The problem with how to fund for the risk of Long Term Care expense continues to increase, and the number of lives covered through insurance and premium volume has dropped significantly in the past 12 years. Industry giants like Prudential, MetLife and Allianz have exited the market.
To add to the problem, those in my generation of the baby boomers are turning 65 daily by the thousands. Fortunately, Obamacare made no effort to fund Long Term Care expenses. Even Ted Kennedy was smart enough to not get the government involved here!
Traditional Long Term Care Insurance will provide comprehensive care but a case can be made for carriers cherry-picking only the healthiest applicants. Given the current state of low interest rates in our economy this position is to be expected.
There is serious rate instability with Long Term Care policies. Claims have been higher than expected while lapse rates have been lower than what was anticipated by carriers. In many cases, rate increases have been so significant policies have needed to be restructured to hold down costs.
Here is an area where annuities can be a great benefit to your retirement planning. Annuity/Long Term Care combination policies will have an immediate multiple of maybe three times the premium. A $50,000 hybrid policy will provide $150,000 of Long Term Care related expenses.
As is the case with Life/LTC combination policies, you retain control of the asset. If you are fortunate enough to not incur Long Term Care related expenses, the annuity remains in your estate and will pass to your beneficiaries. The “use it or lose it” concern is no longer an issue.
Currently, these annuities are designed as fixed interest products, so the return will be low, but the interest tax-deferred.
There is, however, a major tax advantage with these annuities. Under the Pension Protection Act of 2006, withdrawals from the annuity to pay for Long Term Care expense is received free of tax, both at the federal and state level. This translates into a product with tax-deferred growth with tax-free withdrawals for benefits. In the $50,000 example, the potential of receiving $150,000 tax-free is very appealing.
If you are looking for a special Christmas present to improve your retirement planning program, here it is!
Best wishes for a happy and prosperous New Year.
Mike Lassiter is a Chartered Life Underwriter and Chartered Financial Consultant. He is a Licensed Insurance Counselor and a Registered Investment Advisor. He can be reached locally at 770-786-2781.