Hybrid Long-Term Care Annuities Tackle the LTCi Catch-22

If you have older clients sitting on nonqualified assets — especially clients who may have difficulty qualifying for traditional long-term care insurance — there’s a smart strategy to help them get the protection they need, without incurring tax penalties or risking legacy planning.

For clients over 70, it can be a winning combination!

The LTC Catch-22 and How to Solve It

According to the Census Bureau, the fastest-growing segment of the population is adults age 85-100. Because of improved health care and medical technology, many are expected to live even longer.  Unfortunately, while this portion of the population swells, few are holistically prepared for a long-term care event and the costs associated with it.

Many of them want long-term care coverage, but they can’t afford it, or they don’t qualify for it.  Others are in denial that they would ever need it or are misinformed as to what coverage entails.  Finally, some are hesitant to pay premiums for a policy they may never file a claim on.

Fortunately, many of the same individuals, those ages 70-85, could be ideal candidates for a Hybrid Long-Term Care Annuity.

The way the products are designed, the client will either use the long-term care benefit without incurring any tax penalties or, if they never have a long-term care event, can pass the death benefit on to a beneficiary.

Nonqualified Annuities and the Key to Protecting More Retirees

It’s well known that nonqualified deferred annuities are a popular solution for Americans planning their retirement because they offer tax-deferred growth and the opportunity to provide a source of income.

According to a 2013 Gallup Poll where nonqualified annuity participants were interviewed, 86% of people buy one for its tax-deferred accumulation. While some decide to annuitize their contract, most clients never do.

One of the things we train people to ask clients who have nonqualified annuities and don’t plan to annuitize them is ‘What would cause you to spend this money?’  It turns out 73% say it is an emergency fund, they do not need the income, it would be in case they need assistance.

The downside for many clients using their current, nonqualified funds for a long-term care event is that it can come at a hefty price with fees and taxes.

Tucked inside the Pension Protection Act of 2006 is a special exemption for those holding nonqualified annuities.  The provision allows policyholders to make withdrawals for long-term care events (such as at-home nurse visits and live-in facilities) tax free.  These withdrawals are also not counted as income but rather as a reduction of cost basis.  The catch is that, because nonqualified annuities are a form of tax-deferred growth, only select products qualify.  The exemption allows policyholders the ability to access the bases of the annuity rather than the growth, preventing a taxable event from occurring.

An Annuity Offering Hybrid LTC

While many annuities may carry long-term care provisions, few can touch the benefits that a true Hybrid LTC Annuity can offer.

That starts with an annuity’s easier underwriting requirements.  I tell people looking for long-term care that underwriting is so much easier than on traditional policies.