a monthly benefit of $12,000 and $1,000,000 of LTC Benefit.  It should be noted that this benefit is not considered taxable gross income to the employees.   As yearly premiums are not guaranteed, they chose to utilize the 10-pay option so that all contracts would be paid for in 10 years with pre-tax dollars. 10 year premiums spent will be approx. $300,000, for a total permanent benefit of 5 Million. It gets better. The clients chose to include a return of premium option in the contract.  This benefit triggers if the member dies.  All premiums spent (either full or less claims) will be returned to the individual owners’ beneficiary tax free.  The IRS classifies Return of Premium as a non-taxable event.  This is one of the few scenarios where a company can implement a benefit, and receive a double dip tax benefit.

While defined as a long term care contract, our office also utilizes this product as a Catastrophic Disability plan.  In Connecticut, the largest % increase of Medicaid Long Term Care expense demographic is males in their 20′s.   Most people think of LTC as a nursing home benefit, and few think of becoming permanently disabled at any age.  Having a plan in place to assist with the devastating results of either scenario is sound fiscal advice.

What I would like to do is explain exactly what a group or association life insurance plan is. Since there is typically little or no commission being paid to an insurance agent you would think that it would be less expensive. It might very well come out less expensive, although you will not know until they finish the underwriting process and give you a final price. If you qualify, for instance, as preferred, they will honor that level for as long as you have the plan. Group life insurance usually is “age banded” , which means that once you qualify, most of these plans have a price rise when you enter a new age band . This could be at five year intervals , like age 45, 50, 55 or some other inverval. If you are planning to keep this for 20 years, for instance, you should find out the price increments along the way to get the total price. That is what you should compare to the individual 20 year term price. Sometimes the 20 year term is much better. You may also have to stay with the employer or association in order to keep the plan.
The other issue with group term is that if you need (or wish) to convert the policy to a permanent plan they have a conversion option, but usually to a permanent life with very high rates and poor cash accumulation.
The better individual term life plans have conversion options to better performing permanent plans. While you may not plan on converting it is important that this option remain in case your long term health changes for the worse and you become less (or un) insurable.

Vanilla Inc

Andy and Ben are partners in a company called Vanilla Inc. Both men are married 30-year-olds in excellent health. They are not currently planning to sell the business so the question of the current “value” of the business is not one they have fully addressed. Each partner makes $100,000 yearly. The IRS would use a simple formula of 10 times net income to place a value on the business, which would be $2 million (10 x $100,000per year income each). Thus, for this case study we will assume the value of their business is $2 million. The fixed overhead of Vanilla Inc is $60,000 per year in rent, advertising, office, etc. Andy and Ben expect their business to last for at least 30 years. Of the two primary aspects of Vanilla Inc, Andy is the manager of the business and Ben is the salesman for their product.
To Summarize:
- 50% ownership
- Income: $100,000 each
- Business Value: $2 million
- Fixed Overhead: $60,000
Things are going well for Andy and Ben. However, neither can truly enjoy his success until he knows that an unexpected devastation will not be the ruin of either partner’s family. There are several scenarios that haunt the men as they are business-related risks that have not yet been addressed. The right insurance plans will allow the business, and the partners and their families to avoid major financial losses.
Risk #1: Ben or Andy dies. Andy or Ben is now in business with their deceased partner’s wife. Neither of them has the experience, nor the interest in filling their husbands position.
A Buy-Sell Agreement funded by life insurance would be appropriate. If one of the partners should die, the money from the life insurance policy would provide the capital for the remaining partner to purchase the deceased’s wife’s portion of the company. The wife wouldn’t have to go through the process of finding a buyer for her newly inherited share of the business and a purchase price would have already been established. There are clear cut tax reasons for the policies not to be owned by Vanilla Inc. See page 3 for detailed explanation. This policy works best when the partners own life insurance on each other.
There is a second often overlooked aspect of the buy-sell transaction. It is possible that Andy (or Ben) inherits Ben’s (or Andy’s) half of the company after one of these events and is now the sole owner but does not have enough operating capital to make it through the crisis.
A Key Man Life Insurance Policy provides the operating capital to keep the business functioning for a period of time. Perhaps the remaining partner would need to hire someone new to take the place of the former partner to keep the business running. The remaining partner might decide to sell the business. , may find a new partner, or something else. No matter what, it doesn’t make sense for him to own the business without a survival plan and the cash to carry it out. The policy is owned by the business. The premium is a business expense. It pays a lump sum to the business if the insured dies. 

