However, most long-term care services actually are provided in a person's own home according to the U.S. Department of Heath and Human Services. Clients have many more options for their senior years if they find some way to plan for these occurrences. Up until this year people basically had only two options -- self insure or buy long-term care insurance coverage.
Beginning in 2010, Congress added another planning option called the long-term care annuity. The underlying base of a "LTC annuity" is a fixed annuity. Fixed annuities are not new -- they have been available for many years. They are guaranteed by an insurance company, the funds accrue with a competitive interest rate, and the account grows tax-deferred.
What's new is that insurance companies have built in a long-term care option into a LTC Annuity. This option is not a rider and there is not a separate premium paid by the client. The option is just an election to use the long-term care benefit if you need it. If you never need the option, your interest and principal are available for you or your beneficiaries just like a regular annuity.
To make this annuity more attractive, Congress changed the tax law so that distributions from these LTC annuities are "tax free" if used for long-term care. So you can accumulate funds on a tax-deferred basis and use them tax free if needed for long-term care. If you never need this type of care, you simply receive tax distributions as ordinary retirement income or pass them to your beneficiaries. This is an excellent opportunity to legally stiff the IRS!
Pros
- Age limitations are very liberal. People up to age 85 can purchase.
- Simple medical underwriting. There are no physicals required and most people can qualify, even if they have been denied traditional long-term care insurance.
- Tax-deferred accumulation of earnings.
- Potential tax-free use of distributions.
- You or your heirs receive any funds not used for long-term care.
Cons
- You need to have a lump sum to invest, usually at least $40,000.
- There are penalties if you surrender the annuity in early years.
- As with all financial options, "One size does not fit all."
- We encourage everyone to discuss their particular needs with a Certified Financial Planner to determine what long-term care options are needed and suitable in your individual circumstances. At least now Congress has given all of us an additional tax-favored option to consider.
Column by Van Sievers CFP • September 7, 2010
