The newest addition to the LTC marketplace is the long term care hybrid annuity account. This product functions exactly like a fixed annuity, but it has a long term care multiplier built into the policy.
There is no premium rider associated with this medically underwritten annuity policy. Put another way, there is no annual cost to the insured unless funded over a finite period of years. Most consumers fund their policy with a single premium, but not all.
A portion of the internal return in the fixed interest contract is used to pay for the long term care benefit rider. Total long term care benefit payouts are calculated based on the amount of premium deposited into the policy. The larger the deposit, the more leverage benefit that is purchased.
Hybrid annuities will declare a fixed interest rate every year – say 3% for example. The interest rate could be higher or lower depending on economic conditions during the lifetime of the policy. There will always be a minimum guaranteed rate which the policy cannot fall below – say 2% for example.
If the annuity is yielding 3%, then .60% might be used to pay for the long term care insurance benefit rider each year. Thus, the account would grow by 2.40% in this example. (It is understood that 2.40% may not keep up with medical inflation so most hybrid carriers also offer additional inflation protection for purchase. Inflation protection can also be purchased with a lump sum.)
Once the annuity has been funded, the underwriting insurance company will offer a leveraged payout of the initial premium. For example, a policyholder who invested a $100,000 single premium into a hybrid annuity that is leveraged 3x over would have purchased $300,000 in future benefits.
It is important to note that many carriers have a waiting period (usually one year) before the policy could be accessed for LTC benefits – thus, like all things insurance it is wise to plan ahead.
Additionally, the LTC benefits cannot be taken out over one or two years. Hybrid annuity providers usually require that the funds be taken out over a minimum number of years. In other cases, only a certain percentage of the leveraged policy value will be available each month.
Using the example of the $300,000 leveraged policy, if the minimum distribution length was 6 years, then $50,000 would be available each year for LTC benefits. However, this number is subject to change as the policy grows by the declared interest rate each year and also if additional inflation protection was purchased.
There are only a couple of insurance companies offering long term care annuity policies at present and not all plans are available in all states. Some policies will allow for joint ownership while others may require individual ownership.
Hybrid annuities must be purchased with after tax, non-qualified funds or with the proceeds from another non-qualified annuity. The cash value of a life insurance policy can also be used in some cases. Most insurance companies will not accept qualified rollovers (IRA, 401k) as these accounts usually require future distributions or RMDs.
Occurring at 70 1/2, RMDs can upset the balance of the annuity and the long term care proceeds. Additionally, the proceeds will still be taxable upon withdrawal whether they were used for LTC purposes or not. Qualified money does not work well for you or the IRS with hybrid plans.
The main advantage of a hybrid account whether it’s an annuity or a hybrid life insurance policy is the insured can maintain control of their invested dollars. With traditional LTC policies, premiums might be spent for several years with no benefit to the insured if extended care is never needed.
With a hybrid plan, however, the policy has value to the insured for withdraws, loans and/or if it is simply cashed out to be invested elsewhere. If none of the above occur, then the policy can be willed to a beneficiary.
In this way, a small amount of interest has been lost to pay for the LTC benefits, but the accumulated value of the policy will belong to a spouse, children, or any other named beneficiary.
Hyers and Associates, Inc. is an independent insurance agency specializing in long term care and annuity policies. We can help you compare and contrast several linked and hybrid accounts in order to maximize leverage and benefits.