Over the past couple of years I've written several columns regarding my aversion to standalone long-term care policies. I've seen countless premium increases assessed by insurance carriers to offset increasing medical costs and higher-than-expected lapse ratios.
On the other hand, I've trumpeted the virtues of long-term care/annuity combination policies, and now Congress agrees. Come Jan. 1, the proceeds from these policies, if used to pay for home-care, assisted-living facilities or nursing home care, will be tax-free.
When Congress passed the Pension Protection Act of 2006, they recognized the need for long-term care was growing and the current system just wasn't cutting it. Today's annual cost of nursing home care averages $75,000; by 2030, it is projected to grow to more than $300,000.
Anyone who has dealt with the current Medicaid system understands how totally screwed up it is. It's a system that by design makes liars out of good, honest people.
Don't get me wrong. I think if you can afford to pay your way then by all means you should. But to deplete a person's retirement nest egg just so they can get help paying for care is so unfair. LTC/annuity combos are not for everyone, and in some cases -- dare I say it -- a standalone might be better. Let's take a look at the pros and cons of these combo plans.
The pros
-It's not a "use it or lose it" policy like a standalone. Having long-term coverage is great, but having it with the flexibility of getting your money back or taking an income stream in the future if you don't need care is even better.
-The annuity funds are yours to do with as you wish. You can let it grow or you can use it for care. If you do use it for care and there are unused funds left upon your death, those funds will pass to your beneficiaries
-If your health is an issue, you might qualify for a LTC/Annuity policy easier than a standalone LTC policy. These new policies make it easier because they use your investment first and once that amount is used up then the LTC rider kicks in. So the insurer isn't on the hook right out of the gate like they are with a standalone and they can be more liberal.
-You can use these policies for home-care, assisted living and nursing home care as you see fit. The amount you have in your coverage "pool" can be extended if you use a more cost-efficient method of care.
The cons
-If you don't make a large enough investment up front, your coverage might not last through an extended long-term care episode. To make it work you need a substantial up-front investment, at least $50,000 or more.
n The company uses your money first and then their money. Once it's all used up you are left with nothing. Standalone LTC policies with lifetime coverage would continue to pay. But remember, many people have adjusted their coverage to reduce their cost so lifetime policies aren't as prevalent as they once were. If you have a 3, 4 or 5-year plan there might not be a big difference.
-Since this is an annuity, you have the right to a free withdrawal amount each year (usually 10 percent) without penalty, but if you do take money out you are also reducing your LTC coverage amount at the same time.
-If you need more than 10 percent you will be subject to surrender charges just like a regular annuity, plus all annuity proceeds are subject to ordinary income tax if used for anything other than LTC.
They're certainly not for everyone, but if you are in the financial position to be able to afford one of these LTC/Annuity programs by reallocating current funds then by all means check them out.
Fred L. Goldenberg is a Certified Senior Advisor (CSA) and the owner of Senior Benefit Solutions, LLC, a consumer and financial services organization in Traverse City. Questions or comments about this column or any other senior issue can be directed to 922-1010 or www.srbenefitsolutions.com.
