The Long Term Care Annuity

Shawn Plummer

CEO, The Annuity Expert

A long-term care annuity is an insurance policy that helps pay for long-term care costs. It can be a helpful way to protect yourself and your loved ones from the high cost of long-term care. This guide will discuss a long-term care annuity, how it works, and who should consider buying one.

Basically, these alternatives to traditional long-term care insurance double (200%) or triple (300%) your initial single premium payment (based on medical records) to generate a tax-free long-term care insurance benefit.

Why Is The Best Long-Term Care Insurance, An LTC Annuity?

You must start planning for long-term care if you are nearing retirement age. This can include purchasing a long-term care annuity or getting the best long-term care insurance policy. This personal finance guide will discuss what you need to know about long-term care annuities and how to get the best long-term care insurance policy. We’ll also answer the following common questions asked by retirees:

  • How much is long-term care insurance?
  • How much does long-term care cost?
  • What’s the best long-term care insurance available?
  • How much does assisted living cost, and how to pay for it?
  • How much does a nursing home cost, and how to pay for it?
  • The cost of retirement homes.
  • Is there federal long-term care coverage other than Medicare?
  • Is there are alternatives to long-term care insurance?
  • How do you buy LTC without the hassle of finding an agent?
  • What happens if you can’t pay for a nursing home?
  • How do you pay for skilled nursing with social security?

What Is A Long-Term Care Annuity?

A long-term care annuity is a deferred fixed annuity (hybrid annuity) designed to help pay long-term care costs without destroying retirement savings. The LTC annuity is a form of long-term care insurance that helps pay for a nursing facility, assisted living, home healthcare, chronic illness, and terminal illness expenses.

Other long-term care insurance alternatives are annuities with long-term care riders and life insurance policies with living benefits.

What is Long-Term Care Insurance?

Long-term care insurance assists retirees in covering expenses they may need with care at home or in a facility when they cannot perform daily living activities such as bathing, dressing, eating, continence, toileting, and transferring.

70% of people age 65+ will need Long Term Care (September 2008).

– U.S. Department of Health and Human Services.

How Does a Long-Term Care Annuity Work?

When you purchase a long-term care annuity, you are making a financial investment that will provide you with coverage if you need to receive long-term care services.

There are a few different ways these annuities can work, but the most common is for the insurer to pay a fixed amount each month. This tax-free money can cover your long-term care costs, including in-home care, nursing home care, or even assisted living.

While the monthly payments from a long-term care annuity may not cover the total cost of your care, they can help to offset some of the costs and make them more affordable.

Additionally, if you purchase an annuity covering multiple people, the payments may increase if one of the policyholders becomes ill and needs to use more coverage.

Doubling Or Tripling Your Investment, Tax-free

These alternatives to traditional long-term care insurance double (200%) or triple (300%) your initial single premium payment (based on medical records) to generate a tax-free long-term care insurance benefit.

The annuity payments are tax-free, thanks to the Pension Protection Act.

The Internal Revenue Service (IRS) will allow payments toward long-term care expenses via reimbursement only. The withdrawal is taxable if you withdraw money for personal reasons other than LTC.

Long-Term Care Annuity Example:

You invest $50,000 in an LTC annuity. The insurance company declares you are “standard” status; your $50k is worth $100,000 to spend on LTC services and facilities only. However, the insurance company says you’re “preferred” status, and now your $50k is worth $150,000 to spend on LTC services and facilities only.

How To Use The Annuity

  • You will choose a qualified service or facility when ready to use the annuity.
  • Then, you will be able to access the monthly benefit via reimbursement over a specified period of time.
    • Reimbursement means paying the cost upfront out-of-pocket and sending invoices to the insurance company. The insurance company then pays you back up to the monthly allowance.
  • Beneficiaries will inherit the entire annuity policy’s value in a lump sum at the owner’s death.

What is Long Term Care?

Long-term care is the care people require for an extended period because of medical, physical, and cognitive conditions caused by an accident, illness, or frailty.

LTC is receiving assistance or supervision to perform activities of daily living (ADL) when these tasks can no longer be performed independently.

Long-term care may also include professional care services, which will evaluate your current and future needs and then coordinate and monitor the delivery of long-term care services along the way. Someone with a physical or mental illness or disability often needs hands-on or stand-by assistance with daily activities.

For example, people with cognitive impairments usually need supervision, protection, or verbal reminders to do everyday activities.

Types Of Long-Term Care

Today’s long-term care services are changing and expanding but still use standard terms such as “skilled care” or “personal care.”

Skilled care is needed for medical conditions that require assistance from medical personnel such as registered nurses or professional therapists.

Skilled care is usually needed 24 hours a day, a physician must order it, and there must be a plan.

