What is a Long-Term Care Annuity (LTCA)?

A Long-Term Care Annuity (LTCA) is a fixed annuity with a long-term care insurance rider, and it can pay for some or all of your long-term care expenses on a tax-favored basis. Long-term care is care provided for a chronic or prolonged illness or injury, care that is usually not covered by Medicare. A long-term care annuity takes a single payment to set up, and if you never need the care, the cash value balance passes to a named beneficiary(s).

Why get a Long-Term Care Annuity?

Nothing can mess up your retirement plans faster than a chronic illness or injury. Long-term care is expensive. The type of care required and the setting the care is provided in determines the cost.

And....

Traditional long-term care insurance (LTCI) can be expensive and could go up at the end of each policy anniversary. The premium for a traditional long-term care insurance is usually paid for on a monthly or annual basis whether you use it or not. However, a long-term care annuity has no monthly or annual premium. Therefore, a long-term care annuity is considered to be fully-funded once you pay the one-time premium.

What that means is

There are no ongoing premium payments like in a traditional long-term care insurance policy, and the annuity cash value grows tax-deferred. While you are living, you can access the cash value of your long-term care annuity for your personal needs or pay for your long-term care needs. When you die, the remaining cash value passes to your named beneficiary or beneficiaries.

First of all

The long-term care coverage in the annuity is not free because there is no monthly or annual premium required. That's because each year, a fee is charged to cover the cost of the long-term care insurance rider. Consequently, if the interest earned in the annuity is less than the price of the rider, you could lose some principal. As fees tend to increase with age, it is likely that your principal will decrease over time.

A long-term care annuity might make sense if you:

1. Are concerned about paying for coverage that you may never need, or,
2. Have limited dollars to spend on a variety of insurance, or,
3. Have existing life insurance and/or non-qualified annuities with significant cash values, or,
4. Are concerned about having health care choices and protecting your lifestyle in the event of a prolonged sickness or injury.

Look

Traditional health insurance and Medicare typically only pay for a part of the long-term care you might need. Therefore, the rest comes out of your pocket, or from a long-term care insurance policy. Consequently, these additional care costs could cost you thousands of dollars per month, for many years.

Tax-free long-term care benefits

Interest earned by the annuity on nonqualified funds in a long-term care annuity can pay for eligible long-term care expenses free of federal taxes. Nonqualified funds include money from a bank non-IRA checking, savings, and Certificate of Deposit (CD). Qualified annuity such as an IRA, IRA annuity, 403(b) or an employer-sponsored retirement plan, cannot be transferred to a long-term care annuity.

You can also leverage existing insurance and annuities

So, if you have an existing life insurance policy or an annuity that has a lot of cash value consisting primarily of interest, not principle, considering transferring the cash value via a tax-free 1035 exchange. Interest transferred to a nonqualified long-term care annuity can also be used to pay for eligible long-term care expenses free of federal taxes. Therefore, if you don’t need your old annuity contract or cash value life insurance policy and want long-term care coverage, you might consider moving the cash value to a long-term care annuity.

So what do you get?

You can choose how much coverage you want, usually between 200% and 300% more than your premium deposit, depending on age. In some cases, you might be able to add inflation protection coverage.
• You receive the long-term care benefits tax-free.
• You maintain access to your cash value.
• When you die, your heirs will inherit the annuity value, less any long-term care benefits you receive.

Pro’s of the long-term care annuity

1. Most insurance companies let you spend the tax-free payments for qualified long-term care however you want, with few restrictions.
2. It's possible that your premium paid could be worth two or three times more in long-term care benefits.
3. If you are in a high tax bracket, having your long-term care needs paid tax-free could be a big help rather than with after-tax dollars.
4. You do not need to worry about a possible future rate increase like you do in a traditional long-term care insurance policy.
5. You buy it with one payment.
6. Also, inflation protection may be available.

Con’s of the long-term care annuity

1. First of all, you need an extra $50,000 or more to buy one.
2. You get a small interest rate return at best.
3. As you get older, if the rider fee increases, the annuity cash value will likely decline.
4. Unfortunately, most long-term care annuities are not considered a partnership policy and will not help you qualify for Medicaid.
5. Withdrawals not used for qualified long-term care expenses are subject to the same rules as a traditional fixed deferred annuity.
6. Also, better coverage is usually available with a traditional long-term care insurance policy.

Why have I not heard of this?

First of all, the long-term care insurance annuity is relatively new. In 2006, the passing of the Pension Protection Act created the long-term care annuity. As a result, long-term care annuities became available in 2010.

Here’s the Catch

A long-term care annuity like a traditional long-term care insurance policy is available to people who do not currently need it. First of all, there are some underwriting questions in a long-term care annuity to determine if you are healthy enough to qualify for it. However, the underwriting is typically less stringent than if you were applying to a traditional long-term care insurance policy.

For Pre-Existing Conditions

Sadly, a pre-existing health condition could make you unable to qualify for a long-term care annuity. So as a last resort alternative, consider adding an income rider to a traditional fixed annuity to cover confinement care. Unfortunately, the confinement care payout is usually limited to up to 200% of your deposit. Also, unlike a long-term care annuity, confinement benefits are taxable when received.

How is an LTC annuity backed?

A long-term care annuity is a specialty product and is not offered by every insurance company. Remember that the long-term care payments are backed by the financial strength and claims-paying ability of the insurance company or companies you choose. You can check ratings from sources like AM Best, Fitch, Moody's and Standard and Poor’s.

In Conclusion

A prolonged sickness or injury during retirement could be very expensive and destroy your retirement plans. A long-term care annuity uses a single payment to provide tax-free payments for your long-term care needs. If you never need care, your annuity cash value passes to your named beneficiary.

Finally

If you are at or near retirement, and you have any questions about the Long Term Care Annuity or just need a little guidance, feel free to contact us. We know retirement planning can be confusing, so it is important to get the facts before you make any long-term decision.