Annuities to Cover Long-Term Care Costs
Let’s face it, we all like one-stop shopping. Wouldn’t it be great if we could buy one policy that insured us against all of our financial concerns (e.g., disability, premature death, long-term care, etc.). There is a variety of reasons that one product won’t solve all of our problems, but there is a trend toward hybrid insurance products that can solve more than one. The most common examples are life insurance and annuities:
- Life insurance that allows you to use the death benefit while you’re still alive if you have a terminal or chronic illness
- Annuities that double your payout if you qualify for long-term care.
What makes these hybrid annuities so compelling?
Annuities with a long-term care rider are especially compelling because they do not require any medical underwriting and address the two most common financial concerns of seniors: lifetime income and healthcare costs. The other reason why they have become so desirable is that traditional Long-Term Care (LTC) insurance has gone from bad to worse over the past few years. LTC insurance has gotten more expensive, fewer companies are offering it, and they have become incredibly picky about whom they will insure. Many clients seem to be in reasonably good health, yet they still get declined for LTC coverage.
These combo products were pretty clunky when they first hit the scene eight to 10 years ago. However, they have improved substantially in my opinion. I was recently working with a 62-year-old couple living in Arizona who didn’t have a pension, wanted more guaranteed income, and were concerned about potential LTC costs. One spouse was uninsurable for LTC and the other almost had a heart attack when she saw the price for traditional LTC insurance. We found that if they invested $100,000 in a fixed indexed annuity and waited six years before turning on the lifetime income, the guaranteed distribution would be $8,400 per year for the remainder of both of their lives. In addition, if either spouse required long-term care, the insurance company that issued the annuity would double their payout to $16,800 for up to 5 years.
The client can defer for shorter or longer periods and can also decide before triggering the income rider whether to guarantee the income for both lives or just one person’s life. Naturally, the payout is higher if it is only based on one life. For example, in the scenario above, if the client purchased the annuity at age 58 and deferred to age 68 (10 years of deferral instead of 6) and then guaranteed the income for only one spouse’s life, the payout would be $11,395 per year or $22,790 for LTC.
What’s the downside? Here’s a few:
- This type of annuity is not a good vehicle for building wealth,
- Annuities typically have fees, and
- There may be surrender charges (penalties) for excessive withdrawals.
That being said, for many households, this solution is less bad than the alternatives. This type of product has all kinds of variations. Some options have lower income guarantees but better LTC coverage. Some include coverage for home healthcare, and others only if you are confined to a skilled nursing facility. This product seems to appeal to a lot of people because it is not a “use it or lose it” type of insurance. In other words, the policyholder’s beneficiaries receive any remaining account value if the funds are not used during the owner’s lifetime.
Continued innovation in annuity product design has led to record sales, particularly with fixed indexed annuities. Sales of these products were up 7.9% in 2015 to $54.6 billion, the third consecutive annual increase.
Disclosure: Examples used are for discussion purposes only and not meant as a recommendation of any specific product. Annuities are not suitable for all investors. Fixed indexed annuities are not stock market investments and do not directly participate in any stock or equity investments. Additional requirements and restrictions may apply and some annuities and/or riders are not available in all states. Withdrawals and surrenders may be subject to federal and state income taxes and, except under certain circumstances will be subject to IRS penalty if taken prior to age 59 ½. Guarantees are based on the claims paying ability of the insurance company. Speak with a financial advisor regarding your specific situation.