Seniors typically get skilled care in a qualified facility but may receive it elsewhere. For example, you might get professional medical care in your home with help from visiting nurses or therapists. This service is called Home Health Care. Home Health Care may include physical therapy, caring for a wound, or supervising or administering medication.

Personal care (sometimes called custodial care) helps one with ADLs. Custodial care is less involved than skilled care and may be given in many settings, typically in your home.

A long-term care insurance policy is essential in retirement planning.

Any Long-Term-Care insurance requires an individual not to conduct 2 out of the 6 ADLs to receive monthly benefits.

  • Adult Day Care: Adult Day Care is a community-based center for elderly adults who need assistance during the day but do not need round-the-clock care.
  • Assisted Living Facility: These facilities are residential living homes (apartments or houses) that provide individualized care to those who do not perform daily activities.
  • Home Health Care Services: Home Health Care offers health-related and homemaker services to seniors at their homes.
  • Nursing Home: Homes are offered through a qualified facility that provides skilled nursing to seniors with chronic illnesses or who can’t exercise ADLS.
  • Respite Care: Respite care offers caregivers relief for several hours at a time to break from daily responsibilities.

Who Needs Long-Term Care Insurance?

Since the Federal Government predicts that 7 out of 10 retirees above 65 will need some long-term care in their lifetime, it would be safe to say every senior will need coverage in some shape or form. Luckily, there are alternatives (annuities or life insurance) other than traditional long-term-care insurance.

At the very least, the other options are not “use it or lose it” types of insurance plans. Since the immediate need for long-term care won’t begin until you need help with your day-to-day basic living needs, it’s hard to tell when you need to buy long-term care insurance.

I can tell you that it’s already too late when it gets to that point. You probably can’t be insured, and this is why a plan for long-term care needs to be taken care of at the start of your retirement, not the middle of the end.

How Much Does Long-Term Care Cost?

Nursing Home Costs

In 2020, the national average cost of nursing home care was $93,075 a year for a semi-private room and $105,850 a year for a private room. A semi-private room cost increased by nearly 3.24% from 2019, while a private room increased by almost 2%. This cost does not include therapies and medications, making the price much higher.

Assisted Living Facility Costs

In 2020, assisted living facilities had a median cost of $19,240 a year for adult day health care and charged a median price of $51,600 a year. Adult daycare had a 1.33% decrease in cost from 2019, while qualified facilities increased by 6.15% from the previous year. As a result, some residents in long-term care facilities may pay a lot more if their care needs are higher.

Home Health Care Costs

  • Homemaker Services: In 2020, the national median cost for homemaker services was $53,768 a year, a 4.44% increase from 2019. Homemaker services are professionals that come into your home and help with day-to-day chores, cook meals or run errands. Homemaker Services are based on 44 hours per week for 52 weeks.
  • Home Health Care Services: In 2020, the cost for Home Health Care services was $54,912 a year, a 4.35% increase from 2019. Home Health Aide offers more extensive personal care (bathing, dressing, transferring) than Homemaker Services in custodial care. Home Health Aide cost is based on 44 hours per week for 52 weeks.
  • In-Home Care – Skilled Nursing: In 2019, the cost for In-home Skilled Nursing Care was $87.50 per visit. Skilled nursing is licensed health care that sends a registered nurse into your home and supplies personal care, intravenous medications, injections, caring for wounds, etc., on a visit-by-visit basis.

Who Pays for Long-Term Care?

You pay for long-term care using personal resources, long-term care insurance, long-term care insurance alternatives, and some assistance from Medicaid for those who qualify. However, Medicare, Medicare supplement insurance, and regular health insurance (medical insurance) will not pay for long-term care assistance or facilities.

Personal Resources

Typically long-term care expenses are out-of-pocket costs such as personal savings accounts, investments, and retirement plans. However, because of the high price, some people sell their homes and assets to pay for their long-term care needs.

Medicare

Does Medicare pay for a nursing home, home health care, or assisted living? Original Medicare doesn’t cover long-term care or custodial care.

Medicare Part A covers skilled nursing facilities in certain conditions. The skilled nursing facility care (SNF) benefit only covers you if a physician says you need daily skilled care after being in the hospital for at least three days. You are receiving that care in a nursing facility that is a Medicare-certified skilled nursing facility.

While Medicare Part A may pay for skilled nursing services in some scenarios, the benefit doesn’t cover care costs in living facilities. In addition, Medicare does not cover home health care, including homemaker services, home health aides, and in-home skilled care.

Medigap (Medicare Supplement Insurance)

Medicare supplement insurance or Medigap is private insurance that helps pay for Medicare coverage gaps, such as hospital deductibles and excess physician charges above what Medicare approves. In addition, Medicare supplement policies do not cover long-term care costs but may pay for services to people recovering at home from an illness, injury, or surgery.

Medigap does not cover assisted living facilities, custodial or personal care, or adult daycare. Therefore, you must qualify for Medicare-covered home health services before this Medicare supplement insurance benefit is available.

