If you are over 50, your financial advisor, agent, or CPA has probably mentioned the need for some protection against the potentially disastrous costs of long-term care.
Knowing that retirees face increasing costs for long-term care and live longer than ever, your advisor may have suggested you purchase traditional long-term care (LTC) insurance policy. However, if you are like many people who have looked into long term care insurance, you probably did not like the high premiums and the possibility that those premiums will increase in the future. Currently, annual premiums average over $2,700 per year.
Another thing that may concern you about LTC insurance is that it is a “use it or lose it” proposition. Even though most Americans will probably require some long-term care when they get older, there is a chance that you might not need it. If this is the case, then you have lost the money you put into premiums.
One alternative to traditional long-term care
As more seniors become aware of the potential threat to their savings posed by long term care costs, insurers have developed alternatives to traditional long-term care policies. One of these alternatives is a long-term care annuity, sometimes referred to as a “hybrid “annuity.
An LTC policy differs from a hybrid, or LTC annuity, in several ways. When you purchase an LTC policy, you are buying a product designed specifically for long-term care. You can buy these policies either with an upfront premium or with monthly payments. Depending on the company and type of policy, your policy will pay you monthly or in a lump-sum when you need care.
A long-term care annuity is a type of deferred annuity that has an added long-term care rider. Think of a rider as an add-on that gives you additional benefits or extra features that you can purchase when you buy your annuity.
When you need long-term care, your annuity company will either pay you monthly or in a lump sum per your contract. To activate the rider and receive LTC benefits, you must meet specific medical requirements. For example, you may need to prove you have been diagnosed with a chronic or terminal illness, dementia, or another type of degenerative disease requiring round-the-clock care.
Benefits of a hybrid annuity
- Growth component. Unlike long-term care insurance, a hybrid annuity offers growth.
- Guaranteed income. If you don’t need long-term care, you cannot get your premiums back without purchasing a “return of premium” rider. With an LTC annuity, you can still receive payments even if you never use your long term-rider. This gives you a predictable form of guaranteed income you can use in your retirement.
- Often easier to get approved. If you have a serious medical condition, you will typically find it easier to get approved for a hybrid annuity than traditional long-term care insurance. (*there are certain medical conditions that may make you ineligible for either. Be sure to check with your agent or advisor)
- Less expensive. In many instances, a long-term care annuity is easier on your pocketbook. Long-term care insurance premiums are based on a variety of underwriting criteria, any one of which could result in higher premiums. When you add an LTC rider to an annuity, your age and health affect the cost, but you’ll generally pay less in premiums for the coverage.
Potential downsides of LTC annuities
- You may have to make a large payment upfront. If you don’t have extra cash, this could be an issue.
- Some annuities have fees. You’ll need someone to explain those fees and their potential impact on your retirement.
- Tax issues: In general, long-term care insurance benefits are not taxable, while annuity payouts can be taxable, depending on how you purchase them.
- Coverage may not be as comprehensive. Many insurance professionals claim that traditional long-term care policies provide better coverage and benefits.
Protecting your nest egg from the erosive effects of long-term care expenses is something you can and should do. Long-term care annuities may be an economical way to help pay for that care when you can no longer work. You will have a chance to reallocate cash that may be earning little to no interest and turn that into an LTC benefit.