Comparing Annuities With Long-Term Care Insurance

“Americans are underprepared for retirement.” This was CBS News’ conclusion after comparing the average balance in retirement accounts with the nest egg most people believe they need. Factors such as the cost-of-living crisis, increased longevity, diminishing Social Security reserves and the rising expense of long-term care have intensified concerns about retirement planning for many Americans and their financial advisors.

To address these concerns, many are turning to long-term care insurance to help manage out-of-pocket long-term care costs. Simultaneously, the guaranteed returns offered by annuities attract those looking to reduce uncertainty in their retirement planning.

But what exactly are annuities and long-term care insurance, and how well do they fit into your retirement strategy? In the following discussion, we will explore these questions and provide insights into how these financial products can impact your retirement planning.

What Are Annuities and Long-Term Care Insurance?

Long-term care insurance helps pay for the services a person needs when they can no longer independently perform their daily activities. This can include care from health professionals at home or living in an assisted living facility or adult day care. 

Many Americans require this type of care in their later years of retirement, and the rising costs of long-term care threaten the financial stability of seniors. Long-term care insurance is one way to address this issue. By paying into an LTC insurance plan, you can avoid or minimize out-of-pocket expenses for long-term care. 

On the other hand, annuities are insurance contracts that convert your premium payments—whether lump-sum or regular—into a guaranteed, regular and fixed income stream over a defined period or for life.

With the unpredictable nature of the future state of the economy and one’s own retirement needs, it is critical to consider both annuities and long-term care insurance for a long and secure retirement.

Daniel J. Adams, MBA, CFP®, CLU®Founder and President of CEG Life Insurance Services

As the founder of CEG Life Insurance Services, Daniel J. Adams has extensive experience with life and health insurance products. Daniel assists clients in building a secure financial future as a Certified Financial Planner™ professional and independent insurance agent. He also trains new agents and advises other financial professionals.

Types of Annuities and Long-Term Care Insurance

When planning for retirement, understanding the various types of annuities can help you choose the right financial product to meet your needs. Annuities come in several forms, each offering distinct features and benefits.

Annuity Types

Fixed Annuities 

Fixed annuities earn a guaranteed rate of return that remains stable regardless of market fluctuations, offering predictability and security for a set period or for life.

Indexed Annuities  

Indexed annuities tie returns to a stock market index, like the S&P 500, offering a potentially higher return based on index performance while protecting against market losses.

Immediate Annuities 

Immediate annuities start generating payouts right away after a lump-sum payment, converting your savings into a reliable income stream for retirement.

Variable Annuities 

Variable annuities offer returns based on market performance with no guaranteed returns or protection, providing the potential for higher gains but also higher risks.

When it comes to managing long-term care costs, several options are available to suit different needs and preferences.

Long-Term Care Insurance Types

Traditional LTC Insurance 

Traditional LTC insurance is a standalone policy specifically designed to cover long-term care expenses. It provides reimbursement for services such as nursing home care, in-home care and assisted living, without offering additional benefits.

Hybrid LTC Insurance 

Hybrid LTC insurance combines long-term care coverage with life insurance. These policies not only cover LTC expenses but also build cash value over time. This cash value can be used to pay for long-term care or can be passed on as a death benefit if not needed for care.

LTC Riders 

LTC Riders are add-ons to life insurance policies or annuities that allow you to access a portion of your funds to cover long-term care costs. This provides a flexible approach to incorporating long-term care coverage into your other financial products.

Features of Annuities and Long-Term Care Insurance

Planning for a secure financial future involves understanding key products like annuities and LTC insurance. Annuities offer various payout structures and growth options, while LTC insurance covers the costs of long-term care services. It’s important to grasp the features of both annuities and LTC insurance, including their costs, contributions, flexibility, tax implications and risk management, to make informed retirement decisions.

Cost and Affordability

The commissions and fees associated with annuities are among their drawbacks, and excess early withdrawals are penalized with surrender charges. Annuities can be funded through regular premium payments or a single lump-sum payment.

With LTC insurance, premium payments depend on factors such as your age, health condition, coverage amount and waiting periods. Premiums also vary based on the type of LTC insurance, with hybrid LTC insurance and LTC riders generally being more expensive than traditional LTC insurance.

Contributions and Payouts

Payouts from an annuity can be immediate or deferred. Immediate annuities begin payouts within a year of making the lump-sum payment. Other types of annuities have deferred payouts, meaning there is an accumulation phase during which you contribute premiums and earn returns. This is followed by a payout or annuitization phase when the insurer begins regular payments based on the annuity type.

In contrast, with LTC insurance, you must continue contributing premiums for the policy to remain valid. If it’s a traditional LTC insurance policy, some of your premiums may end up unused. Payouts are only made when you incur LTC expenses, and there is no regular or guaranteed monthly payout.

Flexibility and Access to Funds

Many annuity contracts allow you to withdraw from your account during the accumulation phase if emergencies arise. However, this can be costly. If you are 59½ years old or older and withdraw during the surrender period, you will pay taxes and a surrender charge. If you are under 59½ and make an early withdrawal during the surrender period, you will pay taxes, a penalty and a surrender charge.

In contrast, LTC insurance does not offer this flexibility. You can only access benefits when you incur LTC expenses.

Tax Implications

Contributions to an annuity and the interest earned grow on a tax-deferred basis, meaning you only pay taxes when withdrawing from the account. This can be advantageous if you expect to be in a lower tax bracket during the payout phase.

For LTC insurance, premiums for traditional policies and the long-term care rider of hybrid policies are generally tax-deductible, while the benefits received are tax-exempt.

Risk Management

Annuities can be used as a risk management tool for retirement planning, offering guaranteed income and downside protection. Choosing a life annuity ensures you won’t outlive your savings.

Similarly, LTC insurance manages risk by covering long-term care expenses, preventing your retirement income from being rapidly depleted due to the costs of a long-term care event.

Combining Annuities and Long-Term Care Insurance

Should you choose an annuity or LTC insurance for your retirement planning?

In one sense, you can have both since they serve different purposes. An annuity provides you with a guaranteed income during retirement and ensures that you don’t outlive your retirement savings. LTC insurance, on the other hand, ensures you don’t pay for LTC out-of-pocket, thus protecting your retirement income from rising costs associated with a long-term care event.

However, there is a way to enjoy these two benefits without having both an annuity and LTC insurance: the LTC hybrid annuity.

This is a fixed and deferred annuity that also provides you with LTC benefits (as a rider). The annuity makes available between 2 to 3 times the amount you have invested for LTC expenses.

However, to enjoy this benefit, you will sacrifice a portion of your fixed rate of return. For example, if your annuity pays a 7% return, you may receive only 5% with the remaining 2% serving as your LTC fee.

Before making a choice, consult with your financial advisor who can help you determine what option is most appropriate for your specific situation.