A Package Deal: Planning for Long-Term Care With Income Security

Your clients are increasingly aware of the acute limitations in Medicare financing of long-term care expenses; the limitations are such that individual planning for postretirement long-term care, whether in a nursing home or at home, has become essential for those nearing retirement age. Despite this knowledge, your clients are simply weary of hearing about the pros and cons of expensive long-term care insurance. A form of annuity could provide the solution for clients who are looking to plan for long-term care and receive a guaranteed return on their investment.

By combining coverage for chronic medical care with a traditional fixed annuity, two of your clients’ primary concerns—retirement income security and funding of postretirement long-term care—can be addressed in a single package.

Why Not LTCI?

The risks inherent in purchasing long-term care insurance (LTCI) exist on both sides of the equation. In recent months, as the costs of providing long-term care have escalated rapidly, even major insurance companies have begun exiting the market. Lower-than-expected investment returns on policy premiums, coupled with increased claims, have left insurers unprepared to cover these rising costs.

This makes the LTCI that is available extremely expensive, which, compounded with the fact that your client’s entire investment in LTCI could be lost if he does not require long-term care, creates an increasingly difficult product to sell.

The Annuity Solution

The base product is very simple: your clients can purchase a single premium fixed annuity and add on optional death benefits and protection to fund chronic care expenses.

These annuities protect against the use-it-or-lose-it problem of long-term care insurance—if your client is lucky enough to never tap into the chronic care benefit of these products, the product contains a cash surrender value. If the client has opted to include enhanced death benefits in the annuity contract, he will have provided an inheritance for the contract beneficiaries.

Once your client requires long-term care, the long-term care benefits under the annuity begin to pay out over a period of years. Typically, benefits will continue for about five years before they are exhausted. However, if the client holds the annuity for a significant time prior to using the long-term care benefits, the benefits increase accordingly.

The Downside

As with any other financial product, it is important to advise your clients as to the downside of purchasing an annuity with chronic care benefits. Locking funds into an annuity product with a fixed rate of return always creates the risk that the equity markets will perform well, and your clients will have lost the opportunity to participate in these gains.

Further, the income received under the annuity contract could increase your clients’ premiums for the means-tested Medicare Part B, which are adjusted based on annual income.

Most of these products also require a waiting period after purchase of the annuity contract that must elapse before your client will be eligible for long-term care coverage. Because of this, it is important that your clients plan in advance when purchasing these products.

Conclusion

Planning for postretirement medical expenses, including long-term care, should be a high priority for your clients who are nearing retirement age. New annuity products that cover both the costs of long-term care and provide additional cash surrender or death benefits may be the solution that your risk-adverse clients are seeking.

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