Annuities

Long-term care insurance may be an important (even necessary) part of your financial plan. But you may be reluctant to buy a policy whose premiums can rise. Plus, if you never require long-term care, the money that you had spent on premiums simply vanishes.

Still, you may want the financial security that long-term care insurance provides. There is another way to get long-term care coverage - by combining it with a life insurance or deferred annuity policy. These combination policies could make long-term care insurance more financially attractive.

Here’s a brief summary about how they work. Long-term care insurance is added as a rider or as an additional benefit to a life insurance policy or deferred annuity contract. Premiums for many of the life/long-term care insurance combo policies are usually paid up front.  While this can be a significant outlay of funds at the start of the policy, the one-time premium payment for both life and long-term care insurance does provide protection from rising long-term care insurance premiums down the road. In contrast to the life/long-term care policy, the long-term care coverage on a deferred annuity will typically be based upon a percentage of the annuity assets (based, among other things, upon the insured’s age and health).   

One of the combinations of life and long-term care insurance provides current life insurance benefits to the policyholder if long-term care is required. The money to pay for long-term care expenses comes from reducing the policy’s death benefit. So if you have a $500,000 death benefit and incur $70,000 in long-term care expenses, the nationwide average cost of a year of nursing home care  the death benefit will decrease to $430,000.

As previously mentioned, another way that long-term care coverage can be combined with life insurance or a deferred annuity is to include long-term care insurance as a rider to the base policy. For example, a $100,000 life policy with a long-term care insurance rider may pay lifetime benefits up to $200,000.  These policies typically require annual premiums for the long-term care coverage, in addition to the initial premium payment. Many long-term care riders are guaranteed renewable. Assuming the insurer is financially sound, the annual premium on many policies remains constant throughout the life of the policy (subject to the insurer’s claims-paying ability). 

The insurance company will look at your family health history and any pre-existing conditions that you may have. In the case of a life/long-term care plan, the potential death benefit and long-term care expenses will be considered. Therefore, an annuity-based combination might be more appropriate if your health makes it difficult to buy life insurance. The money in the annuity can then be used for long-term care expenses, or passed to a beneficiary. 

Please note, however, that annuities are long-term investments designed for retirement purposes. Withdrawals of taxable amounts are subject to ordinary income tax, and if taken prior to age 59½, a 10% federal tax penalty may apply. Early withdrawals may be subject to surrender charges. Guarantees are backed by the claims-paying ability of the issuer.

Would a combination life/long-term care policy work for you? It depends on your individual needs and financial situation. With many different combinations to choose from, find a retirement advisor that can evaluate your options.

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For some time, insurance buyers have been able to buy annuities or life insurance that included a long-term care insurance. Here is how the policies generally work. In many cases, some of the earnings from the cash value in the life policy or the cash value of the annuity are used to pay premiums for long-term care insurance protection.  A hypothetical example might look like this:

Our hypothetical investor, a 65-year-old man, pays a premium of $50,000.  He obtains a life policy with a death benefit of $74,718.  He also gets long-term care insurance amounting to $149,436, to be used at a rate of $3,133 monthly, when the policy owner qualifies for long-term care benefits.  So far, this may look attractive because there are no annual out of pocket premiums—the only payment is the single payment of $50,000. Additionally, assuming that there are no prior withdrawals or payments for long term care insurance benefits, the insurance company will guarantee the $50,000 which can be withdrawn at any time . |

The $50,000 cash value is credited with interest each year at a gross and guaranteed minimum rate of 4%.  But from the accumulated cash value, deductions are made to pay for the life insurance and the long-term care insurance. Currently, the deductions from the policy to pay for the long-term care insurance are taxable to the policy owner because the IRS views them as payments from the life policy (and because this policy was purchased with one large premium, IRA classifies it as a modified endowment contract and taxes the first withdrawals as ordinary income). 

Good news.  The Congress would like everyone to have long-term care insurance protection so that as of January 1, 2010, these combination policies where a life policy or annuity is funding the long-term care insurance will no longer generate taxable income to the owner.  The change applies to policies purchased after 1996. However,   through 2009, owners of these combination policies will need to make the tax payments each year.  Also, one may consummate a tax-free exchange of an annuity or life policy after 2009 for one of these combination policies.

If you have been interested in long-term care insurance protection without annual out of pocket costs, these single premium annuity or life policies may be the answer.

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Contributed by Javelin Marketing

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