Medicaid

Medicaid is a government-funded program that pays for nursing services only for impoverished individuals. Medicaid pays for almost 50% of all nursing on an aggregate basis. However, people who need federal long-term care rarely qualify for Medicaid benefits.

To utilize Medicaid assistance, you must meet federal and state guidelines for income and assets. Many seniors start paying for care out of pocket and “spend down” their income until they are eligible for Medicaid. The elderly must become legally poor to take advantage of the Medicaid program.

How do you avoid a nursing home taking your house?

Some of the elderly’s assets, such as a home and income, can be protected by a spouse who remains at home through a niche immediate annuity (Medicaid Annuity).

Long-Term Care Insurance

Traditional long-term-care insurance is another way you may pay for long-term care and comes in many forms. Long-term care annuities are just one way to pay or reimburse (Pension Protection Act) for some or all of your long-term care costs.

Additional Reading: The Best Long-Term Care Companies

Annuities

Annuities offer a hybrid deferred annuity policy called long-term care annuity, as explained in this guide. Some annuities also provide contract waivers and optional riders that can be added to help with the cost of long-term care. Whatever value in the deferred annuity contract is not used will be passed down to beneficiaries in a lump sum.

Disclaimer: We are licensed long-term care insurance agents that can provide quotes and applications for all of these products.

Life Insurance

Some permanent life insurance policies can be used as hybrid long-term care insurance policies.

For example, the life insurance policy (Whole Life Insurance or Universal Life Insurance) offers riders and provisions called Living Benefits or Accelerated Death Benefits that will allow you, the insured, to access your death benefit while alive to pay for long-term care needs.

If any life insurance death benefit (face value) is left, the remainder will be passed down to your beneficiaries.

Medical Underwriting Requirements

Some medical background research will be involved whether you purchase a traditional policy or an LTC annuity.

  • The first step is requesting a long-term care insurance quote.
  • Then fill out an application.
  • Finally, submit to the best long-term care insurance company for underwriting.

With LTC annuities, the application process consists of a phone interview and a medical background check. Therefore, the application process can be extensive with traditional policies, similar to applying for life insurance.

Below are some requirements insurance companies look for when a long-term care application is submitted.

  • Activities of Daily Living: The primary requirement to trigger long-term care insurance benefits. Most insurance companies want a person to not meet at least 2 out of the 6 ADLs: bathing, continence, dressing, eating, toileting, and transferring.
  • Cognitive Impairment: Most long-term care insurance policies cover “cognitive impairment” if you obtain overage before diagnosis.
  • Doctor Certification: Some long-term care insurance requires a recommendation from a doctor that long-term care is medically necessary.
  • Elimination Periods: Most long-term care insurance policies won’t allow you to start the benefits on the first day you go to a home or start using home care. Most policies have an obstacle called an elimination period (deductible or a waiting period).
    • The elimination period means benefits can start from 0 to 30+ days after you use the long-term care facility/service or become disabled.
    • Elimination periods for each type of care may be different from another. For example, some elimination periods allow you to accumulate non-consecutive days, and some policies require consecutive days. Finding a policy with a zero-day elimination period might cost you more, but it will put you in a good position when you are ready to exercise the benefits.
    • During the elimination period, your policy will not pay the cost of long-term care services or facilities. Therefore, long-term care expenses could be out of pocket during the elimination period.
    • Elimination periods are determined by calendar days, while other policies use days of covered service to determine an elimination period.
  • Calendar Days: Every day of the week would determine the elimination period regardless of whether you received any services on those days.
  • Days of Service: Only days when you receive the actual services will count toward the elimination period, which means the long-term care benefits can take longer to activate if you only use the services part-time. That means more out-of-pocket long-term care expenses are accrued.
  • Single Elimination Periods: Some policies allow a one-time elimination period for you to get through, and long-term care benefits are eligible at your disposal for the remainder of your life.

 Long-Term Care Insurance Interview Questions

Typical qualifying questions would include:

