insurance

New: a hybrid annuity with LTC coverage

The pros of hybrid policies

  • The underwriting is usually less stringent than for a conventional long-term care policy. Genworth, for example, asks applicants whether they have or have had some serious illnesses like cancer, but the company doesn't require a physical, and less serious ailments don't affect insurability at all. People as old as 80 may be able to buy these policies, even with a $50,000 initial investment.
  • Most policies have few restrictions on how you use the money. Once you meet the qualifications, usually the inability to manage two of the six activities of daily living (eating, bathing, dressing, toileting, transferring and maintaining continence, or cognitive impairment), how you spend your money is up to you. You can pay a neighbor or a family member to help out or use the tax-free payments to augment other money that you have available.
  • If you are in a high tax bracket even post retirement, getting the money federal tax-free could make a big difference in the amount you have to spend.
  • The annuity and your long-term-care insurance are fully funded. Once the plan is in place, you don't have to pay anymore. Unlike with long-term-care insurance, you won't lose your coverage by forgetting to make payments.

The cons of hybrid policies

Independent agent Adam Hyers, owner of Hyers & Associates in Columbus, Ohio, who sells both these and conventional long-term-care policies, offers these precautions:

  • You have to have at least $50,000 lying around that you are willing to tie up indefinitely. "You should ask yourself do I have enough money readily available for an emergency," Hyers says. The money in the annuity is particularly inaccessible during the first five or 10 years because if you try to get your money out of an annuity before it matures, the surrender fees could be as much as 10 percent. Even after the policy is mature, if you take any money out, it will reduce the value of the long-term care insurance by that figure multiplied by the rate of compounding. 
  • If you buy the annuity when you are 60, it will be fully mature when you are 80. If you then choose to leave the annuity in effect so you continue to have long-term-care insurance when you need it the most, the interest rate will decline -- probably precipitously.
  • The return on hybrid annuities is often meager -- significantly less than the return on more conventional annuities. Before you buy one, consider whether it makes more sense to buy an annuity with a higher return and spend the extra interest on a conventional long-term-care policy.
  • These policies generally don't qualify for partnership plans that protect you from having to spend all your money before you qualify for Medicaid. If you have a lingering illness, having partnership insurance that protects some of your assets could be important.

The health care reform bill calls for setting up a government-run long-term-care insurance program, which will be offered primarily through employers. Details are expected to be available in 2011, with participants required to pay in for five years before being eligible for benefits of about $50 per day. Some people may decide this government plan is enough, while others with more assets may want to protect them by purchasing a private long-term-care insurance policy.

Tennessee-based financial consultant Hank Parrott advises looking at these hybrid policies as an estate-planning tool first and foremost. "The money will accumulate and you can leave it to your kids. The long-term care is just an added benefit," he says.

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