Annuities Explained
 
Traditional Fixed Annuities/CD Annuities
Immediate Annuity/Income Annuity
Fixed-Indexed Annuity
Long-Term Care Annuities
 Stock Market Realities
 Fixed Indexed Annuities with Income Riders
CDs versus Annuities
Who can benefit from annuities?
 Annuity Advantages
 Investing vs. Saving
 Common Sense
Retirement Planning
 Myths & Reality
 Variable Annuities - Dangerous times for retirees
 Managing money in retirement
 Reduce Taxation of Social Security
 How much will I need to Retire?
 
Never Outlive Your Income
 Recover Your Market Losses
 Income without using Principal
 Grow retirement saving with no market risk
 A Reverse Mortage
 IRA Rollover Opportunities
 Income Planning
 

Long-term Care Annuity

 

Leverage Your Assets with a Long Term Care Annuity (LTCA).Long Term Care Annuities are "linked benefit products offered through a Life Insurance Company, providing a method of pairing the safety and tax-deferred growth of a single premium non-qualified deferred annuity (SPDA) with long term care (LTC) benefits. It allows you to leverage the assets you put into the annuity to create a larger pool of benefit dollars available for long term care expenses should the need arise. With a Long Term Care Annuity, payments for long term care expenses are tax-free, ultimately allowing you to keep more of your own money instead of paying it in taxes.

Is a Long Term Care Annuity Right For You?

A Long Term Care (LTCA) Annuity can help meet the needs of many individuals seeking an effective way to help protect savings from significant long term care expenses.

A Long Term Care Annuity is a single premium deferred annuity with a long term care rider (LTCR). After a one-year deferral period, the rider first reduces the Annuity Value to pay for covered long term care expenses and then uses company dollars up to the coverage maximum.

A Long Term Care Annuity may be the right option for you, if you:

  • Have assets to protect,
  • Recognize that the probability of needing long term care is high enough and the cost great enough to make it an important part of your financial strategy,
  • Are currently self-insuring for the risk of long term care.

A Long Term Care Annuity provides:

  • Protection in the event of a covered long term care (LTC) event, with comprehensive LTC benefits.
  • No-lapse guarantees long term care insurance.
  • The dependability and stability of an SPDA. Single Premium Deferred Annuity. (See annuity advantages under the “Learning Library Section of the website.)
  • Relatively fast and easy, simplified underwriting process.

4 Steps to Building Your LTCA

Build Your LTCA with 4 Simple Steps

Step 1 Determine Your Single Premium Amount
This is the amount that funds the annuity.

Step 2 Decide Whether You Want Inflation Protection
Inflation protection increases the total amount available for long term care coverage by either 3% or 5% compounded annually.

Step 3Choose Your Leverage Factor
The single premium is initially leveraged to provide your long term care coverage maximum (total amount available for long term care coverage). The LTC coverage maximum can be 1.5x or 2x if inflation protection is chosen, or 2x or 3x without inflation protection.

Step 4Determine Your Length of LTC Coverage
Your length of LTC coverage, or benefit period, can be 4 years or 6 years. The benefit period determines the maximum amount of long term care benefits you can receive each month.

Here is how it works:

LTC coverage maximum ÷ length of LTC coverage in months = LTC monthly maximum

Note: If long term care expenses actually incurred each month are less than the LTC monthly maximum, benefits may last for a longer period of time.

Single Premium Range Inflation Protection Leverage Factor Length of LTC Coverage
$48,000 - $480,000 Yes 1.5x 4 years/48 months
$72,000 - $720,000 Yes 1.5x 6 years/72 months
$54,000 - $540,000 Yes 2x 6 years/72 months
$36,000 - $480,000 No 2x 4 years/48 months
$54,000 - $720,000 No 2x 6 years/72 months
$36,000 - $480,000 No 3x 6 years/72 months
     
Available Combinations

Hypothetical Example - Meet James & Sarah

  • Both Are 65 Years Old
  • Close to Retirement
  • Married with Children and Grandchildren
  • Have Investable Assets of More Than $500,000
  • Concerned A Long Term Care Event, Taxes and Inflation Will Reduce Their Asset Significantly

1) James and Sarah meet with their financial professional.

While reviewing James' and Sarah's asset allocations, their financial professional asks them how they will pay for a possible long term care event. James and Sarah indicate they are confident they have enough assets to cover any long term care expenses they might have.

Their financial professional suggests looking at some different strategies to prepare for a potential long term care event. He recommends James and Sarah purchase A Long Term Care Annuity and leverages their assets to give them access to comprehensive long term care coverage in the future. On a tax free basis, they are able to reallocate $200,000 from their current assets tax-free and purchase two long term care annuities.

The LTCA allows James and Sarah to continue growing their assets on a tax deferred basis in the annuities plus, if they need long term care, their initial premiums are leveraged to help pay for covered expenses. Payment for long term care expenses are tax-free, ultimately allowing James and Sarah to keep more of their own money instead of paying it in taxes. James and Sarah choose inflation protection at 5% compounded annually and choose to leverage their initial premiums 2X with a 6 year LTC benefit period. After 20 years, they will each have $530,660 in long term care coverage if they need it. They are comforted in knowing that they are well protected if they have a long term care event.

 

James

Sarah

Single Premium $100,000 $100,000
Optional Inflation Protection Benefit 5% 5%
Leverage Factor 2x 2x
Long Term Care Benefit Period 6 years 6 years
Initial LTC Coverage Maximum
(Single Premium x Leverage Factor)
$200,000 $200,000
Total LTC Coverage at Year 20* $530,660 $530,660
LTC Monthly Maximum at Year 20* $7,370 $7,370

By choosing a LTCA, James and Sarah significantly increase the amount of money available for covered LTC expenses and have access to comprehensive long term care benefits if needed. A LTCA also helps protect them from a potentially overwhelming reduction of their assets.

