Funding Long Term Care with an Annuity

Benefits of Using an Annuity to Fund Potential LTC Needs 

by Robert Wagner


Facts about Long Term Care Insurance 

With the aging senior population living longer and fuller lives due to modern technology and taking better care of themselves, long term care (LTC) and it’s funding is one of the most important decisions in retirement.  

​Typically there are three ways to fund LTC:

1. Traditional Long Term Care Insurance Stand Alone Policy
2. LTC Rider on a Life Insurance Policy
3. LTC Rider on an Annuity

Traditional LTC policies have been around since the late 1970’s.  Back when they first emerged they were inexpensive and popular. Interest rates were high and insurance companies sold millions of policies with little attrition.  This caused problems after decades passed since the actuaries often miscalculated their policyholders’ longevities, cost of care, interest rates and inflation. This caused significant losses to many insurers and transformed the LTC landscape.  Today, they can still offer adequate coverage for LTC costs, but tend to be expensive to purchase with high monthly premiums that may increase as you age. With many policies, the coverage remains the same and will diminish over time due to inflation, unless you have an extra rider to adjust the benefit yearly.  The worst aspect of these policies is that should you not need LTC coverage, you do not get a return of the premium you paid all those years!

LTC via a life insurance policy or annuity are both often called hybrid LTC policies.  Here at AZ Annuity Pro we like to cut through the jargon and like to use the more specific terms.  

LTC through a life insurance policy is typically purchased as a rider or add on to the main policy.  You pay a extra premium for the ability to draw early from the death benefit (2-4% per month, usually for a set period of time or until the benefit is exhausted).  The problem with these policies is that they are limited on the monthly amount you can draw to pay LTC expenses. They also may have a fixed LTC benefit and the premium costs are age dependent.  Many individuals may already have other life insurance coverage they purchased in the past, making this a less attractive option.

​The third way to approach funding LTC and in our opinion, one of the most efficient ways is to purchase LTC coverage is via an annuity.   An annuity allows an individual to use their assets (pre tax or post tax) to buy LTC coverage that either doubles or even triples the coverage of their single premium while also providing them an interest rate growth on their assets of anywhere from 2-3%.  If they end up not needing LTC coverage, their premium is still there growing with interest and can be drawn from at a rate of 10% of the annuity value annually or paid as a lump sum to heirs upon death.





The topics in this article are discussed as an educational primer and not to be considered legal, investment or tax advice.  Please consult an attorney, licensed investment professional, or CPA to receive guidance on those matters.
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