-           Andy owns a $1million policy on Ben to fund the Buy-Sell. Cost: $890 Annually (30 year term)

-          Ben owns a $1million policy on Andy to fund the Buy-Sell. Cost:   $890 Annually (30 year term)           -         

Buy-Sell agreement requires using the proceeds to buy the partner’s share of the business.

-          Business owns a $500,000 Key man Policy on Ben. Cost: $490 Annually (30 year term)

-          Business owns a $500,000 Key man Policy on Andy. Cost: $490 Annually (30 year term)

Risk #2: Ben or Andy or one of their spouses is catastrophically injured. In either position, as the injured spouse or the caretaker, the partner involved can no longer fulfill his duties at Vanilla Inc.
A Catastrophic Disability Insurance policy would provide funds to survive financially. Because they are very young, this type of plan is very inexpensive- $825 each year per couple, or just $517 a year for Ben or Andy. Premiums are tax deductible and benefits are not taxable.
Ben and Andy could also consider a lump sum buy-out. The Classic

Disability Buy-Out insurance provides funds for the financial survival of the disabled partner.
That takes care of the business, but what about the partner who is no longer employable? He and his wife will need some form of income; the funds from the company will eventually run out. Here, Disability Income Insurance is recommended. This plan provides a monthly benefit that pays up until retirement age.

Risk #3: Ben or Andy is moderately disabled. He will be able to return to work eventually, but is unavailable in the meantime. The company is severely hampered in its ability to earn money yet the overhead costs will continue.
A Disability Business Overhead Expense insurance plan provides the income to pay business expenses if one partner is disabled. Owned and paid for by the company, the company would receive benefits. Vanilla Inc. would be granted an income of $5,000 per month for two years.

In Conclusion

Andy and Ben knew all along that their families and future are a top priority. Ultimately they realized that owning insurance was essential to them as it secured the financial futures of their families and their company.
Purpose of Private Ownership of Policies in Buy-Sell:

Ben and Andy want Vanilla Inc to own the life insurance policies as a business expense. If one of them died, the business would buy the shares from the deceased partner’s spouse. This sounds great in theory but has a fatal flaw. When the remaining partner eventually sells the business he will pay capital gains on the $1million since the company assets grew by receiving a $1 million tax-free insurance payment. It is much better for each partner to own a policy on the other paid for with tax dollars. In practice, many companies pay for these policies with company funds. The accountants make sure these payments are expensed as income to the partners.

All long term care contracts pay out on not being able to perform certain aspects of daily living. These include but are not limited to needing assistance with eating, dressing & cognitive impairment. A traditional Long Term Care contract is a reimbursement arrangement whereby the carrier will coordinate with the facility and pay them based upon the terms of the contract up to benefit amount that was purchased. The premium for a $7500 monthly benefit with a pool of $540,000 for a 61 yr old male and 55 yr old female couple would be approx. $4200 per year. Insurance carriers pay providers directly as claims are filed, and reimburse only what was spent.

A second approach would be to purchase a product that is identical to the above with one exception. Upon claim, the carrier would pay the chosen monthly benefit directly to client. This provides the unique opportunity to do with these monies what you will, such as providers, bills, food, or to build a ramp up to the house for accessibility, etc. Comparing to the above benefit example, the premium for a $500,000 pool of money for the same 61 yr old male and 55 yr old female couple at $7500 per month, would be approximately $4600 per year.

