While you wouldn’t really think an emergency annuity is an actual product, I had a client once who asked if there was anything like that. She had a problem. She’d learned that her husband had a serious illness, but they didn’t have long-term care insurance. Medicare, to her surprise, wouldn’t cover it, and they didn’t have an existing policy. She never thought they’d need one, but the fact is, if you make it to age 65, you have a 60% chance of needing long-term care at some point.1.
While Medicare does cover this to some extent, it’s important to note that it specifically doesn’t cover “custodial care if it’s the only care needed.”2 That means that if you’re not receiving skilled medical care and just need help with activities of daily living, you’re not covered. In this client’s case, this was exactly what her husband needed. She thought she was going to have to dip into her retirement savings but wanted to see if there were any other ways to fund this. One thing she’d heard of was an immediate long-term care annuity.
A Good Alternative When It Seems There’s No Alternative
A long-term care annuity is an immediate annuity with a long-term care benefit. In the event the individual needs long-term care, the benefit might boost the income payment to several times the initial amount. In addition, the portion of the income payment used towards qualifying long-term care expenses will be nontaxable. So someone could purchase this immediate annuity and have the nursing home provider paid directly from the contract. These contracts can come under many different names, but might go by immediate care or immediate need annuity.
Keep in mind the keyword is “immediate need.” In some cases, you can purchase an annuity with an optional long-term care rider, but there could be an exclusion period before that amount kicks in. In an instance where nursing home care is imminent, you’ll likely want something where the long-term benefit kicks in immediately.
Of course, there are a few downsides to consider. In these cases, there’s almost never a death benefit, and if you suddenly recover, it’s unlikely you’ll see your premium returned. Like any other immediate annuity, they are generally taken on a use-or-lose basis, meaning you forfeit the right to get the premium returned in exchange for ongoing benefits.
Finally, these annuities can be relatively expensive because there’s no true accumulation period, and it’s designed to pay out a significant amount for a short period of time. These immediate annuities are best used in the event that you haven’t pre-planned the need for long-term care. However, if the statistics and the risks concern you, now might be the right time to look at other options.
Alternatives to the Immediate Long-Term Care Annuity
There are a few other ways that might be better for funding long-term care if you have a bit of time to plan. After government funded programs are added into the equation, the most common source of funding for long-term care is out-of-pocket payment.
Statistics from “Medicaid and Long-Term Services and Supports: A Primer,” The Kaiser Foundation3
Another source of funding is private insurance, also known as long-term care insurance. These policies are usually health insurance add-ons that cover extended long-term care directly. The problem with these strictly long-term care policies is that you can be turned down. Policies are usually medically underwritten, so they’re contingent on your health. A medically underwritten policy can charge a much larger premium or even disqualify you if you’re found to be in poor health. That’s why it may be best to consider getting the policy before you need it and at potentially lower premiums early on if your health, as you age, is a big concern for you.
Another option to consider is a deferred annuity with a long-term care rider. This is similar to the immediate long-term care annuity, but you’re deferring income payments for a period of time and allowing the value to accumulate more before income payments are made. It’s possible to get out of these annuities, but, usually, there are heavy surrender fees. It’s also important to note that the annuity contract’s value will be reduced by the cost of the rider which may result in a loss of principal and interest in any year in which the contract does not earn interest or earns interest in an amount less than the rider charge. Despite that, it’s a bit more flexible than the immediate annuity, and the cost may be generally lower.
Finally, and a bit more complex, is funding long-term care through life insurance. In life insurance funding, you’re paying for the base policy and adding an accelerated benefit rider. This accelerated benefit option will kick in if you’re diagnosed with a qualified serious medical condition. What happens is the life insurance company allows you to take a tax-free advance on your death benefit, though the amount is usually capped at about 50% of the policy value.
Generally, an immediate long-term care annuity is a good option if you’re in a pinch and want to fund long-term care. The other options may be more suitable for preplanning. Either way, it’s important to consider having a fund set aside for long-term care. Medicare won’t fund all of it, and paying out of pocket could deplete your savings fast. The best way to plan ahead is to talk to a financial professional in Retirement HQ’s network to help ensure you’re prepared to cover potential medical costs as you age.
By contacting RetirementHQ, you may be offered information regarding the purchase of insurance products. All of our financial professionals are licensed insurance agents. Additionally, some individuals may also be registered with a broker/dealer or as an investment adviser.
- “How Much Care Will You Need?” LongTermCare.Gov, The U.S. Department of Health and Human Services, accessed May 12, 2016. ↩
- “Your Medicare Coverage,” Nursing Home Care, Medicare.gov, accessed May 12, 2016. ↩
- Reaves, Erica, and MaryBeth Musumeci, “Medicaid and Long-Term Services and Supports: A Primer,” Kff.org. The Henry J Kaiser Foundation, December 15, 2015. ↩