Americans are living longer than ever before — about 30 years longer, on average, than a century ago. This was the word from leading scholars who participated in the Century Summit, a four-day virtual conference convened in December 2020 by The Longevity Project and the Stanford Center on Longevity.
But because people are living longer, they face the likelihood of dealing with more health issues later on in life.
According to the Administration for Community Living, a part of the Department of Health and Human Services, about seven in 10 people (69%) turning 65 today will need, at some point, some type of long-term-care (LTC) services — either at home, in their community or in a facility. Typically, women need care longer (3.7 years, on average) than men do (2.2 years).
Long-term care needs are unpredictable. Some diagnoses can require many years of care.
A more detailed look at long-term care, published in 2015 by Health and Human Services and revised in 2016, looks at the risk of people developing a disability and needing help with “activities of daily living,” such as bathing, dressing and eating.
The study estimates that about half (52%) of Americans turning 65 today will “develop a disability serious enough” to require long-term services and support — and about one in six (17%) will end up spending at least $100,000 out of pocket for such services.
So what’s your client’s alternative to spending down their savings? Liquidating other investments is an option, but that might put a surviving spouse at risk. It’s a safer bet to use life insurance and annuities with LTC provisions.
Nearly three in four nonqualified annuity owners intend to use their annuity to cover the potential expense of a critical illness or nursing home care, according to a survey conducted for The Committee of Annuity Insurers.
Congress realized that we have an extended health care crisis in the U.S. So in 2010, the Pension Protection Act (PPA) became law. However, one of the most important and powerful provisions of the PPA Act has been entirely overlooked by many over the years.
In retirement, retirees depend on their assets to generate income. Reallocating an existing asset that they won’t need to use for income can help protect them against an unexpected LTC event.
An LTC annuity can help clients convert taxable assets to tax-free assets when they are used for qualifying LTC. Clients can use a single premium deferred annuity to help protect their retirement income stream if the need for care arises.
A one-time premium can provide a tax-efficient way to help pay for LTC. And the issuing life insurance company may credit a higher interest rate to amounts withdrawn for qualifying LTC expenses.
By choosing to pay with a single premium, clients are guaranteed that no more payments will ever be required. Also, there are no unexpected premium increases sometimes seen with traditional long-term-care insurance.
This provision can work with any cash asset like a savings account, but it works exceptionally well with in-force annuities and here’s why.
Interest in an annuity grows tax-deferred. Indeed, that’s one of the excellent features of the annuity.
But when annuitants begin to take money from the annuity, the interest acts as ordinary income. This causes their total income to increase, potentially putting them in a higher tax bracket. This scenario is often referred to as a tax time bomb.
The PPA allows retirees to take the income from their assets tax-free.
Reallocating existing assets such as cash, savings, certificates of deposit or other annuities into an LTC annuity can help maximize those assets if they’re needed to pay for qualifying LTC expenses. And any funds not used for LTC can pass on to heirs.
Annuity-based products feature two accounts: the accumulated cash value and the long-term care accumulated cash value. Money is credited interest each month in both accounts, with a higher rate applied to the long-term-care accumulated value (LTCAV), allowing higher growth to provide more assets to help pay qualifying LTC costs.
Withdrawals are allowed from the LTCAV to help cover qualifying LTC expenses, subject to the monthly LTC limit.
Clients can exchange an existing nonqualified annuity for one that is eligible for the PPA advantages via either full or partial 1035 exchange.
Here’s an example: Ellen is 78 years old, a nonsmoker and in good health. With a single premium of $125,000, Ellen is guaranteed $3,000 per month to help pay for qualifying LTC expenses she may incur. And by selecting a lifetime continuation of benefits option, Ellen can receive $3,000 per month for her entire lifetime.
Underwriting for LTC annuities is slightly more flexible when compared with traditional LTC insurance. The application consists of several health questions and a brief telephone interview. No medical exams are necessary.
Benefit payments are triggered in one of two ways: If the annuitant cannot perform at least two of six activities of daily living, which include bathing, maintaining continence, dressing, eating or feeding, toileting (including getting on and off a toilet) and transferring (such as from a bed to a chair), or the annuitant requires care as a result of a severe cognitive impairment (such as Alzheimer’s disease).
Actual LTC expenses will be paid from the LTCAV, up to the stated monthly LTC benefit limit. The client will receive the lesser of the monthly LTC limit or the actual charge for care.