Ken Nuss: Long-Term-Care Insurance via an Annuity Has Many Pros, Some Cons

Long-term care—whether at home, in assisted living or in a nursing home, costs a lot—especially if it continues for years. To protect their finances and leave something for their heirs, many people would like to buy long-term-care insurance (LTCI).

But LTCI isn’t cheap. And there’s a big drawback. If you buy it and never collect any benefits, you’ll have spent a big sum of money and not gotten anything in return except peace of mind.

To get around the problem, insurance companies developed the long-term-care annuity. This combines a deferred fixed annuity (a tax-deferred savings vehicle) with LTCI. The insurance is provided via a long-term-care rider, a policy add-on that lets the annuity pay benefits for long-term care.

If you don’t ever use the LTCI benefit, or not much of it, you or your heirs will have the remaining annuity value to use.

But LTCI annuities are complex and can have lots of moving parts, so they have both pros and cons. While the concept isn’t new, insurers are always looking to improve their products and offer more flexibility and features.

Because the products are varied, a brief article like this can’t be comprehensive. But there are pros and cons that are pretty much common to all these products.

Some advantages: easier acceptance, tax-deferred savings and guarantees

One key advantage is more liberal underwriting. Traditional LTCI insurers are pretty strict about who they’ll insure. If you have any significant health issues, you may be declined coverage.

LTCI annuity insurers aren’t as stringent. They’re usually much more willing to accept people with health problems. Some will even take everyone. However, if you do have a medical condition, you’ll probably be placed in a lower underwriting class and eligible for lower LTCI benefits. But you’ll still be insured.

Tax deferral is another big plus. The money you place in the annuity will grow free of taxes until you withdraw some of the interest earnings.

Normally, if you take out interest from an annuity, it counts as taxable income. However, LTCI benefits paid by the policy are not taxable.

Another plus: fixed annuities are guaranteed. The issuing insurer guarantees your principal, interest and benefits. Though insurers have an excellent record of keeping their promises and are strictly regulated by their state of domicile, consider the company’s A.M. Best rating for financial strength before you buy an annuity.

Some cons: less immediate LTC coverage and possibly a bigger upfront payment (but not always)

With a traditional LTCI policy, you typically have full coverage from the time you pay your first premium. With an LTCI annuity, the LTCI coverage may be vested over time. You will usually have some LTCI coverage right away, with the amount becoming fully vested after a few years.

Most deferred fixed annuities are single-premium policies. You buy them with a lump sum. Some LTCI annuities are single-premium too. The advantage is that once you’ve paid it, you’re paid up for life. The disadvantage is that you have to come up with a large sum to secure a reasonable level of LTCI.

Traditional LTCI premiums are tax-deductible, up to certain limits, for self-employed people and owners of partnerships, subchapter S corporations, and LLCs. Upfront deposits to fund LTCI annuities are not tax-deductible.

The LTC rider has a cost, so your annuity value will grow more slowly over time when compared to a similar annuity without the rider. If the annuity pays out substantial LTC benefits, the cash value of the annuity will eventually decline to zero.

Insurers pioneer flexibility, features and programs

Recently, some insurers have introduced flexible-premium policies. After you’ve paid the initial deposit, you may make additional deposits, up to a certain limit, to get more LTCI coverage and boost the amount you’re accumulating in the annuity. This makes the policy more affordable for people who don’t have a big lump sum to deposit but can afford to buy additional coverage over time.

Traditionally, these hybrid annuities have been fixed-rate annuities, which act much like a bank certificate of deposit, by paying a set rate of interest for a set term.

Insurers, however, are innovating. At least one company, for instance, yokes a fixed-index annuity with LTCI. The fixed-index annuity provides growth potential linked to a stock-market index without any downside risk.

Some insurers may even offer a wellness program to go along with the hybrid product.  

Financing future long-term care expenses is always a challenge. But with the continued development of LTCI annuities, people have more options now. The product is well worth considering sooner than later. The older you are, the more expensive LTCI coverage becomes and the greater the odds that you’ll have a medical condition that limits your options.
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Annuity expert Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed, and immediate-income annuities. He launched the AnnuityAdvantage website in 1999 to help people looking for their best options in principal-protected annuities. One of America’s top experts on annuities, he writes on retirement income and annuities regularly. 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.