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Financial Planning

Using Annuities for Long-Term Health Care

Long-term care annuities, confinement care riders and Medicare-compliant annuities can help cover the costs of long-term care.

by Stan Haithcock | July 2015

When the Romans started using annuities as pension rewards for their loyal soldiers and families, I doubt if there was additional health care coverage attached to those lifetime payments.

Because we are all living longer, today’s investor is definitely concerned with end of life issues and making sure that enough coverage is in place as Father Time starts to take over.

As we all know, annuities are primarily used for lifetime income needs, but some annuity strategies can provide efficient transfer of risk coverage for confinement-type care. Let’s take a look at some current health care risk-transfer strategies using annuities.

Long-Term Care Annuities

Even though the traditional long-term care product still provides the best coverage, pure long-term care annuities are a great way to have full control over the asset while having long-term care coverage in place if needed. If you don’t ever use the benefit, you still have 100% access to your money. Most people really like that full control feature.

This type of annuity is classified as “simplified issue,” and requires a phone interview with the annuity company for approval. If approved, the issuing carrier will apply a multiple to the annuity premium for long-term care (LTC) coverage. For example, if you put $300,000 into this type of annuity, the carrier might apply a three times multiple for long-term care coverage. You would then have $900,000 for long-term care, but still have full control over the initial $300,000. The $300,000 would be in a fixed rate account, and if you never used the long-term care benefit, this amount would be fully available to you or your beneficiaries.

Unfortunately, only a few carriers are still offering this product, but one A+ rated carrier, State Life, can write the policy jointly with your spouse.

Confinement Care Riders

If you go to a bad-chicken-dinner annuity seminar or watch annuity Internet videos, part of the too-good-to-be-true sales pitch will involve income rider payments that can increase for confinement care. Anytime there are no tests or qualifications to receive a benefit, then it’s common sense that the coverage is not that robust. In other words, if you can fog a mirror, you can get a confinement care rider benefit.

Income riders are attached benefits to a deferred policy (commonly a variable or indexed annuity). The rider is a separate calculation from the policy’s accumulation value and can only be used for income. Because health care is a hot-button issue, carriers are now offering this confinement care enhanced benefit if you cannot perform two of the six basic daily living functions (listed in the accompanying box).

The Six Activities of Daily Living (ADLs)

A person is considered dependent when substantial assistance from another person is required to complete any one of these activities. Being dependent for two or more of these activities can trigger the benefit clause in confinement care riders. (Read the contract for the specific terms and conditions.)

  • Bathing: Getting into or out of a tub or shower and washing your body and hair.
  • Dressing: Putting on and taking off any necessary item of clothing (including undergarments) and any necessary braces, fasteners or artificial limbs.
  • Transferring: Getting into and out of a bed, chair or wheelchair.
  • Toileting: Getting to and from the toilet; getting on and off the toilet; and performing associated personal hygiene.
  • Continence: Maintaining control of bowel and bladder function, or, when unable to maintain control of bowel or bladder function, performing associated personal hygiene (including caring for catheter or colostomy bag).
  • Eating: Feeding yourself by getting food into your mouth from a container (such as a plate or cup), including use of utensils when appropriate (such as a spoon or fork) or when unable to feed yourself from a container, feeding yourself by a feeding tube or intravenously.

Sources: Stan Haithcock and the Federal Long Term Care Insurance Program (www.ltcfeds.com).

Depending on the policy, if you qualify for the enhanced payout, the income stream might double for a specific period of time or increase by another formula to help with confinement care coverage. In essence, you are getting your money back faster. It’s important to point out that this type of coverage does not have the same tax benefits as traditional long-term care insurance and should never be used as primary coverage.

Medicaid-Compliant Annuities

An article in The Wall Street Journal addressed a complex Medicaid-compliant annuity strategy as a way to “play the system” in order to take advantage of Medicaid coverage if you have a substantial asset base (“When a Medicaid Eligibility Becomes Urgent,” April 13, 2015). This “gaming” of the rules is a little controversial to say the least.

If you are interested in this unique type of single-premium immediate annuity (SPIA), you need to consult with a qualified elder law attorney. I would also advise getting a very good CPA involved, as well as an insurance agent who has some experience in this complex planning area.

The reason for needing this level of expertise is that most states require that the single-premium immediate annuity used in Medicaid planning should be issued as both non-transferrable and non-assignable. If improperly structured, you will have a tax nightmare on your hands. Just a handful of carriers currently issue these types of policies, so do your homework and spend the money to hire experts before any decisions are made.

Health Care Longevity Risk

With over 10,000 baby boomers retiring every day, and our life expectancies continuing to increase, health care coverage is now the gorilla in everyone’s room. Annuities can be efficiently used to transfer this longevity health care risk to the issuing carrier and to take away an unwanted burden from your family members.

Annuity companies are well aware of this concern, and they are scrambling to provide those targeted contractual guarantees and absorb that long-term care or confinement care risk.

End-of-life issues can be a stressful part of your overall financial plan because of the unknowns involved in the coverage decisions. Maybe these unique annuity types can help by providing the peace of mind that all of us are looking for concerning long-term care and confinement care.

