Clients are increasingly concerned with having enough funds accessible should long-term care needs arise later in life. The life insurance industry has responded to this by broadening the reach of traditional products. A new type of “hybrid” life insurance, which merges death benefit protection and a flexible, guaranteed premium schedule, along with a long-term care (LTC) rider, can help Clients manage potential long-term care costs while protecting families from financial hardship. Additionally, if benefits aren’t completely utilized, the remaining dollars can help fund a financial legacy. Because Clients may also be concerned about Federal and/or state estate taxes, or wish to set parameters around the inheritance of a death benefit, they may want an Irrevocable Life Insurance Trust (ILIT) as owner of the policy.
It has generally been established that a life insurance policy with an indemnity LTC rider can be appropriately owned inside of an ILIT, vs. a reimbursement LTC rider. The difference being that an indemnity plan pays the benefit directly to the owner of the policy. Thus, if the insured qualifies for a $5,000 monthly benefit and an ILIT owns the policy, the $5,000 is sent to the Trustee. In contrast, with a reimbursement plan, the benefit is paid directly to the nursing home or agency providing the care, with the Insured submitting bills or receipts each month to the carrier. A reimbursement rider will generally not work for a policy owned by an ILIT because the reimbursement benefits the Insured and therefore brings the death benefit back into the Insured’s estate. An indemnity rider can work because the LTC benefit is paid to the Trust.
However, due to IRC § 2042 and the incidents of ownership issues inherent in this planning scenario, we submit that the appropriate considerations do not end here. Just as one does not simply “walk into Mordor,” one cannot simply place a life insurance policy inside a traditional ILIT and intend to benefit the Grantor. The following is an overview of three ways LTC rider benefits can actually (and appropriately) get into the hands of the Insured under the life insurance policy owned by an ILIT.
Ultimately, it is most important that Clients work closely with their Financial, Legal, and Tax Advisors to arrive at the appropriate solution based on their individual facts and circumstances. Nevertheless, when working in conjunction with Advisors who might not be as familiar with the particular design of these products, it is important to highlight these considerations.
 Many carriers now offer this type of innovative policy design. However, so-called “chronic illness riders” are sometimes marketed as “true long term care riders” – it is important to distinguish between the two. For instance, to qualify for benefits under a “chronic illness rider,” a Dr. must certify the Client’s condition is “expected to be permanent.”
 It is most important when considering any estate planning strategies that qualified legal advice be obtained.
THIS IS NOT TAX OR LEGAL ADVICE. Neither the company nor its agents or representatives give tax or legal advice. You should consult your attorney or tax advisor for specific answers to your legal or taxation questions.