While the costs of traditional long-term care (LTC) insurance have skyrocketed to prohibitively expensive levels, a new superstar LTC product has emerged—sales of combination annuity-LTC contracts are soaring, making this the next hot product trend to hit the markets. Carriers have expanded their offerings to include new product features and combinations that have caused sales to jump from just under $50 million in 2012 to a projected $500 million in 2014.

As the baby boomer generation continues into retirement and the need for LTC services rises, clients will continue to search for attractive funding alternatives—and as this product combines the power of a tax-preferred retirement income-planning tool with appealing LTC features, it’s likely to remain a hit among clients for years to come.

Why the Appeal?

Combination annuity-LTC products have surged in popularity 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.  Because traditional long-term care insurance, which also provides tax-free benefits, has become unrealistically expensive for many clients, the annuity-LTC option has emerged as a more reasonable alternative.

Apart from its steep (and rising) costs, a primary downside to purchasing traditional LTC insurance is that it’s possible that the client will not use it. There is no surrender value, so your clients could pay on a policy for years and lose the entire investment if they are lucky enough to never require long-term health care. Because most insurance companies will approve coverage only for relatively healthy individuals, this risk can be significant.  An annuity product mitigates the risk, because absent the need for LTC, the annuity portion of the contract continues to function as a retirement income source.

Combination life insurance-LTC policies similarly protect against the risk of never needing long-term care, but older clients and clients with poor health records may have a much more difficult time qualifying for life insurance than an annuity because of the health underwriting required for life insurance.

As a result, for client who cannot afford or quality for traditional or life insurance-based LTC, the combination annuity-LTC product will continue to offer an attractive option.

Annuity-LTC Product Features

While not all combination annuity-LTC products offer identical features, the concept is the same: the annuity product is combined with a LTC rider that will begin to make (tax-free) payouts once the client requires care. 

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.

Some LTC riders are offered only in conjunction with fixed annuities, while others are available only in conjunction with variable annuities or market value adjusted annuities.  A few combination annuity-LTC products limit the maximum LTC benefit to a percentage of the account value (200 percent or 300 percent), while others express the limit as a multiple of the initial premium deposit (two or three times).

While most LTC riders are offered only with single-premium products, it is now possible to combine LTC coverage with a flexible premium annuity.  Further, while combination products typically only provide LTC coverage for a single life, products now exist that offer joint-life LTC coverage.

Nearly all plans cover the most common LTC expenses that a client is likely to incur, such as nursing home costs, home health care costs, adult day care services and hospice care.

Conclusion

While the need for long-term care among clients will undoubtedly remain constant, the methods for funding this coverage are changing rapidly—and the tremendous growth in combination annuity-LTC sales shows that this type of product is now providing clients with an extremely attractive option.

Originally published on Tax Facts Onlinethe premier resource providing practical, actionable and affordable coverage of the taxation of insurance, employee benefits, small business and individuals.   

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