Nursing care – whether at home, in assisted living or in a nursing home – costs a lot – especially if it lasts for years. To protect their finances and leave a legacy to their heirs, many people want to purchase Long Term Care Insurance (LTCI).
But LTCI is not cheap. And there is one big downside. If you buy it and never get any benefits, you’ve spent a large sum of money and got nothing in return but peace of mind.
To circumvent the problem, insurance companies have developed the caregiver’s pension. This combines a deferred fixed annuity (a tax-advantaged savings vehicle) with LTCI. Insurance is provided through a long-term care tab, a policy supplement that allows the annuity to pay for long-term care benefits.
If you never use the LTCI benefit or use it only to a small extent, the remaining annuity value is available to you or your heirs.
But LTCI annuities are complex and can have many moving parts, so they have both advantages and disadvantages. Although the concept is not new, insurers are always looking to improve their products and offer more flexibility and features.
Because the products are varied, a short article like this cannot be comprehensive. But there are pros and cons that are common to all these products.
Some advantages: easier acceptance, tax-privileged savings and guarantees
A key advantage is the more liberal underwriting. Traditional LTCI insurers are pretty strict about who they insure. If you have significant health problems, you may be denied coverage.
LTCI annuities aren’t as strict. They are usually much more willing to accept people with health problems. Some even take everyone with them. However, if you have a medical condition, you are likely to be placed in a lower underwriting class and be entitled to lower LTCI benefits. But you are still insured.
Tax deferrals are another big plus. The money you invest in retirement grows tax-free until you deduct some of the interest income.
If you receive interest on an annuity, this is normally considered taxable income. However, LTCI benefits paid by the policy are not taxable.
Another plus: Fixed pensions are guaranteed. The issuing insurer guarantees principal, interest and benefits. Although insurers have an excellent record of delivering on their promises and are tightly regulated by their home state, consider the company’s AM Best rating for financial strength before you buy an annuity.
Some cons: less immediate LTC coverage and potentially higher upfront payment (but not always)
With a traditional LTCI policy, you are typically fully insured from the time you pay your first premium. With an LTCI annuity, LTCI coverage may vest over time. You typically have some LTCI protection immediately, with the amount fully vesting after a few years.
Most fixed deferred annuities are single premium policies. You buy them with a lump sum. Some LTCI annuities are also single premium. The advantage is that once you deposit you are paid off for life. The downside is that you have to put up a large sum of money to secure a decent level of LTCI.
Traditional LTCI awards are tax-deductible up to certain limits for self-employed persons and owners of partnerships, Subchapter S corporations, and LLCs. Upfront payments made to fund LTCI annuities are not tax deductible.
The LTC tab has a cost, so your annuity value will grow more slowly over time than a similar annuity without the tab. If the annuity pays significant LTC benefits, the present value of the annuity eventually drops to zero.
Insurers are at the forefront of flexibility, features and programs
Recently, some insurers have introduced flexible premium policies. After you make the initial deposit, you can make additional deposits, up to a certain limit, to get more LTCI coverage and increase the amount you accumulate in retirement. This makes the policy more affordable for people who don’t have a large lump sum to put down but can afford to purchase additional coverage over time.
Traditionally, these hybrid annuities are fixed rate annuities that act similar to bank certificates of deposit by paying a set interest rate for a set term.
However, insurers are innovative. For example, at least one company pegs a fixed-index annuity to LTCI. The fixed index annuity offers growth potential linked to a stock market index without any risk of loss.
Some insurers even offer a wellness program that comes with the hybrid product.
Financing future care costs is always a challenge. But with the continuous development of LTCI annuities, people have more choices now. The product is worth considering sooner rather than later. The older you are, the more expensive LTCI coverage becomes and the greater the chances you have an illness that limits your options.
Annuity expert Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, index-linked and immediate annuities. He launched the AnnuityAdvantage website in 1999 to help people find the best capital-protected annuity options. As one of America’s top retirement experts, he writes regularly on retirement income and pensions. A free quote comparison service with interest rates from dozens of insurers is available at https://www.annuityadvantage.com or by calling (800) 239-0356.