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Three Ways A Long-Term Care Annuity Works

Stan Haithcock
October 17, 2022
Three Ways A Long-Term Care Annuity Works

Planning for Long Term Care: The Role of Annuities

Traditional Long-Term Care (i.e., standalone long-term care) is still, in my opinion, the best coverage you can get. The problem is that not many health insurance companies are offering that product coverage anymore. Every year it seems like there are fewer and fewer carriers in the traditional LTC game, and still, the premium costs continue to rise. In addition, you must undergo full underwriting and medical testing for the most available products. This health hurdle eliminates the abundance of people who need the coverage but cannot qualify for it during the underwriting steps.

People are concerned that they may never use the long-term care benefits they are paying for. And so I get this question from my clients all the time: “Is a Long-Term Care policy or long-term care insurance worth it?” My mom in St. Augustine, Florida, is one of those LTC policy owners concerned they are just “throwing money away” every time that premium bill comes in.

These are similar concerns for other insurance coverages like a flood, home, and car insurance. People don’t like throwing money down a “rabbit hole” and possibly not getting anything in return. I get that, and that always leads my clients to ask, “Can I use an annuity to pay for long-term care, and I still control that money?”

The answer is yes, but in a perfect world, that annuity long-term care type coverage would be secondary coverage (not primary). So, let’s take a look at how annuities can help with long-term care or confinement care type coverage in case you can’t qualify for traditional LTC or want to have better control over that asset.

Simplified Can Be Better

A health insurance product is the first type of annuity with long-term care coverage. It is called a “simplified issue,” which means you only have to do a phone interview with the issuing carrier, and you don’t have to go through the full underwriting process. In my opinion, it is not as good of a product as pure long-term care insurance, but it does allow you to retain full control over the asset. To a lot of people, that’s very important.

Simplified issue LTC annuities require a lump sum deposit, and then based on the answers to the carrier questions, if you are approved, the carrier will apply a multiple to that lump sum for long-term care coverage. For example, if you put $100,000 into the product, the carrier might apply a three times multiple for LTC. So, you would have a $100,000 getting a CD-type interest rate return with a $300,000 amount that can only be used for long-term care.

If you don’t use the coverage and die before accessing it, there is a death benefit in place for your listed beneficiaries. That death benefit is the initial $100,000 plus interest earned. It is not tax-free or income tax-free, but the annuity carrier doesn’t keep a penny under any circumstances.

Drinking & Smoking LTC Goal Setters

Making sure that you are not a burden on your family by having Long-Term Care (LTC) type coverage in place is important to many people.

For those of you burning the candle at both ends, there are annuities issued by life insurance companies that provide nursing home, confinement care, or enhanced benefit-type coverage without any underwriting. The product is guaranteed issue regardless of your health status. Because everyone is approved, this product coverage is not as good as Traditional LTC or the Simplified Issue Annuity.

A deferred annuity is the guaranteed issue product that delivers this LTC-type coverage. The benefit could be a variable annuity or a fixed annuity (depending on the product/carrier). Agents sometimes over-hype it by calling it a hybrid product.

I use a southern saying to describe this type of coverage. “If you get sicker, you get your money back quicker.” In other words, the carrier guarantees an income stream using an attached Income Rider benefit. Which also increases that payment amount.

Once again, if you don’t use the LTC-type coverage, you retain full control over the asset, and the annuity company doesn’t keep a penny under any circumstance.

Transfer That Risk

Annuities are transfer of risk contracts. In my opinion, they should be owned for their contractual guarantees only, and the rate of return or ROI (return on investment) is irrelevant. You are transferring the risk to the annuity carrier to solve for a specific goal or concern. In this case, the goal is Long-Term Care, confinement care, or enhanced benefit-type coverage.

True retirement planning should address long-term care and how a portfolio should be set up to pay for long-term care coverage if that is the client’s goal. I work with many “fee-only” planners where this transfer of risk strategy is part of the overall financial plan.

Speaking with your financial advisor or agent about traditional LTC coverage and long-term care annuity pros and cons is a good idea. No product is perfect, so you must know the benefits and the limitations before signing the application. You are buying a contract, so it’s important to know what’s in that policy.

End-of-life issues are tough to plan for. When you can do the basic functions of life (i.e., feed yourself, clothe yourself, etc.), it stinks anyway. Regardless, you need to have a plan in place to remove that burden (aka Gorilla) from their shoulders.

Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.

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