Long Term Care Annuities: How do they work?
The Annuity Man
Health care in general is not just a politically hot topic, it’s a legitimate concern for most Americans in retirement or nearing that retirement finish line. Whether you are age 55, age 65, or even age 85, 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.
Over 10,000 times per day, a baby boomer reaches retirement age. That is a demographic tidal wave for the health care industry and the government, with Long Term Care concerns front and center for aging baby boomers.
Health Gorilla in Everyone’s Room
That gorilla in every adult’s room is how to plan for possible long term care expenses. Pure long term care products are issued by health insurance companies, and those typically require people go through an underwriting process to qualify for coverage. If you have ever been underwritten for life insurance, the process for LTC is similar.
Long term care annuity providers are life insurance companies, and the long term care annuity cost varies by product type and the issuing carrier. Some products require a simplified issue underwriting process (i.e. phone interview) , while some annuities are guaranteed issue...regardless of your health status.
The Best Coverage Still Is…
Traditional Long Term Care (i.e. stand alone long term care) is still the best coverage you can get in my opinion. 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 the premium costs continue to rise. In addition, you have to undergo full underwriting and medical testing for most available products. This health hurdle eliminates a large number of people who need the coverage, but can’t qualify for it during the required underwriting steps.
Here is the question I get all the time from my clients, “Is a Long Term Care policy or long term care insurance worth it?” People are concerned that they may never use the long term care benefits that they are paying for. My 80 year old mom in St. Augustine, Florida is one of those LTC policy owners that is concerned that they are just “throwing money away” every time that premium bill comes in. I continue to annually tell my mom to calm down, pay the premium, and keep the coverage.
These are similar concerns for other insurance coverage products like flood, home, and car insurance. People never 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 you use an annuity to pay for long term care and I still control that money?” It's that old cake and eat it question!
The answer is yes, but in a perfect world, that annuity long term care type coverage would be secondary coverage (not primary) in my opinion. 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 more control over that asset.
Simplified Can Be Better
The first type of annuity with long term care coverage is actually a health insurance product. It is what’s called “simplified issue,” which means you only have to do a phone interview with the issuing carrier and do not 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...and 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 3 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. Most people really like that aspect.
Drinking and Smoking LTC Goal Setters
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. However, if you are drinking a bottle of Jack Daniels every day while smoking unfiltered cigarettes...this is the product for you!
The guaranteed issue product that delivers this LTC type coverage is a deferred annuity. The attached benefit could be to a variable annuity or a fixed annuity (depending on the product/carrier), and agents sometimes over-hype this strategy 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, but increases that payment amount when you qualify for that confinement care or enhanced coverage.
Once again, if you don’t use the LTC/confinement care 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 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 a goal of the client. I work with a lot of “fee only” planners where this transfer of risk strategy is part of every financial plan.
It’s a good idea to speak with your financial advisor or agent about traditional LTC coverage and also about long term care annuity pros and cons. No product is perfect, so you need to know both 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.), life pretty much stinks anyway. Regardless, you need to have a plan in place to remove that burden (aka: Gorilla) from your family's shoulders.