It might be worth taking a closer look.

Discussion

John Wiltse from NE posted over 11 years ago:

I'd like to know more about what the author meant in this sentence: "It’s important to point out that this type of coverage does not have the same tax benefits as traditional long-term care insurance and should never be used as primary coverage." I am assuming you are referring to a federal tax benefit? Nebraska, the state where I live, has a statute called the Long Term Care Savings Plan Act, Neb. Rev. Stat. sections 77-6101 to 77-6105 (Reissue 2009), found at http://nebraskalegislature.gov/laws/statutes.php?statute=77-6101. The State Treasurer, see https://treasurer.nebraska.gov/ltcsp/ is responsible for administering the law, which gives a tax deduction to participants when they file a Nebraska state income tax return either singly or jointly.


Charles Rotblut from IL posted over 11 years ago:

John, Here is Stan's response: What I am referring to are Income Riders attached to deferred annuities (typically variable or fixed index) do not have any tax benefits. Any money coming out is taxed at LIFO (last in first out) ordinary income levels. That goes for both state and federal. The statute referred to addresses pure Long Term care products (actually a health insurance product), not Income Riders attached to variable or indexed annuities (which is a life insurance product). -Charles


James Harless from TN posted over 11 years ago:

There is a great number of people who might not have purchased either long term care insurance when they were younger or more healthy, or who know they have one or more illness that might be rated to higher cost or lessor coverage for long term care. Some of those people, as I understand it, might not be able to purchase more traditional LTC insurance products, and the fixed index annuity or Variable annuity with LTC rider might be the closest they can come to adding some protection for themselves or their spouse. Is our author, who is my impression sells traditional immediate annuity products, or are others, in recognition of this, or are there most appropriate options that exist, especially without implications to get a reply one must hire and pay lots of specialized expertise? If it varies so much state to state, does this not make what is already very difficult for older Americans just a great deal harder to plan or arrange for long term care needs?


Diane Sracic from FL posted over 11 years ago:

Could you please give me a recommendation of the best deferred annuity with the long term care rider? I am 65 years old and looking to purchase a decent return deferred annuity with the rider; however, there are so many products out there with lots of small print attachments that make them very difficult to understand and know which are good and/or bad. Thank you kindly and I will await your response


James Harless from TN posted over 11 years ago:

No, Diane, I cannot give solid recommendation, beyond this comment. I have worked with one finance advisor who sold me and wife a VA, which I disposed of in 2014, as I felt it was too fee intensive. I worked with a different advisor who sold my spouse a FIA with an income rider and LTC doubler, if person meets 2 of 6 ADLs. Company is Security Benefit. We are looking at a second FIA , called American Equity, with same income rider and LTC doubler. This are added back-up plans, for income or LTC. We also each own Lincoln Money Guard $50K cost LTC insurance policies for LTC, stated coverage is between 200K and 250K LTC coverage, (each) and if the policy is not used at all, the policy will refund most or all of the initial $50K each. There is a health questionnaire for the Lincoln Products. You can evaluate these along with any others you might consider.....


Jerry Chapman from TX posted over 11 years ago:

The riders mentioned in previous comments provide for acceleration of distributions from the accumulation account in the annuity for some contractual period. At the end of the contractual period for accelerated distributions, distributions continue per the income rider. The 6 LTC ADL are used as the trigger to accelerate the distributions. From a tax perspective these benefits are not qualified long term care benefits and therefore taxable income. You might investigate the life insurance/annuity products from State Street (One America) which are designed specifically for long term care and distributions for LTC are qualified and therefore non-taxable distributions. What makes these an attractive option over traditional LTC is they provide monies to beneficiaries if the LTC benefits are not needed and even an option for full return of premium at the end of the surrender period. The life insurance option from State Street is similar to the Lincoln MoneyGuard but unlike MoneyGuard, both spouses can be on one policy. I have used both in my practice. Which is best...it depends on your unique situation.


Nona Edwards-Thomas from OH posted over 10 years ago:

I am reluctant to buy a LTC annuity. I do not like the idea of a company deciding when I need long term assistance. My mother had breast cancer and was 14 year survivor prior to her death at 82. She had metastatic disease to the lungs. She was able to perform the all the six ADL until two week prior to her death. I had a job and was unable to be available during working hours. She was alone during the day. I therefore paid out of pocket expenses for her someone to be with her. It is possible to have a LTC annuity, need assistance and never be able to claim a benefit.


David Humphrey from CO posted over 10 years ago:

Nona Edwards-Thomas comment that she could not collect on LTC rider was very helpful, yet author did not address it. why?


gilbert from CA posted over 10 years ago:

I am a 56 year old diabetic and Id like to protect myself with an annuity with long term care coverage. Are there more articles/resource materials I can look at to compare my options.


Charles Rotblut from IL posted over 10 years ago:

Gilbert, as mentioned in the article, there are only a few carriers offering this type of product. Your best bet would be to sit down with a knowledgeable and reputable rep to discuss the various contracts to determine which is the best for your specific situation. -Charles


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