Friday February 14, 2014

Do Long Term Care Riders on Annuities Make Sense?

Stages of LTC

When does it make sense to own a Fixed Index Annuity (FIA) that provides an enhanced income payment for Long Term Care needs?  First of all, there is no replacement for a good Long Term Care (LTC) policy that covers 3-5 years of potential care needs with a Cost of Living Adjustment (COLA) applied to the benefit payment.  The only reason not to have Long Term Care coverage is if you are able to fully cover these costs from your assets, even then it usually makes more sense to have a policy to cover this rather using your own money.

That being said several Fixed Index Annuities provide an enhanced income payment for qualifying LTC and/or Home Care needs as part of their Lifetime Income Benefit Rider (LIBR) or Guaranteed Lifetime Withdrawal Benefit (GLWB). These benefits are usually are in the form of a doubling of your normal income payment for a period of up to 5 years. Some FIA’s will do this for Home Care as well as Confined Care (Nursing Home or Assisted Living Facility), others will pay this benefit only for Confined Care.

When does this feature actually provide a true benefit to the owner of a Fixed Index Annuity? The following three scenarios describe when this may be appropriate:

1. When a client or spouse is found to be uninsurable due to a pre-existing health condition or that condition makes the cost of a LTC policy prohibitive. Remember though, the LTC rider just pays an enhanced income stream for a period of time. It does not replace the benefits found with true Long Term Care insurance, but it’s better than nothing.

2. Another situation would be if a client currently owns a traditional Long Term Care policy and the coverage was purchased many years ago with a low benefit amount and no COLA adjustment.  The client is now much older; the cost of additional Coverage has risen substantially and the client’s health has deteriorated; and they need something to supplement their coverage limits.

3. In some cases clients have an overly optimistic vision of their own mortality.  They are in great health, exercise regularly, are diet conscious, and feel that will never be infirm enough to need coverage. They feel that traditional Long Term Care coverage would be a waste of money since they will never use it, when in fact the opposite is true. The longer they live, the more their chances of needing some type of assistance in the future.  They would be better served to stop exercising, eat junk food, take up high risk hobbies, and hope for a quick rather than lingering exit.  You and this client may have already come to the conclusion that they want to allocate a significant portion of their assets in some FIA’s.  By helping them choose those FIA’s that provide an enhanced income payment for Home Care and/or LTC needs you are, to some extent, protecting them from their own short sightedness and fulfilling your fiduciary duty to the client.

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