Long Term Care and Annuities
It’s a major selling point of many contracts and an easy sales pitch. “You’ll get a long-term care enhancement if you need it so it’s a win/win!” Insurance companies didn’t become the most stable financial institutions by giving things away so if you really want long-term care than you need to look at all the options.
This is not a product type I’ve put much emphasis on selling because I’ve already run the numbers and determined the cost is not worth it in most cases. But the prospect of needing professional care later in life has pervaded the minds of all retirees if not because of marketing efforts from the insurance industry then because some have seen their parents go through a difficult situation.
First I’m going to talk about hybrid products that offer additional benefits for extended care situations. Most commonly this is an index annuity with income rider. In the best case, the contract reads that you can double your income for up to five years if you can’t perform two out of six activities of daily living (ADLs). If you don’t know what those are, in simple terms, those are the six things you’d rather not have someone else do for you.
Index annuities with care enhancements are fine but you need to understand you are giving up a little in terms of growth, income, fees or all of the above in exchange for the protection. The reason I say it’s not usually worth it is because all contracts I know of remove the care enhancement once the cash value of the contract goes to zero. Income payments will continue but with lower growth and fees the enhanced benefit is gone for most people around age 80. That’s exactly when you’d need it most so that explains why it might look pretty good. Most people won’t ever get it.
No underwriting is required and you can use an IRA or cash to buy it because it comes attached to many of the popular products that sell the most. The downside is the benefit comes as additional income so it’s all taxable, whereas true long-term care is tax-free. But it is something if you don’t have the money for anything else.
If you really want the insurance then you need to look at other options so I’m going to explain briefly what’s available. My first long-term care seminar was probably 15 years ago and the wholesaler said something that has stuck with me since. In his words, “purchasing long-term care is a business decision.” Would you rather spend your money on the care later or the insurance now? I’m not trying to convince you one way or another, just asking you to think about it. There is no right or wrong answer.
Below are your other options. All provide for tax-free care benefits but must be funded using after-tax money and all require some form of medical underwriting to be issued.
Long-Term Care Insurance Policy
Most people who have these got ‘em well before retirement. Policies can be issued as early as age 40 when premiums would be really low, but premiums can increase over time. I’ve heard from several people who feel handcuffed by the rising costs over time and with so much invested already the decision to cancel is extremely difficult. In light of that possibility, policies were created that guarantee a level premium payment over a specific period like ten years. Once finished with the payment terms the policy remains in-force for life and no more payments are required. This is a good option for anyone with extra cash in the years leading up to retirement. It’s not cheap but this is a very effective way to provide for a future care situation.
There are some pitfalls that are important to consider. The father of a person who I’ve been speaking with for the past few months had long-term care insurance when he entered a care facility. His father passed away before the elimination period ended and never got a benefit after paying for the policy for several years. Because of that experience, this gentleman is not too excited about the prospect of buying an expensive policy. Like I said, it’s a business decision.
Permanent Life Insurance
If you are afraid of paying a hefty price for something you may not use then this can be a safer option with a far greater range of outcomes. Most companies issuing permanent life insurance policies now allow for death benefits to be accelerated to pay for long-term care expenses. Since it’s an insurance death benefit then it also comes out tax-free. Ten year payment policies require no payments after ten years, come with a residual cash value that can be used for income later in life or a death benefit that passes to your heirs. There are several options if you don’t exercise the care provision. Money is not lost in either case and you earn a modest interest rate on your money over time. For these policies I recommend whole life over indexed universal life because the cost is lower and the guarantees are much stronger.
True Long-Term Care Annuities
Yes, there are annuities that are specifically built to provide long-term care and many of you know about these already. You can even use a highly appreciated annuity if it was purchased with after-tax funds. I’ve known several people in the past that took advantage of the opportunity to transfer and provide insurance rather than paying income taxes on the appreciation of an old annuity contract. The best contract currently on the market provides 2.5 times the premium amount in qualified care benefit. That means if you put in $100K then you have a guaranteed $250K insurance benefit if you ever need. And if you don’t, the contract can be annuitized for income later or the residual balance will be passed to your heirs.
All of the above are a decent option for anyone with extra cash flow or some money laying around that can help offset a potentially major cost late in retirement. There are obviously several additional details involved in each but the material basics are mentioned. This post literally could have turned into a separate report worthy of a dozen pages or more. In my opinion, the life insurance is the best option because it doesn’t require a large sum in the beginning like the annuity and has level payments with more alternatives than the long-term care policy.
Again, it’s a business decision and a required consideration of any viable retirement plan. If you would like clarification on any of the above information or have a story to share about your experience then please comment below or respond to my email. Those of you with personal experience may be able to help someone else put the subject in perspective.
Have a great weekend…