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How clients can use annuities to pay for long-term care

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With millions of baby boomers in or nearing retirement, the need for long-term care insurance might seem obvious. Retirees face extended life expectancy as well as rising costs for nursing home stays, assisted living facilities and home care. Nevertheless, standalone policy sales declined nearly 70% from $550 million in premiums in 2012 to just $176 million in 2017, according to LIMRA’s U.S. Individual LTCI Sales Survey.

One reason is increasing costs: according to the National Long-term Care Insurance Price Index, published by the American Association for Long-Term Care Insurance, a married couple, both age 55, had an average annual premium of $2,466 in the 2012 survey, a number that increased to $3,000 by 2018.

Demand for LTC coverage is actually on the rise, but dollars are flowing into other types of contracts, including annuities with LTC riders. LIMRA reports that annuity-LTC combos surpassed individual LTC policies in sales for the first time in 2014.

Two years later, the combo product totaled $480 million in sales, more than double sales of the standalone policies, which brought in $228 million in sales. LIMRA’S 2017 numbers for annuity-LTC combos have yet to be released.

Whereas a common LTC insurance policy might charge annual premiums and pay benefits only if care is eventually needed, a client might prefer to pay a larger upfront sum for an annuity-LTC combo that will pay out certain amounts of cash, regardless of need. If care is needed, that annuity will provide either increased liquidity or additional cash flow.

By the numbers, it’s apparent that annuities with LTC benefits are among the arrangements that are replacing traditional LTC policies.

By the numbers, it’s apparent that annuities with LTC benefits are among the arrangements that are replacing traditional LTC policies. In fact, products with some LTC features accounted for 12% to 15% of total annuity sales last year, estimates Jeremy Alexander, CEO of Beacon Research.

Such annuities may deliver protection from potentially disastrous LTC costs, including the $8,121 national median monthly cost of a private room in a nursing home, as per the Genworth 2017 Annual Cost of Care Survey.

Plus, for some clients, the lump sum upfront is more attractive than the uncertainty associated with paying an annual premium, which could rise over time.

“Many clients do not like the high premiums of long-term care insurance and the possibility that insurers will raise premiums in future years,” says Jimmy Lee, founder and CEO of the Wealth Consulting Group in Las Vegas. “We have to educate clients to make sure they understand premiums can go up, and that multiple companies have done so on existing contracts.”

Beyond the current and potential future premium expense, potential LTC insurance buyers may object to the idea of never receiving a benefit if care isn’t needed.

Although the exact guidelines may vary by contract, policyholders often can access benefits only if they qualify for needed care via a diagnosis of some type of dementia or the inability to perform two of six activities of daily living such as bathing, eating, dressing, toileting, transferring from place to place and refraining from incontinence.

Clients react “very positively” to the idea of avoiding this use-it-or-lose-it issue, says Robert Schneider, vice president and relationship manager at Milwaukee, Wisconsin-based Cleary Gull Advisors, a Johnson Financial Group company.

“Clients are often hesitant to discuss LTC insurance because they immediately think of the standalone policies,” he says. “The usual responses are variations of ‘that’s too expensive’ and ‘I might not ever need it.’ However, they open up once they learn of the available alternatives. Knowing that the money can be taken back if needed or go to beneficiaries in the form of a death benefit is comforting.”

Combo annuities can deliver some return if LTC is never required.

Indeed, combo annuities can deliver some return if LTC is never required.

“The annuities I have used for this purpose have mostly been FIAs with lifetime income riders,” says Jeremy Kisner, chief planning officer at Planning Great Retirements in Phoenix. “The LTC rider increases the monthly or annual payout to 150% or 200% of the regular payout once the policyowner cannot perform two of six activities of daily living.”

The increased payout may be limited by time or account value, Kisner says.

“For example, if the lifetime payout is $20,000, the insurance company may increase the payout when LTC is needed to $40,000 per year for up to five years or until the policy value reaches zero. Then the payout would return to $20,000 for the remainder of the client’s life,” Kisner says.

Of course, annuities with LTC benefits are not without their flaws.

“There are many drawbacks to buying an annuity with a long-term care rider,” says Scott Olson, co-owner of LTCShop.com, an insurance firm based in Camano Island, Washington. “The opportunity cost is high because the return on the annuity is usually less than 1%, often 0%. With some of these annuities the return is negative every year: the cash surrender value decreases every year instead of increasing. In addition, someone who puts $100,000 into one of these annuities is essentially buying a $100,000 deductible; the buyer has to use all the money that was paid in before the insurance company starts using its money.”

Some observers question the fees that come with annuities, including those with LTC riders. “Annuities represent less than 10% of my business, but I am happy to defend them when clients raise questions about fees,” Kisner says. “They solve important financial planning problems when used appropriately. I welcome and usually initiate the conversation about fees.”

According to Kisner, he usually says something like, “It is true that annuities have higher fees than other investments. This is because annuities are insurance products and, just like auto insurance or homeowners insurance, you are transferring risk to the insurance company.”

Kisner goes on to explain that an annuity is transferring investment risk, interest rate risk and longevity risk to the insurer.

“Naturally,” he points out to clients, “the only reason an insurance company is willing to absorb those risks is because it is being paid a fee. The fee for this annuity is XYZ amount. I think it makes sense to pay those fees for this portion of your money because the annuity helps with your two biggest objectives: lifetime income and some level of protection in the event of long-term care. The remainder of your investments will have lower fees, more liquidity, more upside potential, etc., but will not have the guarantees of the annuity."

Some clients will be more receptive than others to the idea of getting some LTC coverage through an annuity.

“The ideal client for using these hybrid annuities for LTC coverage is someone who does not want to pay annual premiums for a traditional policy and wants their money in a safe, yet low-yielding investment,” Lee says. “If the long-term care benefits are not triggered, the client can earn a low yield from the annuity.”

Schneider believes that hybrid annuities are appropriate for nearly every level of client, but he has discovered one particularly welcoming scenario.

“We find that many retirees have significant cash value built up in life insurance policies in which the death benefit is no longer needed,” he says. “Exchanging the cash value into a hybrid product to address the potential future long-term care need is a great way to get long-term care insurance with no additional out-of-pocket expense.”

Annuity-LTC combos may gain even more popularity if they’re embraced by fee-oriented advisors.

Annuity-LTC combos may gain even more popularity if they’re embraced by fee-oriented advisors.

“We have found RIAs to be highly interested in no-load versions of both hybrid life and annuity products with a long-term care benefit,” says David Lau, founder and CEO of DPL Financial Partners, an insurance firm in Louisville, Kentucky, that is developing such contracts. “Annuity products with LTC riders, particularly the fixed annuities, generate interest from RIAs because they are less complicated than the life versions.”

Annuities with LTC riders, Lau explains, present clients with an opportunity to reallocate cash assets into a product that delivers similar yields while providing a benefit for long-term care.

“They’re kind of a no-brainer,” he says. “Why sit in cash earning very little interest when you can allocate to a product that pays a competitive rate and two to three times your account balance in an LTC benefit?”

Annuities with LTC features will be described as “no, thanks” by some, rather than as "no-brainers". Yet they offer advisors another tool for their toolbox, one that may deliver some custodial care protection to clients who feel traditional LTC insurance has become the high-priced screwdriver.

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