One reason people are reluctant to purchase long term care insurance is that they think they’ll never need LTC services. Yet two-thirds of people age 65 today will need such care in the future. A “hybrid” annuity, offering LTC benefits with the annuity, might be for them.
Here are the sober realities. Many clients may think they can self-fund their LTC expenses. Yet in 2006, the national average private pay cost of care in a nursing home was about $75,000 per year for a private room. With costs like that, self-funding is not an option for the majority of people.
Others think the government will take care of them. However, many people just don’t realize that Medicare was never intended to pay for LTC. And for those who want to pass on what they’ve worked for their entire lives, Medicaid can be ruled out because of strict asset spend-down requirements.
Advisors know that stand-alone LTC insurance can be a good solution to fund LTC needs. But convincing clients that the potential need justifies the cost can be a challenge.
In cases such as these, another option to consider is a hybrid annuity with LTC benefits.
Hybrid products have been criticized in the past as not fully protecting long term care needs. However, these products have evolved to a point where they may be just what your clients are looking for.
Many hybrid annuity products include a LTC rider. If clients don’t need LTC, they still have access to their funds, including the ability to annuitize their contracts. If LTC is needed, the annuity will fund their care until the annuity is depleted-typically over a 2-year period. Then the LTC rider will pay for at least 4 additional years of services. With one lump-sum premium, then, the client can have the reassurance of LTC protection for up to 6 years if needed.
Here’s an example of how a hybrid annuity might work:
If the accumulated value of the annuity at time of claim is $200,000, 1/730 of that value is available as the maximum daily benefit. In this example, the available daily benefit is $274. If your clients use the maximum daily benefit amount, the benefits received from the annuity value would last for a 2-year period. Once the annuity value is depleted, the LTC rider provides the same maximum daily benefit for up to another 4-year period. Calculating the total amount available for a LTC claim reveals that the benefit amounts are equal to 3 times the annuity value. So this $200,000 annuity can actually create $600,000 of LTC benefits.
Consider these points:
All types of care. The LTC portion of these types of products cover all types of care, including home care, adult day care, assisted living facility care and nursing home care. And today’s policies include all the extras like bed reservations benefits, respite care, caregiver training and so on. The benefit trigger is typically the same as stand-alone tax qualified LTC coverage-the inability to perform at least 2 of 6 activities of daily living or severe cognitive impairment.
Premium payments. A common question about hybrid products is how the premium charge works for the LTC coverage. The LTC rider charge is deducted from the annuity account value on a monthly basis.
Taxes. Under current law, the charges for the LTC rider are treated as a withdrawal from the annuity and taxed until Dec. 31, 2009. Then, based on the current 2006 Pension Protection Act, effective January 1, 2010, charges for the LTC rider and any tax-qualified LTC benefits can be taken from the annuity tax-free. For this reason, non-qualified money is used to fund the annuity.
Inflation protection. This is often available for the LTC component. The inflation protection option ensures that the daily benefit increases by 5% compounded annually. As the annuity accumulation value increases, so do the LTC benefits. But, to ensure a 5% increase, the inflation rider may be helpful
More streamlined applications. Another benefit of hybrid products is that the application process is typically more streamlined than stand-alone LTC insurance. Most hybrid products require a limited number of health questions and a personal health interview. Turn-around time is quick-5 days, on average.
The hybrid annuity products being offered now can truly be a smart planning tool for baby boomers preparing for retirement. Think about a hybrid product offers clients:
- A hedge against the possibility of needing LTC
- A response to the objection that the client could self-fund LTC costs
- An easier way to apply for LTC coverage without extensive medical underwriting
Advisors should make sure the sale is suitable. This product is generally recommended for clients with total assets of $300,000 to $2.5 million. The minimum single premium is typically $50,000. Do the homework. Among matters to consider is that, once the annuity is annuitized, LTC benefits cease. Additionally, LTC benefits typically are not payable for the first 2 policy years, and some policies have an elimination period of 90 days.
Also, advise clients to read the disclosures and other material carefully. Annuities are a serious investment and should not be taken lightly. However, in the right situation, they just might be the answer.