SPL for Long Term Care Insurance
What is a “single premium” Life (SPL) policy?
It’s a policy designed to act partially like an annuity and partially like a long-term care (LTC) policy. Most life insurance policies are funded for two reasons: 1) death benefit or 2) cash accumulation.
A SPL policy is funded partially for the death benefit, but it is also funded to provide significant “living” benefits (accelerated for LTC expenses and if the client has a critical and terminal illness).
Benefits of a SPL policy—A good way to help you understand why you need to learn about these products is simply to list the benefits. The benefits below are not necessarily offered with every product.
- Simplified issued—These policies are NOT medically underwritten like traditional life policies.
- Long-term care benefits—This is a benefit built into almost all SPL policies and the main reason clients will use them. Most people do not like the idea of paying LTC insurance premiums (they see it as a waste of money since they may never use it (not to mention that it’s expensive)). That means many people may choose to self-insure their LTC expenses by keeping money available in CDs or money market accounts which tend to generate fewer returns and are taxable each year. An SPL policy will have tax-free LTC benefits and, if you never use those benefits, a nice death benefit will pass income tax-free to your heirs (much more money will pass vs. keeping money in CDs or money market accounts).
- Avoiding probate—Because the death benefit from an SPL policy is paid as a death benefit (which is not the case with CD or money market funds), the money will pass outside of the probate process. In some parts of the country, this can save the heirs up to 10% of the value of the asset.
- Liquidity—When people think of funding a life insurance policy, they typically think of large surrender charges. There are SPL policies out there that have what is called a Return of Premium (ROP) option to them. That means at any time you can surrender the product and receive your entire premium back.
- Other living benefits—Besides a LTC benefit, some policies have other accelerated living benefits such as a terminal or critical illness rider. These riders allow the insured to access a significant portion of their death benefit while living (vs. having to die in order for a life insurance policy to be useful).
Example—we wanted to show a simple example of the benefits you can receive with an SPL policy. Assume the client is a 65-year old female who is receiving SS benefits and who has $100,000 sitting in CDs. She does not want an annuity because of the surrender charges and is very worried about LTC expenses. If she purchased an SPL policy, the benefits would be as follows:
If the client dies before needing LTC, a death benefit well in excess of the CD balance will pass to her heirs. If she needs the money to pay bills, it is there through the return of premium option. If she incurs LTC expenses, they are covered by the policy and the benefit is significantly more than the balance of her CDs.
This example is for illustrative purposes only and does not take into account your particular investment objectives, financial situation, or needs and may not be suitable for all investors. It is not intended to project the performance of any specific investment and is not a solicitation or recommendation of any investment strategy.
Since many Americans may need LTC at some point in their lives, you may want to consider LTC insurance. We know traditional LTC insurance can be expensive, and an SPL policy can be a nice alternative for money that people would typically keep in a safe place such as CDs or money market accounts.