By David M. Kopyc, CRPC®
As life expectancies increase, retirement planning now involves preparing not just for an individual’s final years, but for a potentially decades-long period of health and financial needs.
For the growing number of blended families, this reality brings unique challenges in legacy planning. Ensuring fairness and security for both a current spouse and children from a previous marriage requires careful foresight. Fortunately, new linked-benefit products—which combine life insurance with long-term care (LTC) coverage—offer a versatile and tax-efficient solution that addresses both needs simultaneously.
Navigating the complexities of blended families in retirement
In a traditional family structure, asset division is often straightforward, with the surviving spouse typically inheriting the bulk of the estate. For blended families, however, this approach can inadvertently disinherit children from a prior marriage. For example, if a parent leaves everything to their new spouse, that spouse could later change their will to leave all assets to their biological children, leaving the first-marriage children with nothing. This can cause significant rifts and legal battles, especially with larger estates.
Even without overt family conflict, a blended family’s financial security is more complex. A couple may be focused on providing for their current spouse, while also wanting to leave a meaningful inheritance for their respective children. In the event one spouse needs long-term care, the substantial cost can quickly deplete the couple’s shared assets, including the very inheritance they intended for their children.
The modern solution: Linked-benefit life insurance
For those seeking to secure both long-term care and a guaranteed legacy, linked-benefit products have emerged as a strategic solution. These hybrid policies integrate the dual benefits of life insurance and long-term care coverage into a single contract. By repurposing an asset, a policyholder can leverage it to provide income tax-free long-term care benefits. The key advantage is the “no use, no lose” proposition: If the LTC benefits are never used, the full death benefit is paid out to beneficiaries. This removes the risk of paying premiums for a traditional LTC policy that could go unused.
For blended families, this duality is especially powerful. A linked-benefit policy can be structured to pay for an individual’s long-term care needs, protecting shared assets from being spent on custodial or nursing home care. After their passing, the remaining death benefit (or a guaranteed minimum) is then paid directly to designated beneficiaries, such as children from a previous marriage, helping to equalize inheritances without a complicated estate battle.
Tailoring linked-benefit products for blended family legacy
To effectively use linked-benefit products for blended family legacy planning, consider these strategies:
• Equalize inheritances: For many blended families, ensuring an equitable distribution of wealth is paramount. A linked-benefit policy can be used to create a dedicated, tax-free cash legacy for children from a prior marriage. The death benefit provides a financial safety net and ensures that they will not be excluded from their inheritance, regardless of future family circumstances.
• Fund an Irrevocable Life Insurance Trust (ILIT): For more complex or larger estates, an ILIT can provide greater control. By transferring ownership of the linked-benefit policy to an ILIT, the death benefit can be managed by a trustee and distributed according to specific instructions. This strategy can help avoid estate taxes and ensure the proceeds are handled according to the grantor’s wishes, bypassing potential family disputes.
• Cover estate taxes and expenses: For estates with significant illiquid assets, such as real estate or a family business, life insurance provides the necessary liquidity to cover estate taxes and final expenses. This prevents the forced sale of valuable assets to settle debts and ensures they can be passed on to the intended heirs intact.
• Protect the surviving spouse: Using a linked-benefit policy to pre-fund potential long-term care costs protects the couple’s primary nest egg from being drained by healthcare expenses. This allows the surviving spouse to maintain their lifestyle and ensures that other assets, like the family home, are preserved for future generations.
How linked-benefit products work
Linked-benefit products offer a variety of payment structures, providing flexibility for different financial situations. Policyholders can choose to fund their policy with a single, lump-sum premium or a series of payments over a set number of years, often 10. This predictability of cost is a major benefit, as unlike traditional LTC insurance, the premiums are typically fixed and cannot be increased by the insurer.
The policies are built on a permanent life insurance chassis and provide a death benefit that is a multiple of the initial premium. If long-term care is needed, a portion of the death benefit can be “accelerated” to pay for qualified LTC expenses. The amount of accelerated benefit, and the duration it can be paid, vary by policy. If the policyholder passes away without ever needing long-term care, the death benefit is paid to the beneficiaries. If some, but not all, of the LTC benefits are used, the remaining death benefit is still paid out. Some policies even offer a guaranteed return of premium, allowing the policy to be surrendered after a certain period to get back some or all of the initial investment.
A comprehensive approach to retirement security
Life insurance with linked-benefit products has transformed from a simple death benefit tool into a dynamic financial instrument for comprehensive retirement planning. For blended families, it is a particularly effective way to overcome complex legacy challenges and secure financial futures. By addressing the dual risks of costly long-term care and potential inheritance disputes, these products offer peace of mind. Consulting with a qualified financial advisor is the best way to explore how a linked-benefit policy can be customized to fit a blended family’s specific goals, ensuring that both spouses are protected and that a lasting, equitable legacy is passed down to all intended heirs.