Annuity Care I: NQ or Qualified, Annuity Care II NQ Only
$10,000
Annuity Care I:
50-85
Joint life annuity with benefits for life
Simplified Issue
Securian
SecureCare
Non-Qualified Only,
Lump Sum, 5, 7, 10 and 15 pay
$50,000
40-80
Cash Indemnity, 100% ROP, 10% residual DB or $10k,
Simplified Issue
Definition: Asset Based Long Term Care
Asset Based Long Term Care is a specific product issued by Insurance Companies that can provide long-term care benefits in the event you need care. They are alternatives to long-term care insurance.
However, if you never require care, your asset passes to the next generation and becomes part of your legacy to your beneficiaries. The marketplace has proved this is a welcomed change from the “use it or lose it” benefits provided by traditional long term care.
When you purchase an Asset Based Long Term Care product you are essentially leveraging a portion of your assets to fund your long term care insurance. In this way, the cost for the long term care insurance you receive is the opportunity cost of what your asset could have earned had it was invested elsewhere.
What is Long Term Care Insurance?
Long term care is advanced and costly care that must be administered over a long period of time due to some type of debilitating illness. It is often referred to as (LTC) and traditional long term care insurance is many times abbreviated as (LTCI).
Long Term Care doesn’t just mean the nursing home. In fact, LTC needs may arise sooner than you think. Short-term access to long-term care can help you recover from a sudden illness or injury. For example, while recovering from hip surgery you may need rehabilitation therapy that requires several weeks or a few months at a nursing facility.
This risk is a source of anxiety for retirees, yet most are unwilling to accept the variable costs and potential loss of premiums paid under conventional health-based long-term care insurance products. And few have taken steps to understand the complete range of long-term care insurance product features and options available to them.
No one wants to think, “This could be me” and no one can predict the future. But, according to the U.S. Department of Health and Human Services (1):
More than half of those 65 today will need some type of long-term care services and support. The average cost of those services and support is $138,000.
Women generally need care for longer periods than men. As a result, the average cost of long-term services and support for men is $91,100 and doubles ($182,200) for women
There are more options than ever to help you maintain comfort and dignity during a care need, including receiving care in your own home. All types of quality Long Term Care are costly especially In-Home Health Care.
Long Term Care Qualifying Expenses
Aging, accidents, illnesses, and chronic conditions may limit your ability to care for yourself. When this happens, you need access to quality care. You also may need assistance with everyday, personal tasks. Licensed long-term care providers and long-term care facilities can help with these and other types of “activities of daily living:”
Asset based long term care insurance benefits become available when you are either confined to an assisted living or nursing home facility, or when you are no longer able to complete 2 out of the 6 activities of daily living.
Activities of Daily Living
Bathing
Continence
Dressing
Eating
Toileting
Transferring (moving in and out of bed)
There are other everyday tasks that you may need assistance with, including:
Housework
Managing money
Taking medication
Preparing and cleaning up after meals
Shopping for groceries or clothes
Using the telephone or other communication devices
Caring for pets
Responding to emergency alerts such as fire alarms
Asset Based Long Term Care Helps Mitigate Longevity Risk
The unknown cost of health care is among the most significant risks to any retirement plan. This risk is amplified even further by the greatest risk we all must face in retirement, Longevity Risk. Advancements in modern medicine and healthcare American’s Life Expectancies continue to increase. All retirees face the possibility of a debilitating illness that will require advanced and costly care over a long period of time.
This risk is a source of anxiety for retirees, yet most are unwilling to accept the variable costs and potential loss of premiums paid under conventional health-based long-term care insurance products. And few have taken steps to understand the complete range of long-term care insurance product features and options available to them.
Will you need long-term care? The statistics say more than likely. With the life expectancy continuing to grow, those statistics will grow stronger.
Currently, more than 70 percent of people over the age of 65 will need long-term care in their lifetime.
Who would take care of you? How would you pay for long-term care?
While the numbers say you should prepare for long-term care, how you will pay for it is becoming complex. Medicare, Medicaid, health or disability insurance, long-term care insurance, reverse mortgages, and life insurance are just some of the possible sources.
HIPPA Makes Asset Based Long Term Care Possible
The chaos in the traditional health-based long term care insurance led many middle-income retirees to throw up their hands in frustration and decide to simply take their chances on not needing assistance in old age.
Understanding this frustration, Congress has passed laws that provide incentives for taxpayers to purchase LTC coverage but in a manner different from traditional, stand-alone, health-based LTCI. In 1996, with the:
Health Insurance Portability and Accountability Act (HIPAA), the federal government set forth the requirements for tax-qualified LTC policies. Until that time, the tax status of benefits paid under LTC policies was uncertain. HIPAA provides that, if the policy meets certain triggering events for payment of benefits, then the benefits paid will be received free of income tax.
These provisions are codified in:
Internal Revenue Code (IRC) Section 7702B.18 HIPAA also provides for the first type of “combination contract” or what is known as a hybrid orasset-based LTC policy.
Asset Based Long Term Care – Alternative to Traditional LTC
Life Insurance Combined with LTC Benefits
HIPAA stated that life insurance and LTC benefits could be combined in one policy. If the provisions for payment of LTC benefits comply with the law, those benefits will be received income tax-free.(6) Additionally, if the policy pays no LTC benefits and the policy pays its life insurance death benefit on the insured’s death, then that benefit will also be received free from income tax. (7)
The typical configuration of a life insurance asset-based contract involves what is basically an acceleration of the life insurance policy’s death benefit for qualified LTC claims.