A third and perhaps the most compelling option would be a single premium product that provides two benefits to the policy holder. For those who are approaching retirement age who have not yet planned for long term care expense, and have monies in CD’s that are earning paltry returns, or perhaps a sum of money dedicated specifically for long term care, a single premium long term care/life insurance product can be an opportunity to leverage these assets. For a 61 yr old male, a $100,000 one time premium payment provides a guaranteed death benefit of $160,000 and a long term care benefit of $480,000. This would provide a monthly benefit of $6682 paying out a total of 6 years. This product has unique flexibility as the client can withdrawal the original single premium payment at any time throughout the life of the contract with no surrender charges. Clients could deposit $100,000, be covered by this two for one policy for a number of years, and then be able to rescind the contract and receive the $100,000 back without penalty.

Any of the above examples prevent the rapid depletion of assets built over the course of a lifetime. The important point is to have this discussion with your financial advisor, accountant, and your own peer group who have already chosen to complete this process. It is also advisable to work with a licensed agent to determine what coverage fits your needs and budget.

Purchasing a catastrophic disability plan makes much more sense, especially for the trade professions noted above. This product does not care what you do, how much you earn, and medical underwriting is limited. Benefit qualifications are less likely as they are based upon not being able to perform certain activities of daily living. This results in affordable premiums, and rich monthly benefits. A $7500 benefit for an employee and his/her spouse in their 40′s quotes out at $1600 per year. Portions of the premium are tax deductible, while the benefit is tax free. Another advantage is that the monthly benefit, when triggered, comes directly to the beneficiary, and can be used for any expenses.

Our office can write these policies nationwide.

All premiums collected by insurance carriers get divided up and placed into separate “buckets” for costs such as claims and administrative expenditures.  While “healthy” group trend lower with rate increases at renewal, one company takes this a step further.  

Trustmark processes their premium income the same way as above, but puts aside the claims portion of the premium into a separate account.  If the claims activity of the group is low throughout the contract year, then the company receives a reimbursement check.  This plan works particularly well with groups that tend to skew younger such as some of the blue collar trades, coffee shops, or those companies offering many entry level positions. 

One hurdle that can be problematic is that while carriers require all enrollees to fill out family health statements at time of application,  Trustmark needs all this information prior to the application in order to determine the exact premium.  There are cases when this program does not price out competitively with the other market options due to the health history of the group,  but when it is a right fit, it can be a boon to both the agents and their prospective new clients.

While a large number of States allow purchasing health care over the web, this discussion will be focused on those plans offered in Connecticut.  Anthem, Connecticare, Aetna, Celtic & United Health One all market individual health plans in CT.  All offer several plan designs featuring a dizzying array of co-pays, co-insurance & deductibles.  Further, the ways in which these plans are underwritten vary widely amongst each carrier.  (Remember, guaranteed issue plans for adults are not available until 2014, if Obamacare remains intact.)    

Typing in the words “health insurance Connecticut” into Google yields an astounding 12,600,000 results.  Several companies under these search results allow you to input your birthday and gender, choose amongst several plan design options, and receive an instant quote.   From there you may apply directly using the online application process.  At that point your application is in underwriting and a determination will be made usually within 7 to 10 business days, unless further medical information is needed. 

Anthem & Connecticare are accept or reject companies in that they either accept you at the rate quoted, or reject your application based upon health status.  All other carriers who offer health insurance in Connecticut reserve the right to increase the premium at time of application based upon underwriting review.  Further, 2 of these carriers reserve the right not only to rate up the policy, but to also rider (exclude) certain conditions.   The online application does not notify the applicant of these rate-ups or riders, so the assumption is that the policy will be issued as quoted.  I have gained many a client who has been approved with riders and rate ups they know nothing about until the policy is mailed to them.

Utilizing an agent familiar with the application process above will save you time and headaches, and won’t cost you anymore as agents are compensated directly by the insurance companies.   

Kevin Murray – HIQS Group 203-730-8304