Asset based long term care is quickly growing in popularity as those nearing retirement plan for potential long term care costs. There are only a few companies marketing long term care annuity policies and Mutual of Omaha is one of them.
Their policy is called the Living Care Annuity. The primary advantages of their hybrid annuity plans are the absence of ongoing premiums and the leverage gained on your invested dollars.
Simply put, a hybrid long term care annuity policy is an ordinary deferred fixed annuity with a declared fixed interest rate. The account grows every year through compounding interest. Assuming no interest is withdrawn, the interest gains will accumulate tax deferred.
The difference with a hybrid annuity is in the leverage it provides for long term care costs. The Mutual of Omaha annuity will leverage the invested dollars three times over for nursing home, assisted living, adult day care, home health care and several other LTC types of expenses.
Let’s take the hypothetical example of $100,000 invested in a hybrid annuity. The $100k would grow each year based on the declared interest rate and would otherwise function like a traditional fixed annuity while in deferral.
However, the $100k would create a $300,000 pool of of money that can be accessed by the owner for LTC expenses two years after the policy has been purchased. The $300k pool of money would then be available over a minimum of 6 years for a total of approximately $50k per year – plus the interest growth.
If the annuity policy was accessed for long term care, the owner would essentially spend his or her own money for the first two years and for the next four years, s/he would be using the insurance company’s funds. That is to say, that after the policy has been spent down to $1 in value, Mutual of Omaha then pays the claims up to the individual policy limits.
The $100k initial investment will grow year over year based on the declared interest rate. Let’s use a hypothetical declared fixed interest rate of 3%. The $100k would now be worth $106,090 after two years.
Leveraged 3X over, this equals $318,270. Divided over 6 years, the policy would pay $53,045 per year for a minimum of 6 years or $145.33 per day. The policy funds could last longer if less than $53,045 was used in any given year. This is not a “use it or lose it” type of policy.
There is an annual cost for the long term care rider provided by the policy. This cost is subtracted from the declared interest rate each year.
Using another hypothetical example: If the declared interest rate of the annuity policy was 4.0% and the LTC rider costs 1.0%, then the annuity would credit 3.0% for that given year and the example above would be accurate.
Like most annuity policies and long term care riders, interests rates and rider costs can change based on economic conditions, but only within certain reasonable limits outlined in the policy at onset.
There is medical underwriting associated with this policy. There are twelve pre-qualifying questions as well as a required phone interview for the applicant. If you have been turned down for other types of long term care coverage, then you may not qualify for this policy, but generally speaking, hybrid annuities require less medical underwriting than traditional LTC policies.
You must prove insurability before you will be able to purchased this hybrid annuity and the policy must be in-force for at least two years before benefits can be accessed for long term care expenses.
Mutual of Omaha does offer additional inflation protection on the Living Care Annuity beyond the yearly interest growth. The annual fixed interest annuity growth will account for some inflation, but possibly not enough.
For those who want additional protection, a 5% compounding inflation rider can be added to the long term care rider at an additional cost to the policy. Inflation protection must be purchased at onset and cannot be added later to the contract.
There are potentially two primary benefactors of a long term care annuity; the owner and the beneficiaries.
Owners retain control of their investment and can always withdraw the invested funds (subject to any applicable surrender penalties) at a later date. The accumulated interest is available monthly although most owners tend to reinvest their gains in order to grow the policy each year.
Assuming little or no long term care is needed, then the owner has an asset that can avoid probate and be passed on to his or her beneficiaries. This policy can be appealing for those who are concerned about paying for traditional long term care insurance that may never be needed.
Long term care annuities can also be appropriate for those with an existing annuity policy. Consumers can exchange existing annuities for the Mutual of Omaha hybrid policy on a tax-free basis through what is referred to as a 1035 tax-free exchange.
This can be advantageous for those with significant deferred income in an existing fixed annuity or for those who wish to exit an under-performing or volatile variable annuity account.
The Living Care Annuity is designed to be a tax qualified policy. The cost of the LTC rider has been setup in order to avoid income taxes. The future policy payouts are also designed so as not to create any taxable income to the owner – even if deferred income was transferred in from an old policy.
It is always a good idea to consult with a tax consultant about specific questions regarding the taxability of certain long term care policies. This post is not to be misconstrued as tax or legal advice.
Hyers and Associates, Inc. is a independent long term care, annuity and insurance agency. We represent several traditional and hybrid long term care providers direct and can help you find the policies that best suit your needs.