Discussing a client’s long-term health needs can be uncomfortable. Everyone wants to live an active and fulfilling lifestyle in retirement. But your health is unpredictable. Assisted living and home health care are expensive realities of aging.
Long-term care is an unavoidable and highly important segment of retirement planning.
Take advantage of Long-Term Care Awareness Month, a marketing campaign held annually in November, to get your clients thinking about their long-term care needs.
Nearly 70 percent of people who live to age 65 will need some type of long-term care in their lifetimes, according to Forbes.
And this need can come with quite the steep price tag. The Genworth 2017 Cost of Care Study found:
- Nursing home care in the U.S. can cost a person anywhere from $85,000 to over $97,000 a year.
- An assisted living facility can set a person back by about $45,000 a year.
- Home health care can range from nearly $48,000 to over $49,000 annually.
Here’s what you should know about long-term care annuities and how they can best be used to help your clients develop a comprehensive retirement plan.
How Long-Term Care Annuities Work
A long-term care annuity is essentially a pool of money set aside to pay for long-term care expenses. It can be used to cover the expenses associated with home health care, assisted living or nursing home care.
It is sometimes purchased as a rider — designed to protect your client’s principal or investment and income or fixed payments — on a deferred annuity.
Long-term care funds can be accessed immediately. But the cash portion of a deferred annuity is reserved for a future date that is determined at the time the annuity is set up.
A deferred annuity is available to people up to age 85. Individuals wanting this type of annuity will need to meet certain health criteria.
Like other annuities, a deferred annuity provides a regular monthly income for a specified period of time in exchange for a lump-sum premium payment.
Clients who take advantage of this benefit will have a predictable stream of income in retirement.
Deferred annuities with long-term care benefits are beneficial to people who:
- Do not qualify for long-term care insurance or life insurance
- Cannot afford long-term care insurance with limited or restricted benefits
- Do not need immediate income payments
- Have a lump sum of cash to invest for a number of years
What Is a Hybrid Benefit Annuity?
A hybrid benefit annuity is one that combines long-term care coverage with a fixed-income annuity into one convenient product.
Your clients put a chunk of money into the product and then choose the amount of long-term care coverage they want and how long they want it to last.
This type of annuity may be appropriate for a person who is unsure of whether long-term care benefits will be needed or in what amount.
If the long-term care benefits are not used, a portion of them can still be paid out as an annuity payment for use towards other retirement needs.
The IRS allows deferred annuity holders to use money from their policy to pay for long-term care while foregoing federal taxes.
Typically, annuities grow money tax-free. But when your client’s cash in, they also need to pay out — in taxes.
But in 2010, the IRS nixed this requirement when it comes to covering long-term care expenses.
A tax break included in the Pension Protection Act of 2006 was designed to help promote sales of hybrid benefit annuities.
Using the IRS 1035 exchange rule, consumers can move deferred gains from their existing non-qualified policy — such as another annuity or whole or universal life insurance policy – to a hybrid policy without the imposition of a tax payout.
Additionally, proceeds from these combined annuities can be used tax-free to pay for qualified long-term care coverage and premiums.
Your clients will eventually pay taxes on the annuity’s remaining gains when they cash out. But the amount owed will be reduced — possibly eliminated — depending on the amount of money transferred for long-term care premiums over time.
Other Key Points Worth Talking About
Before having your client sign on the dotted line, make sure to have a conversation with them about all the benefits — as well as the drawbacks — of a long-term care annuity.
Having a long-term care annuity — or deferred annuity — assumes you will live long enough to enjoy the payout. Unfortunately, this is not always the case, as life expectancy is unpredictable.
But, if a person does not use their long-term care portion of an annuity, it can be passed on to their heirs. So the money is never actually lost.
Also, long-term care coverage may be an alternative for people who do not qualify for long-term insurance or life insurance. This is because the underwriting process required for a long-term care annuity is often less stringent than for other long-term-care policies.
But there are some downsides. First, the annuity may not be enough to pay for the entirety of a person’s long-term care expenses. Long-term care is a difficult thing to predict, and the amount that is put aside may not be the amount that is ultimately needed.
If your client is independently wealthy or has other funds available to cover the added or unexpected expenses, then this downside may not apply.
But if they are depending on their long-term care annuity as their sole source of payment to cover long-term care expenses, then shorting on their policy benefits can present a real problem.
An annuity can potentially affect a person’s eligibility for Medicaid. So, if a proper amount of money is not available via their long-term care coverage, they may be out of luck.
Long-term care annuities are valuable tools to cover an often inevitable and expensive part of life. But it’s important to tailor the long-term care annuity to each client based on their individual needs, goals and overall retirement income plan to best maximize their benefit.
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