What is a Long-Term Care Annuity and How Does It Work?

Good health can be fleeting as we grow older, and long-term care expenses that are not covered by traditional health insurance can devastate a retirement budget. The good news is that long-term care annuities can provide guaranteed income to cover essential services when long-term care is needed. These annuities serve two purposes. They ensure a stable flow of retirement income while affordably setting aside money to cover potential long-term care expenses.

What is a Long-Term Care Annuity?

Long-term care annuities are deferred annuities with either built in long-term care features or as an add-on to the product. These annuities are considered hybrid long-term care insurance products, with traditional deferred annuity features and provisions to pay long-term care benefits if they are needed. They are funded with an initial lump-sum, single premium payment.

You can use existing non-qualified annuities (after tax funds) or qualified money (funds for which you haven't paid taxes yet) as premium sources to obtain long-term care protection. You can even use 1035 exchanges to fund your new long-term care annuity. When making a purchase of a long-term care annuity with qualified money, the insurance company can accept direct transfers and rollovers.

Annuities grow with interest and a long-term care annuity can either be fixed or variable. With a fixed annuity, you’re earning a guaranteed rate of return. This may be a preferred annuity type to fund long-term care since it is generally considered safe and returns are predictable. A variable annuity tends to be riskier but it offers the opportunity to earn higher returns if the underlying investments perform well.

When, or if, you eventually need long-term care, the insurance company provides you with payments to help with those expenses. The payments you receive can be monthly or as a lump sum. The company can give you the money to use as needed or reimburse you after the fact for long-term care expenses you’ve already paid.

To activate the long-term care feature you generally have to meet medical standards that drive the need for long-term care (more on that below).

What is Long-Term Care Insurance?

Traditional long term care insurance is an insurance product that has one function – paying for long -term care expenses for a period of time when or if they occur.

Long-term care refers to care services that aren’t covered by traditional health insurance. This includes paying to assist the insured with what are referred to as "activities of daily living," including the following activities: bathing, using the toilet, dressing, eating, and/or getting in and out of bed.

A long-term care insurance policy helps cover the costs of that care when you have a chronic medical condition, a disability, or cognitive impairments. Most policies will reimburse you for care given in a variety of places, such as:

• Your home
• A nursing home
• An assisted-living facility
• An adult day care center

Considering long-term care costs is an important part of any long-range financial plan, especially as you get older and good health can be fleeting. You won’t qualify for long-term care insurance if you already have a debilitating condition or are in poor health, and coverage is dependent on you having received a medical exam. Also, Medicare may cover short nursing home stays or limited amounts of home health care, but it doesn’t pay for day-to-day care, which includes supervision and help with activities of daily living.

If you don’t have insurance to cover long-term care, you’ll have to pay for it yourself in most states. While you can get help through Medicaid, this can happen only after you’ve exhausted most of your savings. The rates you pay for long-term care coverage will depend on factors including your age, health status, gender, marital status, and the amount of coverage you are seeking. Rates may vary significantly from insurer to insurer.

Importantly, your policy premium could go up after you buy your policy. In fact, in recent years, many policyholders have seen rates spike after the insurers who issued the policy began to experience claims at levels that were not priced for. For this reason, among others, a long-term care annuity may be a better choice for people who want money reserved for the possibility of long-term care needs.

Pros of a Long-Term Care Annuity

A long-term care annuity may be the right product choice if you’re looking to protect yourself against the possibility of significant long-term care costs and the impact these costs can have on your retirement nest egg. This product presents the best of both worlds, a regular monthly annuity payment that you can use to enjoy in retirement with the ability to use the long-term care feature if necessary to pay for nursing and home care costs.

If you have existing health issues, it will likely be easier for you to get approved for an annuity with long-term care features than it would be to buy long-term care insurance. Cost is also a significant issue. Utilizing funds from your annuity to pay for long-term care may be much more cost effective than paying long-term care insurance premiums which, as we mentioned, can increase year to year.

With a long-term care annuity, your age, analysis of medical records, and overall health can affect the cost but not significantly as buying a long term care insurance policy.

Cons of a Long-Term Care Annuity

Annuities, by nature, require a large up-front premium payment, unless you purchase a flexible premium annuity. Long-term care insurance only requires monthly premium payments.

Buying a long-term care annuity reduces the monthly income payments you receive during your lifetime because part of the money is being held in reserve in case you need to use it for long-term care expenses. That is the "price" you pay for choosing a hybrid policy that is an annuity that doubles as a hedge against long-term care costs. An annuity that has a long-term care rider may have a monthly cost associated with the benefit.

If you use qualified money to buy your annuity (money from an IRA or401(k) for example, then the entire annuity is subject to income tax, including the principal and any earnings. Buying an annuity with after-tax dollars (non-qualified) means only the earnings are taxed. Conversely, long-term care insurance benefits are not taxable.

When Should You Consider Buying One?

A long-term care annuity could be right for you if you’re worried about needing long-term care but don't want to go through the process of applying for a separate insurance policy. A long-term care annuity can give you the best of both worlds: regular monthly income and a long-term care enhancement.

If you'd like to begin the journey of building the conservative portion of your retirement nest egg, then a Canvas annuity may be a good choice. Canvas annuities do not have a long-term care component but they do offer a fixed, guaranteed rate for a period of time that you choose. You can buy over the phone or 100% online! The interest rates offered to you are among the highest in the country. Visit www.canvasannuity.com to learn more.