Sometimes, retirement doesn't go as planned. Health issues can take an unexpected turn for the worse and expenses can start piling up. Planning for long-term care is overwhelming, especially when you face rising healthcare costs.
Many people worry about how they’ll cover these expenses with a fixed income in retirement. One option is a long-term care annuity. Unsure if a long-term care annuity is the right fit for you? Let's examine how it works, what to consider, and how to find the best options.
What is a Long-Term Care Annuity?
A long-term care annuity is a financial product that provides:
- regular income payments
- coverage for long-term care costs.
You invest a lump sum with a long-term care annuity provider. In exchange, they provide regular payments for the rest of your life or a set period—depending on the plan.
There's no one-size-fits-all long-term care annuity product. Working with a financial advisor will help you to determine if a contract makes sense for you. You can also use a long-term care annuity calculator to see how they can help. But, keep in mind that that there is no substitute for custom advice.
An annuity is only one aspect of a wider retirement plan. While you want to cover long-term care costs, there may be other more effective ways to do so.
What Do Long-Term Care Annuity Products Cover?
Some long-term care annuity products come with extra coverage for long-term care expenses. If you need help with daily activities, the annuity can help pay for those services. These services assist with acts of daily living (ADL) which Medicare doesn't cover, such as:
- bathing/showering
- getting dressed
- cooking
- cleaning
A long-term care annuity is a way to plan for potential care needs while still receiving retirement income. However, you still need to meet specific criteria before your annuity with a long-term care rider kicks in.
Medicare doesn't cover expenses from a nursing home or assisted living facility. What would happen if your health or your partner's health deteriorates? An annuity with a long-term care rider can help ease the financial burden.
This added feature increases your payouts if you need long-term care. It gives you a safety net in case your care costs rise over time. The rider can help cover everything from in-home care to nursing facilities.
Each long-term care annuity product is different; your terms depend on your contract. Annuities with a long-term care rider aren’t the standard. It’s advisable that you work with an independent professional to help you find something suitable for you.
The Pros and Cons of Annuities with Long-Term Care Provisions
Long-term care annuity providers design these products to help those in retirement. But, you should ensure your annuity contract has favorable terms for you. These are some common pros and cons of annuities for long-term care.
Advantages of Long-term Care Annuities
These are some upsides of purchasing a long-term care annuity product:
- Long-term care annuity products provide both retirement income and coverage for care costs. This makes it a convenient option.
- It provides guaranteed retirement income. You receive regular payments over a set period or for life. This helps create a stable financial future in retirement.
- Unlike traditional long-term care insurance, many long-term care annuities don’t need you to pass a medical exam. This makes it easier to qualify for and more accessible.
- An annuity with a long-term care rider can increase your payouts if you need care. You have added protection without needing separate long-term care insurance.
- Your funds in a deferred annuity grow tax-deferred. You only pay taxes on your earnings when you start receiving payments.
Disadvantages of Long-term Care Annuities
Here are the downsides of this type of annuity:
- Long-term care annuities often need a large initial investment. The lump-sum payment needed might not be workable for you. Working with a financial fiduciary can help you find the best solution for your long-term care needs.
- Once you commit to any annuity, the terms are generally fixed, so you can't change them. You can't withdraw money without paying a penalty if your financial situation changes.
- Annuities may offer lower returns on your investment compared with other financial products. This is especially true if you don't end up needing an annuity with a long-term care rider.
- Long-term care annuities come with hefty fees and costs.
- Inflation can affect your long-term care annuity. The value of your payments might decrease over time as living costs rise.
What Is the Biggest Disadvantage of an Annuity?
The biggest disadvantage depends on your contract. However, many people consider annuities inflexible. You are typically locked into a contract and your funds become illiquid. Early withdrawal penalties make it difficult to get out of a contract.
Is a Long-term Care Annuity an Alternative to Long-term Care Insurance?
Yes, a long-term care annuity product can be an alternative to long-term care insurance. You should, however, keep in mind that they work differently. Long-term care insurance provides coverage specifically for care expenses. But, a long-term care annuity combines retirement income with some long-term care benefits.
With a long-term care annuity, you receive regular payments. These payments can increase if you need long-term care. You'll still receive regular payments even if you don't need care.
For insurance, you pay higher premiums for dedicated care coverage, even if you never use it.
Is a Long-term Care Annuity a Good Idea?
An annuity with a long-term care rider addresses many needs and concerns. You should consider it if you want:
- to secure guaranteed retirement while planning for potential long-term care costs
- a backup plan for declining health later in life
- want an alternative to long-term care insurance with more flexibility about qualifying
- to protect your assets for your family while covering future care
- predictable income with the option for healthcare coverage if needed
- to ease the potential burden of rising healthcare costs
- reduce the stress and financial burden your family may face
Take Control of Your Financial Future
At Asset Preservation Wealth and Tax, our team uses a holistic approach to retirement planning. We cover every aspect of your financial future. Annuities are one tool in our toolbox— our experts aim to create custom solutions.
As fiduciaries, we always put your best interests first. Get peace of mind with transparent advice and personalized recommendations. Ready to explore the right options for your retirement? Contact our team today to start building a financial plan that works for you—now and in the years to come.
Plan your future with Asset Preservation!
Any comments regarding safe and secure investments and guaranteed income streams refer only to fixed insurance products. They do not refer in any way to securities or investment advisory products. Fixed insurance and annuity product guarantees are subject to the claims paying ability of the issuing company; not guaranteed by any bank or the FDIC.
Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
The commentary on this blog reflects the personal opinions, viewpoints and analyses of the author, Stewart Willis, providing such comments, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”), an SEC registered investment adviser or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment, legal or tax advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Personal investment advice can only be rendered after the engagement of Foundations for services, execution of required documentation, including receipt of required disclosures. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Any statistical data or information obtained from or prepared by third party sources that Foundations deems reliable but in no way does Foundations guarantee the accuracy or completeness. Investments in securities involve the risk of loss. Any past performance is no guarantee of future results. Advisory services are only offered to clients or prospective clients where Foundations and its advisors are properly licensed or exempted. For more information, please go to https://adviserinfo.sec.gov and search by our firm name or by our CRD # 175083.
