Linked Annuity-LTC Policies – Pros & Cons – 2 of 4
The main long term care planning solution for the last forty years has been a traditional long term care insurance policy. These policies continue to provide the best solution for a long term care need, and we recommend them whenever we can.
However, the insurance companies have had a very difficult time making decent profits from this product for a variety of reasons, among them the high and expensive incidence of claims. Therefore, the insurance companies have created a number of new life insurance and annuity products which provide at least some long term care protection and are more profitable for them. In the second of four blogs, let’s briefly discuss the relative merits of linked annuity- LTC policies.
Linked-annuity-LTC policies are now available as deferred fixed annuities and indexed annuities. The fixed annuities have become less desirable due to their continuing low interest rates. This has pushed most of the marketing into indexed annuities, which have a choice of investments. There is normally a minimum interest rate and a rate cap, so that there is at least some growth of the annuity value every year, but not as high a growth as the growth of a stock portfolio in a good year.
Like the linked life-LTC products, linked annuity-LTC products sound like a two for the price of one deal, but they are not. The cost of the long term care protection is deducted from the annuity account value. This deduction normally amounts to at least a hundred basis points per year. So if the annuity account value grows at 3 %, the net growth in the account value will be under 2 % after the deduction. Consequently, this is a lousy annuity compared to other annuities, where there is no such deduction.
In addition, any benefits for long term care are first deducted from the annuity account value. The result is that this account value can be completely eroded by a significant long term care scenario, even one which lasts only a year or less.
The insurance company may or may not be familiar with long term care claims adjudication. They may not grant access to full care coordination, a huge feature in a traditional long term care insurance policy. They may have benefits gatekeepers in addition to the gatekeepers in a traditional long term care insurance policy. It’s important to read the fine print in these policies.
However, like the linked life-LTC policies, linked annuity-LTC policies perform better as a long term care solution. They can pay two or three times the annuity account value for long term care costs. So an investment or a reallocation of an asset of $ 100,000 can provide up to $300,000 of long term care benefits. A sizeable annuity of this type can provide robust long term care protection.
Linked annuity-LTC products have a distinct advantage over traditional long term care insurance in that what underwriting exists is far more liberal. Most policies will accept non-qualified annuity exchanges, but there is one exception which will take qualified money. One can also use surrender-free withdrawals from the annuity to fund a linked life-LTC policy. This is a unique way of getting money out of a qualified annuity without adverse tax consequences.
This makes linked annuity-LTC policies a very good solution to long term planning. There are only a handful of these products because of the current low interest rates, but if and when interest rates rise, many insurance carriers will enter this market, hopefully with fresh solutions to people’s needs.
We have a full suite of linked life-annuity products in our portfolio with the requisite expertise to explain them. Please give us a call at (800) 303-1527 for further information.