Annuities With Long-Term Care (LTC) Benefits

On January 1, 2010 the PPA added several provisions to specifically address annuities that include long-term care benefits and riders. These new provisions have made nonqualified annuities with LTCI benefits much more attractive to consumers.

1. Rider charges deducted from annuities to pay for LTCI benefits are no longer a taxable event.
2. Tax-deferred growth within annuities pays for the LTCI benefits on a tax-free basis.
3. The new rules only apply to non-qualified annuities coupled with tax-qualified long-term care riders. A tax-qualified long-term care rider provides various levels of LTCI benefits, including benefits for cognitive impairments such as Alzheimer’s.
4. Clients can also make a 1035 exchange into a combo annuity. This allows clients with existing annuities that do not have these types of benefits to take advantage of LTCI benefits through a combo annuity.

Combo annuities were created to help protect your client’s risk boundaries, specifically their level of risk for retirement accumulation and insuring dollars are available if long-term care is needed.

The need for long-term care has never been greater. Despite the fact that 69 percent of people over age 65 will rely on some type of long-term care service or support during their lifetime, only 10 percent have acquired private long-term care protection. In 2009, the average yearly cost alone for a private pay room in a nursing home was $79,935. And the average long-term care stay was 3.7 years for women and 2.2 years for men, with roughly 20% of Americans requiring long-term care coverage for 5 years or more.

Below is a chart that shows the different levels of care that are routinely covered by combination annuities.  You should check each particular policy to determine coverage.

Fixed annuities, those CD-like investment vehicles that can provide an income stream for life, are a tough sell in the current low interest rate environment. However, if you're a risk-averse shopper who can't pull the trigger on a use-it-or-lose-it long-term care policy, an LTC annuity may be worth exploring.

The annuity approach has several advantages: You retain access to your money (although fees usually apply), the cost of the LTC rider may be less than an LTC policy, and you can obtain coverage without health underwriting if you've been turned down for a stand-alone policy.

The disadvantage: Besides that steep upfront investment, the rider fee can eat into your annuity's interest income, and you'll be locking that money up today at a relatively low rate.