Life Care Annuity


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Don’t Jeopardize Your Financial Independence


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Long-term care refers to a wide range of medical and non-medical services – including custodial help with daily activities, nursing care and skilled nursing services – for people who are physically or mentally unable to care for themselves. Home health care, adult day care, respite care, assisted living and nursing home care all fall into the category of long-term care.

I don’t think a lot of individuals think enough about that uncertainty. In fact, when I talk to older individuals, they see it happening around them, but they say, “Well, that won’t happen to me.” So, there is sort of a head-in-the-sand, ostrich [mentality] to saying, “Well, I won’t have to deal with that.  Even though the longer you live, the more likely some degree of expenditure will be needed to support a frailer existence.

Many Americans assume that Medicare will cover these costs. However, coverage is limited and may still require large out-of-pocket expenses. Also, Medicare pays for skilled nursing facility care only after a discharge from a three-day hospitalization. It does not pay for custodial or intermediate care, and the majority of care provided in nursing homes is custodial, which includes assistance with dressing, eating and moving around.

After an individual has exhausted all of their assets, they may qualify for coverage under Medicaid. However, with Medicaid, an individual and their family members lose choice over the care received.

“A long-term care insurance policy can save you from having to deplete your assets to provide for care. “In some sense it’s lifestyle preservation to ensure you have a choice in your care. At the same time, it’s asset preservation – allowing you to pass something to your heirs.”

But the interesting thing to me–and I call it the second half of retirement problem–is the question of thinking about the period of frailty, generally post age 80, sometimes post age 85, sometimes post age 75, where you’re actually alive and well but need additional support in the form of long-term care–and that includes home nursing care (incidental or around the clock), assisted living, or true long-term nursing care.

And those liabilities sort of come on you suddenly. It’s not like you sit down and think, “In five years, I’ll the long-term care.” It could be the next day; it could be 10 years. And they require suddenly large drawdowns from your portfolio.

Until recently, consumers had few choices when it came to long term care insurance. Traditional policies, which provided a certain amount of selected coverage, were the norm. Policies could be designed to cover care expenses for a few months, or much longer, even providing benefits for the insured’s lifetime.

For example, consumers could purchase coverage that would provide $100 a day in benefits for a period of three years. When calculated, the $100 daily benefit multiplied by 365 days in a year for 3 years would create a $109,500 “pool of money” available for care.

This pool of money would pay for care in a nursing home, assisted living facility, adult day care, or in the personal residence of the policyholder once certain criteria had been met.

When the pool of money was depleted, the traditional policy would provide no more benefits. However, if the policy was never used, the owner would lose the investment of his or her premium payments. Thus, some seniors opted not to purchase these policies, deciding instead to rely on their families or current savings in the event that care became necessary.

With the cost of health care rising rapidly, and a single day in a nursing home costing $175 or more in major cities, self insuring is a risky proposition. Relying on family is an alternative, but not necessarily a viable one. Unfortunately, most families do not have the time, resources or ability to provide around the clock care to a loved one.

The average cost for a private room in a nursing home is more than $87,000 per year, according to the 2014 Cost of Care Survey produced by Genworth, a financial-services company.

And the average cost of an assisted living facility, which provides a level of care that is not as extensive as that offered by a nursing home, is $42,000 per year, according to the same Genworth study. All long-term care costs have risen steadily over the past several years, with no indication that they will level off.

Many people, when they think about long-term care at all, believe that Medicare will pay these costs — but that’s just not the case. Typically, Medicare only covers a small percentage of long-term care expenses, which means you will have to take responsibility.

Of course, if you are fortunate, you may go through life without ever needing to enter a nursing home or an assisted living facility, or even needing help from a home health-care aide. But given the costs involved, can you afford to jeopardize your financial independence — or, even worse, impose a potential burden on your grown children?

To prevent these events, you will need to create a strategy to pay for long-term care expenses — even if you never incur them. Basically, you have two options: You could self-insure or you could “transfer the risk” to an insurer.

In response to customer demands, insurance companies have designed what can be best described as hybrid or linked policies. These policies combine the benefits of an annuity or life insurance agreement with a traditional long term care contract. With hybrid policies, the consumer has the guarantee of long term care benefits or, if no care is needed, the promise of insurance benefits to themselves and their beneficiaries.

The Long Term Care Annuity –The newest addition to the hybrid marketplace is the long term care annuity. This product also functions exactly like a fixed annuity, but has a long term care multiplier built into the policy.

There is no premium rider attached to this medically underwritten annuity policy. Instead, a portion of the internal return in the contract is used to pay for the long term care benefit. Long term care coverage is calculated based on the amount of coverage selected when the policy is purchased.

