For several years, AAFMAA has been offering a Long Term Care Settlement Option (LTCSO) on all Value-Added Whole Life policies. This option has no cost to the policy holder unless the option is exercised. It is included with all AAFMAA Value-Added Whole Life policies, even those that were purchased and in force before the option was made available. The following Q&A describes the key points of the LTCSO. If you think that you qualify and are interested in exercising the option on your current Value-Added Whole Life policy, please contact Policy Services at 1-800-522-5221. If you would like more information about applying for a Value-Added Whole Life policy, you can contact a Membership Coordinator toll-free at 1-877-398-2263.
Q. What is LTCSO?
A. The AAFMAA LTCSO provides an owner of an AAFMAA Value-Added policy(s) the option of converting the death benefit(s) on an eligible insured life (normally payable only on death of the insured) into regular periodic payments before death to help defray the cost of nursing home, custodial or home health care of the insured.
Q. Why is this option being offered?
A. Financing long term health care is a widely recognized and growing problem for both society and the individual. In most cases an individual or the family must pay for long term care out of their own resources. Recognizing that some insureds will eventually require long term care due to disability or chronic illness, and that the AAFMAA life insurance plans constitute an important asset, the Board of Directors approved LTCSO.
Note: This is not an additional monetary benefit but rather represents an early payout of a death benefit on behalf of the insured rather than to a designated beneficiary.
Q. Who is eligible for this option?
A. Any insured person who has attained the Social Security Full Retirement Age, who has been covered by an AAFMAA Value-Added policy for two or more years and has been confined to a long term care nursing facility or has required continuous home nursing care for the past four months or more is eligible. Medical certification as to the need for continued long term care will be required as part of the application process. An annual recertification is necessary to ensure compliance with IRS guidelines. In cases where the insured is not the owner of the plan, it is the owner who must apply for the LTCSO. It is the insured, however, who must require and be receiving long term care.
Q. How much does having the LTCSO cost me?
A. There is no cost to having the LTCSO as a part of your policy. It is included in all Value-Added Whole Life policies. If the LTCSO is elected, then there is an administrative cost. So, if you never use it, there is no cost at all.
Q. How much will I receive if I elect this option?
A. The standard option for disbursement of the LTCSO benefit is monthly, for a fixed period of 50 months. Any amount of coverage that generates payments up to the current annual IRS maximum that can be received tax-free may be converted. The amount permitted by the IRS to be tax-exempt for Long Term Care for 2009 is $280 per day or $8,400 per month. That equals $420,000 over the 50 months. The monthly payment is the amount of the approved death benefit as of the date the application is approved (less any outstanding loan) divided by 50 months. An administrative fee (currently $20) will be deducted from the monthly payment. Payments may be made to the owner, the insured, deposited to a bank account or paid directly to a long term care facility as designated by the owner of the plan.
Q. What does this do to my insurance benefit?
A. By electing to apply the death benefit to periodic payments before death, the insurance value is frozen at the amount of coverage in effect as of the date the LTCSO application is approved by AAFMAA. However, if the policy selected for conversion to the LTCSO exceeds the IRS tax-free maximum, the policy will be amended as necessary on an individual basis and any excess insurance coverage above the amount elected for LTCSO will remain in effect with an adjusted premium. All other previous policy provisions and beneficiary(ies) will remain unchanged. Once the LTCSO is elected, and all payments are made for the fixed period, there will be no residual funds from the LTCSO portion that pass to a beneficiary. However, should the insured die before the end of the monthly payout period, the remaining death benefit will be paid to the designated beneficiary in the form selected or authorized by the owner. If no selection is made, the default will be lump sum payment. If the Value-Added policy contains a designated irrevocable beneficiary, converting to the LTCSO will require notarized approval by the designated irrevocable beneficiary.
Q. How much will election of the option cost?
A. The administrative cost of providing this additional service will be paid by the policyholder and deducted from monthly payments. This fee is currently $20 per month. The amount is set when the LTCSO application is approved and remains fixed for 50 months or until death, if earlier.
Q. If eligible and receiving LTCSO payments, do I still have to pay premiums?
A. Once a LTCSO application has been approved, all subsequent premiums for those amounts converted to the LTCSO are terminated by AAFMAA. For any amounts not converted to LTCSO there will continue to be premiums charged or remaining amounts may be converted to Reduced Paid Up or any of the many alternatives available to any policy.
Q. If I am eligible and receiving LTCSO payments, can I reinstate the insurance coverage?
A. The application for and subsequent approval of a LTCSO will be considered irrevocable except that an owner may elect to discontinue the option and reinstate insurance benefits as a Reduced Paid Up benefit plan if, and ONLY if, the annual recertification fails to comply with IRS code. Under this condition, the death benefit would be re-established at a level supported by the remaining value of the LTCSO at the time it is discontinued. However, once discontinued, there will be no option to reinstate a subsequent LTCSO election of that insurance policy.
Q. Are there any tax implications of a LTCSO?
A. The LTCSO is considered a qualified accelerated death benefit (living benefit) under IRS regulations. As such, the net amount of the death benefit is excluded from gross income and, as long as the total annual payments do not exceed IRS guidelines, is not generally subject to Federal or State income tax. AAFMAA will provide an IRS From 1099-LTC each year summarizing the distribution. If an irrevocable trust is to be the plan owner, a tax advisor should be consulted prior to exercising this option.
Q. How can I apply for the LTCSO?
A. An application is available from AAFMAA?s Policy Services Department. An attending physician?s certification will be required. If an owner is unable to complete the application because of illness or disability, the application may be completed for the owner by a designated guardian or Attorney-in-Fact.
Q. Will my beneficiaries still receive AAFMAA Survivor Assistance Services at my death, even though I have elected the LTCSO?
A. Yes, services will remain intact for AAFMAA members even though insurance benefits may have been exhausted by election of the LTCSO. AAFMAA membership continues during the payout period.