What if James and Sarah chose an alternate financial strategy?

Assume James chose to take $100,000 and purchase a non-qualified traditional annuity without long term care insurance. Let's also assume that Sarah chose to take $100,000 and purchase a LTCA policy.

Their financial strategies produce very different results if a long term care event occurs. If a long term care event happened, James could use the contract value of his annuity to pay for long term care expenses. However, without the leverage of a LTCA, James has significantly less money available to him to pay for long term care expenses from the annuity.

The chart illustrates the differences between James' non-qualified traditional annuity and Sarah's LTCA policy.

1James' and Sarah's LTCA summaries reflect total LTC coverage and subsequent LTC monthly maximum in 20 years. These summaries are calculated based on them being 65 years old, having a couples discount and a 3.25% interest crediting rate.

  Amount Available for Long Term Care at Year 20

  Account Value Available to Beneficiary at Year 20.Illustrates $100,000 initially used to fund a traditional annuity or LTCA. All LTCA examples assume a 3.25% interest crediting rate. Sarah's annuity value reflects the effect of charges for long term care insurance.

*All LTCA examples assume policies are in force over the period illustrated and no withdrawals or claims have occurred.

By choosing a LTCA, James and Sarah significantly increase the amount of money available for covered LTC expenses and have access to comprehensive long term care benefits if needed. A LTCA also helps protect them from a potentially overwhelming reduction of their assets.

2) Additional Long Term Care Annuity Features

No-Lapse Guarantee

Monthly LTC charges begin on the policy's effective date and reduce the Annuity Value. Long Term Care Annuities come with a no-lapse guarantee. The policy will not lapse even if the annuity policy value isn't sufficient to cover the long term care charges. Long term care coverage can continue until both the Annuity Value and the LTCR coverage maximum are depleted.

Waiver of Monthly Long Term Care Charges
We waive the monthly long term care charge beginning with the first monthly charge after the first claim payment is made for home care, facility care or bed reservation benefit. Charges resume once claims are discontinued.

Death Benefit Your beneficiaries will receive a death benefit that is the greater of the Annuity Value or the single premium less long term care expenses paid and other withdrawals

Next Steps

Long Term Care Annuity
Talk with your financial professional or insurance agent today about a Long Term Care Annuity. Take steps to make sure your future is covered. A Long Term Care Annuity is an effective way to help protect yourself from the high cost of a long term care event, by significantly increasing the amount you have available to pay for covered long term care expenses when needed.

Additional Information

Withdrawals and Surrenders:

For Covered Care: There are no surrender charges for withdrawals due to covered care. The annuity value and rider coverage maximum are reduced by the amount of the withdrawal. The rider monthly maximum remains unchanged.

For Other Than Covered Care: An annual free withdrawal amount up to 10% of the prior anniversary's annuity policy value (or 10% of the single premium in the first policy year) can be withdrawn without surrender charges in a policy year. Surrender charges, consider the following rates below as an example, apply to withdrawals and surrender amounts in excess of any free withdrawal amount.

  • $500 minimum withdrawal
  • $25,000 must remain after withdrawal
Policy Year: 1 2 3 4 5 6 7 8+
Surrender Charge: 7% 7% 7% 6% 5% 4% 3% 0%

The rider coverage and monthly maximums are reduced in the same proportion as the withdrawal bears to the annuity value immediately before the withdrawal. These reductions may be significantly larger than the amount of the withdrawal. The annuity value is reduced by the withdrawal. In South Dakota, a person must have at least $250,000 in assets, excluding their home and other qualified assets in order to purchase a LTCA.

A Long Term Care Annuity is a single premium deferred annuity with a long term care benefit rider and is subject to Policy Forms and Rider Forms specific to the issuing insurance company, and may vary, or may not be available in all states, thus terms and conditions may vary by state.
All applications are subject to the underwriting requirements of the issuing life insurance company.
Generally, an annuity death benefit payable to your beneficiary is subject to federal income tax to the extent that the benefit exceeds the income-tax basis of the annuity policy. Policy value that accumulates within the annuity policy grows on an income-tax deferred basis and is not subject to income tax until it is withdrawn or if the annuity policy terminates. If the policy owner is under age 59½ when a termination or non long term care withdrawal occurs, the policy owner may be subject to an additional tax of 10% of the amount includible in gross income unless an available exception applies.

Benefit payments made under this policy for covered long term care services are income-tax free. Monthly charges to pay for long term care insurance are not included in gross income of the policy owner, but reduce the policy owner's income-tax basis (not below zero) in the annuity policy. No medical-expense income-tax deduction is available for these monthly charges.

American Annuity Advocates has provided this information to help you understand the ideas discussed. Any examples are hypothetical and are used only to help you understand the concepts of the policy. What American Annuity Advocates says about legal or tax matters is its understanding of current law, but American Annuity Advocates is not offering legal or tax advice. Tax laws and IRS administrative positions may change. This material is not intended to be used by any taxpayer to avoid any IRS penalty. You should consult independent tax and legal professionals for advice based on your particular circumstances.

3) Insurance and annuity products:

  • Are not deposits.
  • Are not insured by the FDIC or any other federal government agency.
  • May decrease in value.
  • Are not guaranteed by any bank or its affiliates.

Details about benefits, costs, limitations, and exclusions can be found in the outline of coverage issued by the specific insurance company offering coverage.