Single Premium Fixed Annuties
Single premium fixed annuities with long term care benefit riders are great insurance products for long term care planning. They offer benefits if you need them, and your money back if you don't. Understanding how they work is important for deciding if it is the right product for you.
With any fixed annuity, the consumer is committing a single lump sum of money to a term in exchange for a fixed interest rate, typically around 2.9%. So a single premium fixed annuity with a long term care rider is the same thing, except instead of getting 2.9% interest you're going to get closer to 1%. Your long term care rider has annual expenses which are being funded with the difference in interest rate to cover the insurance costs.
Because this is an annuity, there is a beneficiary assigned to the account. That means if you pass away before using the money, your beneficiary would receive it. You also have the option of getting your money back after the 9 year contract term if you need it. You can also access 10% of your principle each year if you need it, although that does reduce your benefit if you need it. Long story short, you can't lose on these policies, you can only win or break even.
If and when you need long term care, to qualify for benefits you'll need a doctors note explaining that you can no longer perform 2 or more average daily living activities. Once approved, you have access to a wide array of long term care services including ones that allow you to stay in your own home. In fact 70% of LTC claims start at home. There are home care services, personal care, homemaker services, adult day care services, and hospice care for people who still live at home. If you're no longer comfortable at home, then you may want to move to a nursing or assisted living facility, which are covered, and you also have bed reservation services as well in case you need to leave your facility for an extended health procedure and recovery.
So how exactly does the insurance work? If you put $50k into your annuity, and the insurance company offered you their triple rating, that means you have $150k to spend on long term care over a period of six years. The payment allowance is divided up into monthly payments over that time. The first two years the insurance company uses your principle to pay claims. After 24 months of care your principle will be spent, and then the insurance company starts using their money to pay your claims for the remaining 4 years of coverage. If you passed away 1 year into receiving coverage, the remaining half of your principle would go to your beneficiary. If you passed away 4 years into the plan, your principle would be spent and there would not be anything left for your beneficiary.
To make a comparison, if you tried to self insure with $50k, you would run out of money in 2 years, where as with the insurance policy they give you an additional 4 years of coverage. The average amount of time people spend in long term care is 5 years, so it's a great way to extend your money if you need it.
Monthly payments are reimbursements, so your providers would simply bill the insurance company directly, and benefits are tax free. If your monthly long term care expenses exceed your monthly allowance, that balance will have to be covered out of pocket, and how much you put into the policy determines how much you will get out of it each month. If your expenses are less than your monthly allowance, then your left over balance will carry over to your total balance.
If you don't have the liquidity to fund a single premium fixed annuity, another option is to purchase a life insurance policy with a long term care rider and pay it off over a number of years, possibly 10 or 20 years. The set up of the policy is similar in that there's a death benefit if you were to pass away before using it, and there's an additional rider that provides monthly reimbursement payments.
But what if most of your money is put away in retirement accounts? The insurance company actually has a process set up specifically for this type of funding. First they roll the money into an annuity so that it does not trigger a taxable event, and immediately give you a 20% BONUS. Then, they use this annuity to make annual payments for the life insurance policy with the long term care rider so that the life insurance policy is paid off in a certain amount of years, usually 10. Income taxes are due on the annual withdrawals, but they are in much smaller increments, helping to keep you in a lower tax bracket rather than taking out all the money at once.