Not-so-risky business: The indemnity-style long-term care rider

January 8 2013

by Creative Life Sales Team

As you and all of your business owner clients know, getting started on your own is accompanied by taking a risk. Business success is hardly a sure bet, but taking appropriate precautions and planning carefully can help minimize the potential for obstacles that could damage or dismantle the company you work so hard to build. One strategy business owners use for protection is to purchase life insurance for achieving a variety of goals, from retaining top talent to preparing for succession. Yet most life insurance only pays when a business owner dies; so what happens if she lives but can no longer take part in the business?

We all know that medical advances are helping doctors save lives they couldn’t have saved in the past. That’s good, but it also complicates business succession planning in the following ways:

  • No death means no death benefit to help with the buyout
  • The policy’s cash value may not be enough to help
  • Bank loans and depleting company assets usually aren’t attractive options

One way to provide some coverage without buying a separate disability policy is to add an indemnity-style long-term care rider to the life insurance policy. It pays when an illness or injury causes cognitive impairment or the inability to perform two activities of daily living. At this point, the contract owner gets an accelerated death benefit in monthly installments, after a 90-day elimination period. Let’s look at an example.

Sarah and Wendy started a business two years ago. Its current market value reached $700,000, and they felt a responsibility to each other and their families to help protect everyone involved if one of them died. They talked it over with their advisor and realized they also needed a solution that would help if one of them couldn’t work because of an unforeseen illness or injury. The advisor priced disability income insurance for both of them and found it to be quite expensive and difficult to obtain due to their occupations and age. With the help of his Creative Life Sales Consultant, the advisor presented a solution that was within the budget of the owners.

They executed a cross-purchase buy/sell agreement and funded it with life insurance policies that included a long-term care rider. Each bought a $350,000 life insurance policy on the other and included the long-term care rider for $350,000. If Wendy dies, Sarah will get $350,000 in a lump sum and use it to buy Wendy’s share of the business. If Wendy has to stop working due to a condition that leaves her with cognitive impairment or the inability to perform two activities of daily living (ADLs), Sarah (contract owner) will get monthly benefit payments of $7,000 for 50 months ($350,000 total payout) after the 90-day elimination period, which she’ll use to buy Wendy’s share of the business via an installment plan (provided for in the buy/sell agreement). It works the same way if something happens to Sarah.

How does one of the better indemnity long-term care riders work?

Total long-term care specified amount. The client selects the total amount of long-term care coverage, called the long-term care specified amount, at the time of application. It can be as much as 100% of the policy’s total specified amount, as little as 10% of that total specified amount or anywhere in between. In New York and Kentucky, however, the long-term care specified amount is automatically equal to the policy’s total specified amount.

Monthly benefit amount. The carrier pays the contract owner the long-term care specified amount in monthly installments. The monthly benefit amount will be the lesser of 2% of the long-term care specified amount or the HIPAA per diem amount ($300 for 2011) times the number of days in the month.

Pays contract owners directly.  Because it is an indemnity-style design, the contract owner is paid directly – no need to send bills or receipts – once the insured qualifies due to an inability to perform two activities of daily living (ADLs) or with cognitive impairment, and after a 90-day waiting period. Reimbursement plans, which only pay the amount of qualified LTC bills and which pay the health care facility directly, won’t work for buy/sell funding.

Tax-free benefit. This tax-free application would apply to any type buy/sell agreement, whether it was cross-purchase, or an entity (or stock) redemption plan. However, one detail that will need to be addressed by the business partners involves HIPAA limitations. Qualified LTC benefits are paid tax free up to the greater of the per diem amount established by HIPAA amount for a given year, or the actual LTC expenses incurred. If the afflicted partner is also collecting a benefit from his own personal LTC insurance policy, a taxable event could occur on the business. Remind your clients to seek the advice of their legal or tax advisors as needed.

Please remember the purpose of the long-term care rider for this plan is to protect the business owner who needs to buy the business interest of the incapacitated partner, not necessarily to pay the long-term care bills of that partner, although the incapacitated partner could use his buyout proceeds to pay long-term care bills. Also note that as an acceleration of the death benefit, the long-term care rider reduces the death benefit dollar for dollar. Care should be taken to make sure the client has additional life insurance as necessary.

For help in aiding your clients with not-so-risky business planning, call your Creative Life Sales Team for more information on how a long-term care rider could add significant value to their long-term objectives. While you have them on the phone, ask them to tell you about two valuable services we can provide at no cost to your clients: a Buy and Sell (Document) Review and our complimentary Business Valuation. Happy selling.



Agents may not give tax, legal, accounting or investment advice. Individuals should consult with a professional specializing in these areas regarding the applicability of this information to his/her situation.

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