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Long-Term Care Annuities

Some annuities offer long-term care (LTC) via rider with benefits amounts that can be substantially larger than the annuity deposit or annuity current account value. This is not traditional LTC but rather an alternative to self-insuring because benefits are paid from an asset (death benefit) that would otherwise go to heirs upon passing. This annuity can also be used as a premium source for exchange into a traditional LTC policy. One form of benefit is to increase the elected payout from a guaranteed income stream available from an optional rider in the annuity. For example a policy owner may be collecting $1,000 per month guaranteed for life and if they trigger the LTC benefit (being unable to perform two of six activities of daily living) that income amount would be increased, perhaps to $1,500 per month or more. While annuity income payments are often at least partially taxable, all annuity benefits paid as LTC are tax-free, even if the policy has deferred gains yet to be taxed, making the benefit that much more robust, especially if the policy owner has substantial gains yet to be taxed.

Only a limited number of annuity providers offer this type of benefit and carriers may have different requirements or calculations for each rider or annuity product. Most charge a fee that is often deducted from the internal policy value annually. The products that offer more substantial LTC benefits often charge a larger internal fee. The rider fee is often less than traditional LTC because the rider does not pay until the annuity value has been fully depleted. Therefore, an annuity LTC option can help self insure and reduce overall premium for LTC by first spending down one’s own resources, then tapping into insurance afterward. In some cases benefits can be structured to pay if either spouse meets the LTC trigger (2 of 6 ADL’s). Linked benefit annuity LTC owners appreciate that the cost for the LTC benefit is often guaranteed not to increase, unlike traditional LTC policies. When electing a LTC enhanced income from an annuity rider payment, the income and LTC payments come initially from the owners account value, reducing it steadily over time (leaving less for heirs) which means that the initial LTC payments are a return of personal savings. In the event that the owner lives for a longer than average time, the benefit continues to be paid from the insurance company funds after the owners account value would otherwise be depleted to zero. Some linked benefit annuities require underwriting while others do not, so it can be a useful tool for those who may have health impairments. In some cases, non-qualified (i.e. non-IRA/TSA, etc) annuities may be fully or partially transferred into a tax qualified LTC policy or linked benefit annuity/LTC policy, inherently making the gains in the annuity tax-free if later distributed as LTC benefit. While no tax deduction is available for linked benefit policies, the benefit payment of these LTC products to the policy owner is always tax-free.

In some cases, non-qualified (i.e. non-IRA/TSA, etc) annuities may be fully or partially transferred into a tax qualified LTC policy or linked benefit annuity/LTC policy, inherently making the gains in the annuity tax-free if later distributed as LTC benefit. While no tax deduction is available for linked benefit policies, the benefit payment of these LTC products to the policy owner is always tax-free.

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