An advisor may choose to present a Long Term Care Annuity contract that is backed by an insurance company and used to help pay for long-term care services. In exchange for a single payment or a series of payments, the insurance company will send an annuity, which is a series of regular payments over a specified and defined period of time. There are two types of annuities:
- Immediate annuity
- Deferred long-term care annuity
Immediate annuity
If one has an immediate long-term care annuity, the insurance company will send a specified monthly income in return for a single premium payment.
This option is available regardless of the current health status. If someone does not qualify for long-term care insurance because of age or poor health or if already receiving long-term care, they can still purchase an annuity.
The insurance company converts the single premium payment into a guaranteed monthly income stream for a specified period of time or for the rest of the client’s life. How much they receive in income each month depends on the amount of their initial premium, age, and gender. Since women tend to live longer than men, women generally receive a smaller monthly payment over a longer period of time than do men of the same age.
Key things to consider before purchasing an annuity:
- The annuity amount received may not be enough to pay for all long-term care expenses.
- Inflation may reduce the value of the monthly income received from the annuity.
- The effect that annuities can have on taxes is complicated.
Deferred Long-term Care Annuity
These plans are currently available to people up to age 85. Similar to other annuities, in exchange for a single premium payment, the annuitant receives a stream of monthly income for a specified period of time.
The annuity creates two funds: one for long-term care expenses and another separate fund that can be used as desired.
The long-term care fund can be accessed immediately, but the client must wait until a specified day in the future to access the separate cash portion. The rules of the annuity define how much one can access on a monthly basis from the long-term care fund and how much can be accessed on an annual basis from the cash fund. To qualify for a deferred long-term care annuity, the client must generally satisfy some health criteria.
Key things to consider before purchasing a deferred long-term care annuity:
- If the long-term care fund is not used, it can be passed on to heirs
- The annuity may not be enough to pay for all long-term care expenses
- The long-term care portion of the annuity may satisfy the requirements for a tax-qualified long-term care policy
- The effect that annuities can have on taxes is complicated
- An annuity can affect eligibility for Medicaid, and whether or not Medicaid will pay for long-term care services