Answers · Annuities

Is an annuity with a long term care rider worth it?

It can be, for one kind of buyer: someone with a lump sum already set aside for care, who wants the money back if care is never needed, and who may not qualify for a standalone policy. In most designs the first care dollars are your own money. The insurer's extra coverage comes after, and any promise depends on its claims paying ability.

The first care dollars are usually your own money

In a typical care annuity you put in a lump sum, say 100,000 dollars. If you later need care, the contract pays you a monthly care benefit. But for the first stretch, often around two years, that benefit comes out of your own account value.

The insurance company's money starts only after yours is used up. It comes from a continuation pool that keeps paying for another set period, often two to four more years. Some designs talk about a multiple, like two or three times your deposit in total care coverage.

In plain terms, you are prepaying part of your own care, and buying extra years on top of it. The extra years are the insurance. Price the contract on those extra years, not on the big total number.

A quick word on who is writing this. opfinances.com is a licensed insurance agency. We are not a financial advisor and not a fiduciary, and the insurance company pays us a commission when somebody buys a contract. This is general education, not advice about your situation.

If you never need care, the money is still yours

This part of the pitch holds up. A standalone long term care policy is use it or lose it. You can pay premiums for twenty years, never file a claim, and get nothing back.

With a care annuity, if you never need care, the account value is still there. You can take it out under the contract terms, or it goes to your beneficiaries when you die.

Standalone policies also come with a risk people underrate. The premium can go up after you buy. Plenty of long term care policyholders have seen large increases over the years. A care annuity is usually funded once, so that problem mostly goes away.

You pay for the care feature in growth you never see

Nothing here is free. The cost shows up as a lower credited rate than a plain annuity would pay, a yearly charge for the rider, or both. You rarely get a bill, so it is easy to forget the cost is there.

Ask what the same deposit would earn in a plain annuity with no care feature. The gap between the two, year after year, is your real premium for the coverage.

Inflation is the other cost. Care in California gets more expensive every year. A benefit that looks fine today buys less in fifteen years unless the contract has an inflation feature, and that feature costs more again.

Your money is also tied up. Most of these contracts carry surrender charges for several years. If you need the lump sum for something other than care, getting it out early can be expensive.

Federal tax rules can make the care money tax free

Under federal rules in effect since 2010, care benefits paid from a qualifying combination annuity can come out income tax free, even the part that came from growth. Pull the same growth out of a plain annuity and it is taxed as ordinary income.

Those same rules allow a tax free exchange of an old annuity into a qualifying care annuity. If you have an old deferred annuity sitting on years of untaxed growth, that is worth knowing. The gain can end up paying for care instead of going to tax.

The details depend on how the contract is built, so get the tax treatment in writing and run it past your tax preparer before you move anything.

It fits some buyers and is wrong for others

It tends to fit someone with savings they would never touch except for care, whose health might fail full underwriting for a standalone policy, and who hates the idea of paying premiums for nothing. Health questions are usually lighter than for a standalone policy, though most contracts still ask some.

It tends to be wrong when the lump sum is most of your savings, when you are younger and healthy enough that a standalone policy buys more coverage per dollar, or when you are counting on Medi-Cal. California has a Partnership program that gives qualifying standalone policies extra asset protection under Medi-Cal. Care annuities usually do not qualify, so ask.

The benefit only starts when the contract's trigger is met. That usually means a licensed health care practitioner certifies you cannot do two of six daily activities like bathing or dressing, or that you have a severe cognitive impairment. There is often a waiting period before the first payment. Read those words before you sign, because they decide whether you ever get paid.

Related

Is a hybrid annuity better than long term care insurance?

Neither wins in general. A hybrid annuity can be easier to qualify for, is usually funded once, and leaves money for your heirs if you never need care. A standalone policy usually buys more coverage per dollar, but premiums can rise and nothing comes back if you never claim. Compare the real cost of the care feature against what the same money buys in each.

Are long term care benefits from an annuity taxable?

Under federal rules in effect since 2010, care benefits paid from a qualifying combination annuity can be received income tax free, including growth. Money you take out for other reasons is taxed the normal way. Whether a contract qualifies depends on how it is built, so confirm it in writing and check with your tax preparer.

Can I exchange my old annuity for one with a long term care rider?

Often yes. Federal tax rules allow a tax free exchange of an existing annuity into a qualifying care annuity. Before you move, check the surrender charge on the old contract, compare the new credited rate, and ask what the new contract will pay in care benefits for the money you bring over.

What age is best to buy an annuity with long term care benefits?

Many buyers look at these in their late 50s through early 70s. Earlier usually means easier health questions and more time for the money to grow. Later means less time before you might need care. Any promised benefit depends on the claims paying ability of the issuing insurance company.

Where this fits.

This question sits inside a bigger one. Annuities walks through the whole decision rather than this one piece of it.

On Point Finances is a licensed insurance agency, not a tax, legal, or investment adviser. This page is general education, not a recommendation, and reading it does not create a client relationship.

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