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Annuities + LTC: Does the Rider Fit?

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Protection against future long-term care (LTC) expenses is important for all clients and, for the right client, combining LTC insurance with an annuity product can make all the difference between comfort and anxiety late in life. That the need for coverage is relatively universal, however, does not mean that the analysis of a particular combination annuity-LTC product is any less nuanced. Just as every client is different, not all LTC riders are created equally—and your advice can prove crucial in finding the most suitable product for the individual client.

Annuity-LTC Coverage Basics

Combination annuity-LTC products have become more widely available in recent years at least partially because, under rules enacted in 2010, LTC benefits that are paid out under an annuity product are received entirely tax-free, unlike a traditional standalone annuity where the payouts are partially taxable to the client.

The concept is relatively straightforward. Your client purchases an annuity product with a LTC rider that will begin to make (tax-free) payouts once your client requires care. Once the annuity funds run out, assuming the client still requires LTC services, the LTC rider activates and begins making tax-free payments. If the client never requires long-term care, the product simply provides annuity payouts according to the terms of the annuity portion of the contract, which are taxed under the usual rules governing annuity taxation.

Terms of the LTC riders vary, and the client can choose whether he or she wants to limit the LTC payments to a specific term of years or if the LTC benefits will continue for the remainder of the client’s lifetime. The contract can be funded with a single-premium payment or, in some cases, through installment payments made over time.

The Suitability Analysis: Which Client Fits?

It is important to ensure that the funds used to purchase a combination annuity-LTC policy are not funds that would otherwise be needed to ensure a secure stream of retirement income for the client. This is particularly true in a low interest rate environment because most combination products will provide for a comparatively low—though generally secure—rate of interest.

The level of interest actually paid on the account value will often depend on whether the interest rate is guaranteed—a contract providing for a guaranteed growth rate will typically grow at a slower rate than one with a nonguaranteed interest provision. While the guarantee protects against market downturns, it can also cause a client to miss out on the potential for rising interest rates.

These factors lead to the conclusion that the combination annuity-LTC product may be best suited for clients with substantial retirement savings who are willing to forgo potentially higher growth rates in exchange for the peace of mind the product can offer. Further, the appropriate client should have a fairly significant sum to invest in the product in order to ensure that the account value grows to a level that can provide adequate payouts to cover the cost of LTC, especially because these costs will likely continue to rise.

Remember, not all riders are created equally. A chronic care rider, which is similar to a LTC rider, will not pay out benefits if the client is expected to recover from whatever ailment necessitates the care. A traditional LTC rider will often cover expenses derived from non-chronic illness, but it is important that the client understand the triggers defined within the contract itself in order to ensure that the most appropriate rider—considering the client’s specific risk factors and goals—is chosen.


Special considerations come into play when your clients are choosing the most appropriate long-term care funding strategy for the future. Annuities with LTC riders can provide the security clients need—but, as with any other strategy, it is important to ensure that the product is the right fit for your client before jumping in.

Originally published on National Underwriter Advanced Markets. National Underwriter Advanced Markets is the premier resource for financial planners, wealth managers, and advanced markets professionals who provide clients with expert financial and retirement planning advice.

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