The Split Policy Strategy: Maximizing Benefits Through a 1035 Exchange

In the evolving landscape of long-term care (LTC) planning, innovative strategies are crucial for advisors to offer clients tailored solutions that maximize benefits. One such strategy gaining traction is the Split 1035 Exchange. This method leverages existing permanent life insurance policies to enhance LTC benefits while maintaining a significant death benefit, providing a comprehensive financial solution for clients.

Understanding the Split 1035 Exchange Strategy

The Split 1035 Exchange involves reallocating funds from an existing permanent life insurance policy into two new policies: an Asset-Based Long-Term Care (ABLTC) policy and a Hybrid Life Policy. This dual approach ensures clients receive extensive LTC coverage alongside a death benefit, balancing immediate and future financial needs.

Case Study: A Practical Application

Consider a 55-year-old male client with a $200,000 permanent life insurance policy. He wants to repurpose this policy to address potential long-term care needs while preserving some death benefits for his beneficiaries. By utilizing a Split 1035 Exchange, the policy can be divided as follows:

1. Asset-Based Long-Term Care (ABLTC) Policy: $120,000 is allocated to an ABLTC policy with a 3% compound inflation option.
2. Hybrid Life Policy: The remaining $80,000 is directed toward a Hybrid Life Policy that includes a 4% chronic illness agreement.

Benefits of the Strategy

Enhanced Long-Term Care Coverage

By age 85, the client could have access to over $1.6 million in indemnity LTC benefits through the ABLTC policy. This significant coverage ensures that the client is well-prepared for potential long-term care expenses, mitigating the financial strain on both the client and their family.

Substantial Death Benefit

In addition to the LTC benefits, the client retains a death benefit through the Hybrid Life Policy. This policy is projected to offer approximately $300,000 in death benefits. Moreover, if the LTC benefits from the ABLTC policy are never utilized, a combined death benefit exceeding $500,000 would be payable to the beneficiaries from both policies. This ensures that the client's legacy and financial security for their beneficiaries are preserved.

Strategic Advantages

1. Leverage Existing Assets: This strategy allows clients to maximize the utility of their existing life insurance policy without additional out-of-pocket expenses.
2. Flexibility and Adaptability: Clients can adjust their financial plans based on evolving needs, ensuring that both their long-term care and death benefit requirements are met.
3. Tax Efficiency: Utilizing a 1035 exchange enables clients to reposition their assets tax-free, enhancing the strategy's overall financial efficiency.

Implementing the Split Policy Strategy

For advisors, implementing this strategy involves a few critical steps:

1. Client Assessment: Evaluate the client’s current financial situation, health status, and long-term goals.
2. Policy Valuation: Determine the value of the existing permanent life insurance policy and the potential benefits of reallocating these funds.
3. Carrier Selection: Choose carriers that offer competitive ABLTC and Hybrid Life Policies to maximize the client’s benefits.
4. Detailed Planning: Create a comprehensive plan outlining the split allocation, projected benefits, and long-term financial impact.

A Strategy for Peace of Mind

The Split 1035 Exchange strategy is an effective tool for advisors looking to provide clients with a balanced approach to long-term care planning and death benefit preservation. By leveraging existing assets, this method offers substantial LTC benefits while maintaining significant death benefits, ensuring clients are well-prepared for future financial needs. Advisors who incorporate this strategy can deliver enhanced value to their clients, fostering long-term financial security and peace of mind.