For example, a policy may provide that the maximum monthly LTC benefit is 2 percent of the policy’s death benefit. Hence, if the policy had a $250,000 death benefit, the maximum monthly LTC benefit would be $5,000 per month for 50 months. Each payment of LTC benefits would correspondingly reduce the policy death benefit. If the full payment of $5,000 were to be paid for 50 months, the policy death benefit would likewise be exhausted.
Benefits of Asset Based Long Term Care
#1. If there are no LTC claims the insured’s beneficiaries receive the policy death benefit and receive it income tax-free.
#2. Pricing Stability – It is fair to say that the mortality of the U.S. population has been one of the most studied of any in history, and it is fair to say that the actuarial profession has the mortality risk of the general population pretty well figured out. Risks associated with Long Term Care Insurance, a relative newcomer, have proven difficult to accurately predict. Asset Based Products combine the uncertainty of LTC underwriting with the relatively stable assumptions used in life insurance.
#3. They permit the individual who is willing to partially self-insure his or her LTC risk the ability to do so and to do so in a manner that is generally more tax-efficient than with any other method of investment. Setting aside funds in an asset-based life insurance LTC policy can free up other funds to use as the insured desires in his or her retirement and estate planning.
Attorneys, accountants, and financial advisors who work with the elderly often encounter clients who are concerned and confused about LTC. A complete exploration of assets and a thorough knowledge of the options available is required if the advisor is to provide competent advice.
Long Term Care Annuity
A long term care annuity is an annuity with a qualified long-term care rider attached.
The second of the two laws passed by Congress that had a positive impact on the LTC marketplace, specifically long term care annuities, is the:
Pension Protection Act of 2006 (PPA). The PPA extended the preferential treatment of life insurance LTC combination contracts to deferred annuity LTC combination contracts. (3)
With a traditional (non-LTC) fixed annuity, withdrawals are taxed as ordinary income to the extent there is gain in the contract, and gain is deemed to be distributed first. (4) However, the payments made from an asset-based annuity for qualified LTC expenses are income tax-free. Amounts remaining in the contract at the annuitant’s death are ordinary income to the annuitant’s beneficiaries to the extent there is taxable gain remaining in the contract.
IRC Sec. 1035 Exchanges to Asset-Based Policies – If you own an existing non-qualified annuity with gains that have accumulated tax-deferred for years – you will be required to pay ordinary income tax on those gains at the time you withdraw them from the annuity contract (LIFO).
However, if you 1035 (commonly called transfer) your existing annuity to an Annuity with LTC Benefits; your gains will come out income tax-free if used to cover qualified LTC expenses.
This is one of the very few examples when the IRS allows you to go from tax-deferred to tax-free. If you pass the annuity on to your beneficiaries or withdraw your funds for any other purpose, gains will be taxed just like they would on a traditional non-qualified deferred annuity.
Long Term Care Annuity Example
The below chart is an example of how an annuity with a long-term care benefit works. This sample illustration shows the benefits provided to a 60 year old female purchasing a One America Annuity Care II for $100,000.
As you see the Single Premium is $100,000 (purchase premium) and the LTC Balance is $250,176. The $250,176 is the total amount of LTC Benefit this annuity will provide over a 60 month period.
100,000 / 24= $4,169 monthly benefit
$4,169 x 36 =$150,084 COB Benefit (additional 36 months)
Premium + COB Benefit = Total LTC Balance $250,084.
(I realize this number is almost $100 off the illustration below – that is because there is a small amount of interest being credited and I used simple math)
As you can see we’ve added a 36 month COB Rider (continuation of benefits). This annuity is very simple to understand. You take your account value and divide it by 24 to get your monthly LTC Benefit. Your money pays for the first 2 years of benefit and once your annuity account value reaches zero – the COB Rider kicks in to pay the same monthly benefit for another 36 months.
One America Long Term Care Annuity
The table below lists the Accumulated value, cash surrender value, LTC total Balance, and COB Annual Benefit for ages 65 thru 100 (using One America’s Annuity Care II).
You’ll notice the account value and LTC balance are barely increasing and that is because interest rates are so low right now that the cost of the LTC rider is essentially using all of the interest that is earned.
I think of it as paying an interest rate commensurate with a short-term certificate of deposit. The only reason to purchase this annuity is to leverage your asset two and a half times for LTC and favorable tax treatment.
If your goal is more geared towards accumulation you can view and compare current fixed annuity rates at our online fixed annuity store.
At the time this article was written, there were 14 carriers that market some form of either asset-based life insurance LTC benefits, asset-based annuity LTC benefits, or both (8), and several more carriers are planning to enter the market. While specifics of the various policies may differ, the general methodology for most of them is based on the same concepts described above.
In a nation with an aging population and a volatile economy, and where end-of-life care and the cost of that care is an ever-increasing concern, understanding the role that asset-based LTC products can play in retirement income planning should be the cost of admission for a financial advisor.
Attorneys, accountants, and financial advisors who work with the elderly often encounter clients who are concerned and confused about LTC. A complete exploration of assets and a thorough knowledge of the options available are required if the advisor is to provide competent advice.
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