By Krista McBeath, McBeath Financial Group
When planning for the potential cost of long-term care, you’ve probably considered long-term care insurance. But premiums can be expensive and if you do buy the coverage, you probably hope you never have to use it. The prospect of paying costly premiums for long-term care insurance that you might never use might discourage you. Enter the long-term care annuity.
What is it?
This hybrid product offered by insurance companies is a non-qualified annuity that provides long-term care benefits (it can’t be used with IRAs or employer-sponsored qualified retirement plans). These policies allow you to use the annuity proceeds for long-term care, and if you don’t use the long-term care benefit, you still have typical annuity options. For instance, you can convert the annuity to a stream of income payments, redeem the annuity at its maturity (e.g., cash in the annuity), or, at your death, you can pass the remaining balance of your annuity to your named beneficiaries as a tax-free death benefit.
Generally, you put a lump sum into the annuity. You may also be able to exchange an existing annuity or cash value life insurance policy for a long-term care annuity through a tax-free Section 1035 exchange. The annuity typically pays a fixed rate of interest each year. In addition, the annuity provides a long-term care benefit amount, usually equal to two or three times your annuity cash value. There are a lot of details that need to be discussed before you decide to purchase or surrender an annuity.
How does this product work?
Typically, long-term care annuities have the same qualification requirements as most stand-alone long-term care insurance policies. You first have to be considered “insurable” by the annuity company, which means you have to answer questions relating to whether you have suffered any major illness such as cancer or heart disease, or whether you have a significant cognitive impairment like Alzheimer’s disease. But you usually don’t have to undergo a physical, and the underwriting is generally less stringent than with stand-alone long-term care insurance, meaning it’s a little easier to qualify for the long-term care annuity.
What about taxes?
Generally, withdrawals from an annuity are considered to come from earnings first and are subject to income tax. With respect to long-term care annuities in particular, prior to 2010, payments of long-term care benefits from annuities were also deemed to have been taken from annuity earnings first, then principal. Thus, each long-term care benefit payment was taxed as ordinary income to the annuity owner until all earnings within the annuity had been exhausted.
The good news is that potentially favorable tax treatment applies to certain withdrawals from annuities purchased after 1996, if the withdrawals are used to pay for qualified long-term care insurance coverage. This means you won’t have to pay income tax on the benefits you receive from your long-term care annuity used to pay for long-term care expenses.
Highlights
There are many details that need to be considered and discussed before you purchase this type of product. However, here are a few of the key benefits.
- Long-term care annuities allow for tax-free withdrawals if used to pay for qualified long-term care coverage.
- At your death, you can pass any remaining annuity balance to your beneficiaries.
- If you’re not in the best of health and you want some long-term care protection, you might not be able to qualify for stand-alone long-term care insurance. But, it’s generally easier to qualify for a long-term care annuity (e.g., you probably won’t need a physical).
- Some companies offer simplified underwriting. This means you are either approved or denied after a short application, and not charged extra premiums based on your health conditions.
- Once you put money in the annuity, you don’t have to make any more premium payments as you would with stand-alone long-term care insurance policies. If you don’t need the policy for long-term care, your beneficiary receives the death benefit upon your death.
- Some companies even offer a Return of Premium feature
Is it right for you?
Whether a long-term care annuity is right for you depends on a number of factors. But the long-term care annuity is certainly a viable option available for long-term care planning that might merit a second look.
For more information on discovering your investment potential, visit their website at www.YourRetirementSource.com, or contact Krista at 309-808-2224. Her office is located at 211 Landmark Dr E5 in Normal. You may call to request a complimentary “Building Your Financial Pyramid” brochure, which will assist you in building your financial plan.
Fee-based financial planning and investment advisory services are offered by McBeath Financial Group, a Registered Investment Advisor in the State of Illinois. Tax preparation and insurance products are offered through McBeath Tax and Financial Services, LLC. McBeath Financial Group and McBeath Tax and Financial Services, LLC are affiliated companies.
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