The insurance company offers a payout of 200% or 300% of the aggregate policy value over two or three years after the annuity account value is depleted. For example, a policyholder with a $100,000 annuity who had selected and aggregate benefit limit of 300% and a two year benefit factor would have an additional $200,000 available for long term care expenses after the initial $100,000 policy value was depleted.

The policy owner would spend down the $100,000 annuity value over a two year period and then receive the additional $200,000 over a four year period or longer. In this example the contract pays $50,000 a year for a minimum of six years, but care will last longer if less benefit is needed. Again, if long term care is never needed the annuity value would be paid out lump sum to any named beneficiary.

These innovative products can meet consumer demands and provide more guarantees by combining traditional long term care insurance with the advantages of life insurance or annuity policies. Thus, consumers who utilize hybrid policies can avoid self-insuring against catastrophic long term care related expenses and have the peace of mind associated with a comprehensive plan.

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Monday, November 17th, 2014 Wealth Preservation Comments Off on Don’t Jeopardize Your Financial Independence

Silver Tsunami Coming For Boomers

There is a silver tsunami coming; 10,000 people are turning 65 every day, a phenomenon that will happen for the next sixteen years. Living longer than expected, which is often referred to as longevity risk, can increase the likelihood of other risks occurring, driving up certain retirement expenditures such as long-term care costs.  This tidal wave of baby boomers will someday soon need long-term care.

When planning for retirement, clients often list long-term care as a primary concern. However, very few people have well defined plans for dealing with related expenses. The financial cost of long-term care is incredibly expensive, with the average U.S. semi-private nursing home room costing roughly $85,000 a year.

A basic problem for clients looking for long-term care insurance today is that they simply may not be able to find it. Major carriers have pulled out of the market in the last year, and the policies that remain can be prohibitively expensive and contain strict qualification requirements.

One of the things that can discourage people from buying long-term-care insurance is the idea of paying a lot of money for a policy that with any luck they’ll never have to use. Of course, almost all insurance is like that. But long-term-care insurance is particularly expensive and frequently, its purchase comes at a time when people are facing retirement and looking for ways to cut back.

Hybrid or linked-benefit products now allow for long-term care insurance and annuity products. These products can help cover multiple risks for one client through one product, simplifying the planning process. They also can alleviate the “use it or lose it” concerns many people have with long-term care insurance as some of the premium goes to fund another benefit, either annuity payments or a death benefit, in the event they do not need long-term care.

One way to avoid spending a lot of money directly on a long-term-care policy while still getting its benefits is to buy an insurance policy with a long-term-care rider. These hybrid policies work variously, but the type that has gotten the most attention is a long-term-care annuity. Beginning in 2010, the IRS will let those who hold one of these deferred annuities use the money to pay for long-term care free of federal taxes.

A Hybrid life care annuity is a bundled insurance product comprised of a life annuity and long-term care insurance. The life care annuity—the integration of the life annuity with long-term care insurance coverage—is intended to deal with major problems in the currently separate markets for life annuities and long-term care insurance. Some recent studies find the two risks – longevity risk and long-term care risk – to be opposing and thus life care annuities is advantageous in regard to pooling the two risks.

Hybrid annuity products that combine the estate and income planning features of an annuity with the protection of long-term care insurance are becoming increasingly popular among clients looking for replacement insurance. Because the available long-term care benefits under these contracts are based on a percentage of the annuity premium value and often offer optional inflation coverage, clients may need to triple their initial investment to ensure long-term care needs are met, but with the added bonus that those funds are not lost if care is never required.

A “Hybrid” annuity product features an annuity combined with a qualified long-term care insurance rider. It provides financial protection for retirement assets by offering benefits for a potential long-term care event. The long-term care benefits are typically a multiple of your initial investment. In other words a $100K investment in to the annuity can almost immediately be worth up to $300K in long-term care benefits.

Most people will get better coverage if they buy a stand-alone long-term-care policy. But the combination products appeal to people who prefer the flexibility of being able to finance long-term-care coverage if they need it, or to use the policy for other expenses.

Under this combination design, the insured can simply reposition assets into an annuity and receive growth on principal as well as long-term care protection. In accordance with the Pension Protection Act, amounts including investment gains can be paid out as tax-free LTC benefits. The insured maintains the account value and death benefit within the annuity to the extent that these amounts are not used for LTC benefits. Any withdrawals taken for purposes other than for qualified long-term expenses will naturally reduce the account value and thus the total LTC guaranteed benefit as well.

