An Annuity Alternative to LTC Insurance

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Can long-term care annuities supplement or expand the LTC portion of your practice? LTC insurance is a powerful wealth-preserver for individuals who qualify and families that can afford it, but despite its value, LTC insurance can be a tough sell.

Insurability issues can put LTC insurance out of reach for clients with health problems, and resistance to paying for an insurance product that may never pay off may keep your clients away from the table.

Enter LTC annuities—also referred to as hybrid annuities. As the name implies, the product functions like a deferred annuity, but offers an increased payout, typically equal to 200 or 300 percent of the face value of the annuity, if the annuitant needs LTC. Payments may continue for a fixed period, or, if an optional rider is purchased, payments for LTC can continue for the rest of the annuitant’s life. LTC annuities are purchased as are any deferred annuity, usually with a lump-sum premium of at least $50,000.

As more carriers pull back from the LTC insurance market, decreasing competition and increasing rates, the availability of these annuities are a boon for advisors and clients who seek more LTC options. They are especially valuable for those who understand the value of LTC planning, yet may be unable to qualify for LTC insurance because of health problems or age.

The underwriting for LTC annuities often is far less stringent than for LTC insurance, opening the product to a broader range of clients. The application for a LTC annuity may ask whether the applicant has been diagnosed with cancer or another serious disease. But beware that it may take some shopping around to find the right product, because underwriting standards  differ from carrier to carrier, and may even diverge between products.

LTC annuities also may be the perfect antidote for clients who qualify for LTC insurance but  don’t like the idea of paying into a policy that may never pay a benefit and won’t leave anything for their beneficiaries. One key selling point of LTC annuities over their insurance cousins is that, unlike most LTC insurance, if the annuitant doesn’t need LTC, the annuity will grow in value and pass to the annuitant’s beneficiaries.

For clients who don’t want to commit significant capital to a product that leaves nothing for their beneficiaries, LTC annuities offer a generous death benefit equal to the accumulated value of the annuity. Or, if the annuitant requires LTC, the amount of the premium paid into the annuity, less the LTC benefit paid during the annuitant’s life.

One disadvantage of LTC annuities over traditional annuities is that their payout can be significantly smaller. But LTC annuities have a tremendous tax advantage over standard deferred annuities. The Pension Protection Act of 2006 changed the taxation of LTC products, and as of 2010, payments received from a LTC annuity will not be taxed if they are used to pay for LTC expenses. Considering the income tax savings of an LTC annuity, the lower crediting rate starts to look a lot more enticing.

For couples, there’s a relatively new option in LTC planning, joint LTC annuities. Certified LTC specialist Randy Gallas, of the long-term Care Insurance Agency, says that “a joint annuity can be a great way to leverage dollars allocated by a couple for LTC expenses.” Joint LTC annuities allow both spouses to pay LTC expenses from this product.

For example, using one carrier’s illustrations, a couple that wants to

self-insure their LTC risk can exchange an existing annuity (1035 exchange) for a hybrid LTC annuity that will pay long-term care expenses tax free.   

For instance, a 65-year-old couple that repositions $200,000 from an existing non-qualified annuity can leverage over $500,000 of long-term care benefits. If both spouses pass away and neither uses the hybrid annuity, their beneficiaries or estate can receive all or most of the original investment (age dependent) back.  

“For those planning to self-insure, why not do that with a product that can give them their principal back?” asks Gallas. Currently, only a small number of carriers offer joint LTC annuities.

Conclusion

LTC annuities can supplement your book of business by overcoming resistance to other LTC products and giving otherwise uninsurable clients the LTC protection they need. Here are some key points to remember:

  • Payments received from a hybrid annuity for LTC expenses are received tax free.
  • A 1035 exchange is a great way to move funds from a standard deferred annuity to an LTC annuity if the standard annuity isn’t needed for retirement income purposes.
  • On average, men don’t need LTC as often as women. Consider a joint LTC annuity for couples.
  • Unlike LTC insurance, LTC annuities offer a death benefit for loved ones. The benefit will be much higher if the annuitant does not use the contract’s LTC benefit.

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See also The Law Professor's blog at AdvisorFYI.

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