Long-term Care Annuities
When planning for the potential cost of long-term care, you’ve probably considered long-term care insurance. But premiums can be expensive and if you do buy the coverage, you probably hope you never have to use it. The prospect of paying costly premiums for long-term care insurance that you might never use might discourage you. Enter the long-term care annuity. WHAT IS IT?
This hybrid product, offered by insurance companies, is a non-qualified annuity that provides long-term care benefits (it can’t be used with IRAs or employer-sponsored qualified retirement plans). These policies allow you to use the annuity proceeds for long-term care, and if you don’t use the long-term care benefit, you still have typical annuity options. For instance, you can convert the annuity to a stream of income payments (annuitization), redeem the annuity at its maturity (e.g., cash in the annuity), or, at your death, you can pass the remaining balance of your annuity to your named beneficiaries. While policy provisions may differ from company to company, generally you put money into the annuity, usually in a lump sum. You may also exchange another annuity or cash value life insurance for a long-term care annuity via a Section 1035 exchange. The annuity typically pays a fixed rate of interest each year. In addition, the annuity provides a long-term care benefit amount, usually equal to two or three times your annuity cash value, subject to a maximum benefit period, which is the maximum length of time that you may receive long-term care benefit payments from the annuity. Long-term care annuity benefits are usually paid monthly.
THE PROSPECT OF PAYING COSTLY PREMIUMS FOR LONG-TERM CARE INSURANCE THAT YOU MIGHT NEVER USE MIGHT DISCOURAGE YOU. CONSIDER A LONG-TERM CARE ANNUITY.
HOW DOES THIS PRODUCT WORK? Typically, long-term care annuities have the same qualification requirements as most stand-alone long-term care insurance policies. You first have to be considered “insurable” by the annuity company, which means you have to answer questions relating to whether you have suffered any major illness such as cancer or heart disease, or whether you have a significant cognitive impairment like Alzheimer’s disease. But you usually don’t have to undergo a physical, and the underwriting is generally less stringent than with stand-alone long- term care insurance, meaning it’s a little easier to qualify for the long-term care annuity. Like most stand-alone long-term care policies, in order to be eligible for long-term care benefits from the annuity, you must either suffer from cognitive or mental incapacity or be unable to perform at least two of six activities of daily living that include feeding, bathing, dressing, transferring, continence, and toileting. Thereafter, benefits are typically available after a waiting period of between 30 days and 2 years (depending on the particular product). Example: Say you pay $75,000 to purchase a long-term care annuity. You select a long-term care benefit equal to 200% of your annuity’s cash value, with a 5-year benefit period. Initially, your long-term care benefit equals $150,000 ($75,000 x 2). Let’s assume the annuity earns 4.5% per year and the cost of the long-term care provision is 0.5% per year. At the end of 20 years (presuming you take no withdrawals) the annuity is worth about $163,622 and the long-term care benefit amount is $327,244. This will provide maximum long-term care benefit payments of $5,454 per month for as long as 5 years. And even if cumulative long-term care payments exceed the annuity’s contract value ($163,622), the long-term care payments will continue until you either exhaust the long-term care benefit amount ($327,244) or you no longer need long-term care. (This is a hypothetical example. It does not represent a specific product. Product terms and conditions may differ. Check with the annuity issuer for specific product details.) WHAT ABOUT TAXES? Generally, withdrawals from an annuity are considered to come from earnings first and are subject to income tax. With respect to
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