Advantages of Hybrid Annuities:

  • If you need long-term care you can receive up to three times the annuity value to pay for your care
  • In many cases underwriting is limited
  • In some case there is no underwriting
  • If you don’t need long-term care, you still receive the benefits of the annuity
  • Can have a guaranteed interest rate
  • Tax-deferred growth
  • Access to your principal through penalty-free partial withdrawals (typically 10% of account value)
  • Ability to create a guaranteed lifetime income stream
  • Provides a death benefit to your beneficiaries that is designed to avoid probate
  • Usually paid with a one- time lump-sum premium payment
  • Conversion opportunities
  • Can be guaranteed benefits for life

How does this strategy compare to a traditional LTCI policy? While premiums paid to fund the traditional long-term care policy will continue over the life of the policy, an annuity contract with long-term care benefits is fully funded when the contract is purchased. The client will not have to worry about meeting the monthly premium payment or potential future increases in that premium.

Further, while a long-term care policy provides benefits only if the client eventually does require long-term care, the value of the annuity with long-term care benefits may be withdrawn by the client when the contract reaches maturity or passed on to the client’s heirs in the event that care is not required. Conversely, the client’s investment in a traditional policy is lost if he does not require care.

Annuities allow money to grow tax-free, but the tax man has to be paid when the money is removed. These long-term-care annuities free holders from this obligation.

Purchasers put money — $50,000 is about the minimum — into an annuity. Purchasers then choose the amount of long-term care coverage they want, usually 200 percent or 300 percent of the face value of the annuity, and they decide if they want inflation coverage. They also have to decide how long they want the coverage to last, usually two to six years. Inflation coverage will affect the maximum duration of the plan.

Most hybrid deferred annuities operate this way: A long-term-care annuity. You buy an annuity with a lump sum and can use double or triple the premium amount as your long-term-care benefit. A $100,000 investment could provide up to $200,000 or $300,000 in long-term-care benefits. If you choose the $200,000 coverage with a four-year benefit period, the monthly benefit would be $4,200. The LTC Payments within the combo policy are comparable to a stand-alone policy with similar benefits.

If you need the coverage, the value of the benefit is subtracted from both the annuity’s value and the coverage’s value. After a person uses $4,200 for a month in a nursing home, there would be $195,800 left in long-term-care benefits and $95,800 left in the annuity. In the past, the policyholder would pay tax on the amount transferred from the annuity to long-term care. If the policyholder uses up the entire annuity, he or she would still have long-term-care benefits left.

Example: A 60-year-old purchases a $50,000 long-term care annuity with 5 percent inflation protection compounded annually with a 200 percent coverage maximum and a six-year benefit period. So, his initial long-term-care coverage maximum is $100,000 — double the premium he paid. (If he had refused inflation protection, then he could have chosen three times the premium, or $150,000.)  If he makes no withdrawals over 20 years at a 3.5 percent compound interest rate, minus administrative fees, he would have — under the 5 percent inflation-protected scenario –$265,330 available in long-term-care insurance. Or a monthly maximum of $3,685.

If this person never needs long-term care, then the annuity can be redeemed for its accumulated value when it matures at 20 years — or it can be left to accumulate further interest and the long-term care policy will remain enforce. When this person dies, his heirs will inherit the greater of the accumulated annuity value, if there have been no withdrawals, or the single premium he paid initially less the amount of long-term care paid.

Many annuity contracts with long-term care riders will provide coverage with significantly fewer qualification requirements than a traditional policy, providing an attractive alternative for clients with preexisting conditions who may be unable to qualify for traditional policies.

Like a traditional long-term care policy, if amounts are withdrawn to pay for the client’s long-term care expenses, those amounts are taken tax-free (regardless of whether they represent the client’s investment in the contract or earnings over the accumulation period).

However, clients should be advised that some of these contracts may take years to fully mature and tie up a larger dollar value over this accumulation period. The contract may permit the client to make withdrawals during the accumulation period, but any withdrawals will reduce the amounts available to the client if care is needed.

Conclusion – Though a hybrid annuity contract may not be the solution for all clients, for those who seek to protect themselves in the event that extended long-term care becomes necessary, finding long-term care benefits through the use of an annuity product may provide a relatively simple-to-obtain and tax-preferred alternative.

The appeal of these products lies in their ability to use leveraged dollars to secure both life and LTC coverage. In the current interest rate environment, it’s a great use for money that’s earning next to nothing in a fixed vehicle such as a CD. What’s more, if the policyholder never needs long-term care, that money stays inside the policy, to eventually pass to beneficiaries on a tax-favored basis. “So you’re not only getting death benefit coverage, you’re getting living benefit coverage.

 

 

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Tuesday, February 4th, 2014 Wealth Management Comments Off on Silver Tsunami Coming For Boomers

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