How to Cover Long Term Care Costs with Annuities

It’s time to reconsider how your cash and “safe funds” are invested. Those of you with significant sum in safe investments or cash have at least one new option that pays more than a competitive yield. In addition, to earning a decent, safe return, the vehicle delivers up to three times your money for any long-term care expenses you incur.

Longtime readers know I’ve been cautious about annuities and life insurance policies that also offer long-term care coverage. The long-term care coverage tends to be inferior to stand-alone policies, and the LTC often is used to distract attention from the products’ many costs and restrictions.

But there is one annuity with a long-term care rider worth considering. It’s known as the 3-to-1 Long-Term Care/Annuity Combo or ForeCare Fixed Annuity. Here are some details.

You make a lump sum deposit of from $35,000 to $400,000, or $600,000 for a joint annuity for a married couple.  (You also can make a tax-free exchange of an existing annuity.) Your deposit immediately begins accumulating interest. The current rate is 3% for deposits over $200,000 and 2.5% from lower amounts. The rate changes annually but can’t fall below 1%.

Plus, you have long-term care benefits that are up to three times the annuity’s value. If you deposit $100,000, you now have up to $300,000 of LTC coverage. The cost of the LTC coverage won’t increase over time and won’t reduce your principal. Interest earnings increase your LTC coverage.

As with a standard long-term care insurance policy, the LTC benefit is triggered when you can’t perform two or more of the six activities of daily living (determined by a licensed medical professional) or are cognitively impaired. Eleven long-term care services are covered, including adult day care, home care, homemaker services, and residence in an assisted living facility or nursing home. There’s no waiting period for reimbursements for home health care or respite care, and a 90-day waiting period for other types of care.

Since this is an annuity, your deposit and accumulated interest are available for other uses. You can withdraw up to 10% of the contract value each year or schedule regular annuity distributions, such as a single life annuity or a joint life annuity covering the lives of both you and your spouse. The amount you don’t distribute or use for long-term care can be transferred to your heirs or other beneficiaries. Keep in mind that any lifetime distributions reduce your LTC benefit.

A withdrawal of the full account within the first nine years faces an early withdrawal fee. The fee is 8% of the amount withdrawn the first year and one percentage point less each year until there is no fee for distributions in year 10 and later. This early withdrawal fee, or liquidity fee, doesn’t apply to any of the up to 10% annual withdrawals.

When LTC reimbursements are triggered, they first reduce your annuity account value. After the account is exhausted, additional LTC reimbursements from the insurer continue until the coverage limit is reached.

A maximum monthly LTC reimbursement is set by the insurer based on the premiums you deposit. Currently that limit is $4,220 monthly, during the first year, for a 65-year-old male who puts in $100,000, which means there are 72 months of coverage from a $100,000 deposit. Assuming you take the maximum monthly LTC limit, the payments would last 72 months for a single insured and 90 under a jointly insured annuity. If your monthly reimbursement is less than the maximum, the number of months you’ll have coverage is extended.

There’s no medical exam to qualify for the LTC coverage, only an application and telephone interview. You can qualify for either Premier coverage under which LTC coverage is three times your account value or Standard coverage in which LTC coverage is two times your account value.

Married couples can elect Joint LTC Coverage, which can be advantageous. The two spouses share the maximum benefits, which last for 90 months if the maximum monthly reimbursement is taken. This means if the spouses both need LTC but at different times, they have a joint 90 months of care. But if they need care at the same time, the maximum benefit period is shorter because they’re using two months of coverage each month they both receive reimbursements.

The LTC/Annuity Combo Annuity has tax advantages. A 2006 law provides that distributions from an annuity that reimburse long-term care expenses are tax-free. (See the box on page 6.) Of course, the annuity qualifies for the usual tax deferral of interest earnings of the annuity. Also, if you have an annuity that is less attractive, you can exchange it tax free for the 3-to-1 Combo Annuity.

Here’s an example of how the annuity can work. Max Profits has $100,000 in CDs. He doesn’t expect to need the money unless he suffers a financial reversal or has unplanned expenses such as long-term care. He hopes it is available for his children to inherit, but he’s keeping it in safe investments partly as an emergency fund for unexpected expenses and partly because he doesn’t trust other investments these days.

Max uses the maturing CDs to make a deposit in the 3-to-1 Annuity. He’ll earn 2.5% interest for the first year, and it will compound tax-deferred in the annuity. If he needs cash, Max can withdraw up to 10% of the annuity’s value during a year free from the insurer liquidity charges, and there won’t be an early distribution IRS tax penalty as long as he is 59 1/2 or older. Such distributions would reduce the LTC benefits. After nine years, Max can withdraw the entire amount without penalty if he wants.

Should Max need long-term care while he owns the annuity, he’ll have long-term care benefits of more than $300,000 if he qualified for Premier coverage or $200,000 under Standard coverage. If Max passes away without taking any distributions or needing LTC, his beneficiaries receive the annuity account value. If he does need LTC, the reimbursements reduce the account value available to his heirs until the account value is spent.

The annuity can be a good idea for people in several situations.

The 3-to-1 Annuity/Long-Term Care Combo Annuity should be considered for money you are using to self-insure for all or part of potential LTC expenses. You instantly multiply the amount that is available for LTC to two or three times the amount you’ve set aside. You continue to earn safe interest on the money and have some access to it. If you are fortunate enough not to need LTC, the money passes to your loved ones. The annuity also can supplement an LTCI policy that isn’t likely to cover all potential needs, or the annuity can allow you to purchase affordable stand-alone LTCI and have the annuity available to fill the gaps.

When you’re keeping a portion of your nest egg in safe or fixed income investments for emergencies or diversification, consider whether you might benefit by shifting part of that allocation to the annuity and creating the LTC coverage.

The annuity is offered by Forethought Life Insurance Co., a little-known insurer with solid safety ratings of “A-“/Excellent by A.M. Best and “B”/Good from the more-rigorous Weiss Ratings. One of a limited number of agents through whom the annuity is available is David T. Phillips (1-888-892-1102). I’ve known and worked with David for more than 20 years. You can trust him as one of the few customer-focused insurance agents around. He can help clients in any state.

There are many annuities and life insurance policies that offer LTC riders and coverage. But the 3-to-1 Annuity/Long-Term Care Combo offers a unique range of benefits and advantages. For more details, contact David Phillips.