What Is A Long Term Care Annuity?
Long Term Care Annuity Solutions
Having enough money for retirement is more than just covering your annual expenses. You also need enough money to cover the cost of losing your independence as you age. To ensure a stable retirement, it’s smart to plan for the possibility that you may need long term care at some point. Because, long term care costs can devastate a retirement budget, planning ahead with a long term care annuity can be a great solution.
You can use existing nonqualified annuities or qualified money as premium sources to obtain LTC protection. Providing even more flexibility is the ability to use 1035 exchanges for nonqualified annuities. When funding an LTC Annuity with qualified money, the insurance company can accept direct transfers and rollovers.
Traditionally, there were only two ways to handle long term care costs: paying out of pocket or purchasing long term care insurance. But long term care annuities give you an alternative way to pay for long term care costs.
What is an Annuity?
Before looking at how long term care annuities work, let’s discuss the core product – the annuity.
An annuity is a contract between you and an insurance company. You make a lump-sum payment or series of payments and, in return, get regular guaranteed payments from the insurance company. These payments start either immediately or at some point in the future. Payments can be for a fixed period or for the rest of your life.
There are two main types of annuities – Immediate and Deferred.
With an immediate annuity, in return for your lump sum, the insurance company promises to pay you a regular income, according to the terms of the contract. You may want to have income for the rest of your life, or a limited period of time, such as five or 10 years. In most instances, immediate annuity payments are sent to you starting one month after you buy your annuity. An immediate payment annuity is also known as a single-premium immediate annuity (SPIA), an income annuity, or simply an immediate annuity.
A deferred annuity is an insurance contract that allows you (the annuitant) to delay or defer your income stream. Deferred annuities differ from immediate annuities in that immediate annuities often begin making payments right away. Designed for long term savings, a deferred annuity grows tax-deferred until you withdraw the money. Deferred annuities allow your principal to increase before you begin to receive the stream of payments. The period when the investor is paying into the annuity is known as the accumulation phase (or savings phase). Once the investor starts receiving income, the payout phase (or income phase) begins.
Annuitants are unable to withdraw money from the annuity during the contract’s first several years unless they pay a surrender charge for withdrawals. For this reason, deferred annuities should be considered long term investments.
How Does a Long Term Care Annuity Work?
Long term care annuities are deferred annuities with a long term care rider. These hybrid long term care insurance products, like traditional deferred annuities, provide future payments based on an initial lump-sum investment.
A long term care annuity will typically double or triple your investment for long term care benefits. For example, a $100,000 investment in an LTC annuity would provide to $200,000 or $300,000 of long term care benefits. This can provide an annuitant with tremendous leverage of their premium dollars.
Long term care annuity benefits are a pool of money with a monthly benefit cap. So an LTC annuity with a $300,000 benefit could pay a monthly benefit for three or four years depending on the monthly benefit selected. Some products can even pay benefits for an unlimited amount of time. Access to benefits are triggered like long term care insurance (when you have cognitive impairment or need help with two out of the six activities of daily living).
A popular way to fund an LTC annuity is to reposition an existing annuity or other asset. Many people are able to perform a tax-free 1035 exchange from an annuity to an LTC annuity. Others pay their long term care premiums from their IRA, or use funds from bank CDs, savings, annuities, life insurance, or retirement plans. And you may be able to increase your current return while protecting yourself with tax-free long term care protection.
An annuity which funds a 10-pay whole life insurance policy with accelerated death benefits for qualifying LTC expenses using an income rider; can be funded with either qualified or non-qualified funds.
Long Term Care Annuity Pros and Cons
LTC Annuity Pros
No Premium Increases – A hybrid annuity can be purchased using a single premium payment. This gives you the benefit of never having to worry about future premium increases. Guaranteed level premiums are not usually available with traditional LTC insurance. Knowing your premium will never change can be a big advantage of a hybrid long term care insurance annuity. This can provide peace of mind beyond your long term care protection.
1035 Exchanges – Options are available for repurposing existing annuity and life insurance policies via 1035 exchanges.
Tax-Free Withdrawals – Tax-free annuity withdrawals for long term care expenses can be a great advantage of an LTC annuity. The tax free nature of your annuity will depend on the product and your personal situation. We can make a product recommendation and then refer you to your tax adviser for confirmation.
Simplified Health Requirements – A hybrid LTC annuity may have easier health underwriting than traditional LTC insurance. This can make a hybrid long term care insurance annuity policy a great fit for someone unable to health qualify for traditional long term care insurance. Health requirements vary by company.
Premiums Invested Are Not Lost – Premiums invested in an LTC annuity are not lost if you don’t need care.
LTC Annuity Cons
Up-front Premiums – Some policies require a large up-front premium payment so you might need to sell some investments. Yet, there are products that allow you to pay part of the premium over time.
Withdrawals – Long term care benefits received may reduce the annuity value which could result in little or no death benefit for your heirs.
Tax Treatment – If you buy an annuity inside a qualified plan, such as a 401(k) or IRA, then the entire annuity is taxable, including the money you used to buy it and any earnings. Buying an annuity with after-tax dollars means only the earnings are taxed. Generally, long term care insurance benefits are not taxable.
LTC Annuities vs. Long Term Care Insurance
A long term care annuity can be a great alternative to traditional long term care insurance. Deciding between the two will depend on several factors, including your health, available assets and tax implications. For example, if you’re younger and in good health, you may get more bang for your buck with either traditional long term care insurance or a life insurance policy with a long term care rider. But if you have certain pre-existing medical conditions, an LTC annuity might be the best fit. One of our long term care professionals can help you compare your options.
Long Term Care Annuity Providers
One Stop Shopping
We shop the leading long term care annuity companies to help you find the best policy and company. We’ll supply you with rates, ratings, and reviews of the companies that sell these alternatives to long term care insurance.
The State Life Insurance Company
The State Life Insurance Company is a OneAmerica Company. State Life Insurance Company offers several long term care annuities. These hybrid long term care insurance annuities allow you to better use assets you may have designated for long term healthcare costs.
For example, you can use the asset based LTC annuity’s value to cover your first few years of care. Then protect yourself beyond that with an optional coverage extension. Access to your long term care benefits can even be income tax-free. Contact us for a personalized State Life Insurance quote.
State Life’s Financial Ratings
A.M. Best | A+ (Superior)
Standard & Poor’s | AA- (Very Strong)
Global Atlantic Financial Group
Global Atlantic Financial Group offers the ForeCare fixed annuity. This hybrid long term care insurance annuity can protect you should you suffer a health event requiring long term healthcare.
With the Global Atlantic ForeCare annuity, you get all the benefits of a fixed annuity, such as income options and tax-deferral. Plus a death benefit that passes any remaining contract value to your named beneficiary at death. And you get financial protection at two or three times the contract value for long term care costs.
Global Atlantic Financial Ratings
A.M. Best | A- (Excellent)
Standard & Poor’s | A- (Strong)
Click below for more articles from this section:
1. 2022 U.S. Department of Health and Human Services (www.longtermcare.acl.gov), site accessed 02/22/2022
2. Cost of Care Survey 2021 (Genworth.com), site accessed 02/22/2022
3. The Official U.S. Government Site for Medicare (Medicare.gov), site accessed 02/22/2022