  • Are you currently hospitalized, confined to a bed, or residing in an Assisted Living Facility?
  • In the past 12 months, have you applied for any long-term care insurance policy or long-term care rider that was declined or postponed?
  • Are you currently using, or in the past 12 months, have you used or been medically advised by a Health Care Professional to use any of the following:
    • Medical Care in a Nursing Facility
    • Home Health Care
    • Adult Day Care
    • A Walker,
    • Wheelchair
    • A Cane,
    • Motorized Scooter
    • Hospital bed
    • Stair Lift
    • Oxygen
    • Dialysis machine
    • Hospice Care
  • Do you require assistance or supervision in performing any of the following activities:
    • Taking medication
    • Bathing, dressing
    • Getting in and out of a chair or bed
    • Eating, toileting
    • Managing your bowel or bladder
    • Walking
  • In the last seven years, have you had, been diagnosed or treated by a Health Care Professional, been prescribed or taken medication for any of the following:
    • Alzheimer’s disease or dementia
    • Recurrent memory loss
    • Mild cognitive impairment (MCI)
    • Organic brain syndrome
    • Mental incapacity or retardation
    • Multiple sclerosis
    • Parkinson’s disease
    • Paralysis
    • Organ transplant other than cornea or kidney
    • Spinal Stenosis or Chronic back pain with narcotic medication
    • Autoimmune disorder/disease such as Systemic Lupus
    • Systemic Scleroderma
    • CREST syndrome
    • Connective Tissue Disease
    • Mixed Connective Tissue Disease
    • Muscular dystrophy
    • Lou Gehrig’s disease (ALS)
    • Huntington’s disease
    • Hepatitis
    • Cirrhosis
    • Smoking in conjunction with Emphysema
    • COPD
    • Stroke
    • Multiple Transient Ischemic Attach (TIA)
  • In the last 12 months, have you had, been diagnosed or treated by a Health Care Professional or been prescribed or taken medication for any of the following:
    • Aneurysm
    • Heart bypass surgery
    • Heart valve replacement
    • Vascular surgery
    • Been hospitalized overnight two or more times
    • Had any fall resulting in a fracture
    • Had a seizure or convulsion
    • Had multiple falls, Tremors
    • Congestive heart failure
    • Cardiomyopathy
  • In the last five years, have you been diagnosed or treated by a Health Care Professional or been prescribed or taken medication for any of the following:
    • Leukemia
    • Hodgkin’s disease or other lymphomas
    • Any cancer other than non-melanoma skin cancer
    • Alcohol or drug abuse or dependency, Hospitalization for depression
    • Bipolar disorder or any other psychiatric disorder
    • Blood clotting deficiency, Factor V, VII, VIII, IX, X
    • Idiopathic thrombocytopenic purpura (ITP) or essential thrombocythemia
    • Von Willebrand disease
    • Smoking with peripheral vascular disease
    • Diabetes
    • Renal disease
  • In the last seven years, have you been diagnosed or treated by a Health Care Professional or been prescribed or taken medication for any of the following:
    • TIA with a history of heart disease
    • Diabetes is currently treated with insulin
    • Rheumatoid arthritis with joint deformity
    • Rheumatoid arthritis with joint replacement
    • Kidney or cornea transplant
    • Myasthenia gravis
    • Diabetes with a history of TIA
    • Stroke
    • Neuropathy
    • Kidney disease
    • Peripheral vascular disease or congestive heart failure
    • Rheumatoid arthritis requires the use of narcotic medication
    • Bipolar disorder
    • Schizophrenia or other psychosis
    • Chronic kidney failure
  • Have you been medically advised by a Health Care Professional to have any surgery, non-routine diagnostic test, or medical evaluation that has not yet been completed?

What Do My Beneficiaries Receive When I Die?

Long-term care annuities come with a straightforward death benefit: the annuity’s accumulation value or the minimum guaranteed surrender value, whichever is greater.

Helpful tip: Life insurance might be better if you want to leave money to your beneficiaries. In some cases, you don’t need to take a medical examination. You can find affordable coverage by shopping for life insurance policy quotes. Coverage starts at $9.37 per month.

Next Steps

Whether you buy a traditional long-term care insurance policy or long-term care insurance annuity will depend on your age, health status, overall retirement goals, retirement income, and assets. If you have assets for retirement, you may want to buy long-term care insurance sooner than later since there is roughly a 70% chance of needing long-term care.

Many seniors buy a policy because they want to stay financially independent of government aid or don’t want to burden anyone, such as family members, to care for them in the future.

Not everyone should purchase a traditional long-term care insurance policy.

You should not buy a long-term care insurance policy or long-term care annuity if you cannot afford the insurance premium or aren’t sure you can pay the premium for the rest of your life. On the other hand, if you’re living on a fixed income from primarily Social Security Benefits, Medicaid might be the way to go.

If you currently have serious health problems, you probably won’t be able to buy a policy. Insurance companies have medical underwriting guidelines and procedures to keep the cost of long-term care insurance coverage affordable. Without these guidelines and procedures, most people would not buy coverage until they needed long-term care services.

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Frequently Asked Questions

Does Medicare cover long-term care?

Original Medicare doesn’t cover long-term care. However, Medicare Part A covers skilled nursing facilities if a physician says the patient needs daily skilled care after being in the hospital for at least three days and is receiving that care in a nursing home that is a Medicare-certified skilled nursing facility.

What is the key determinant of the need for long-term care?

A person who can not perform 2 out of 6 daily living activities (ADLs) such as bathing, dressing, eating, continence, toileting, and transferring is the determinant of long-term care.

How much does long-term care insurance cost?

Long-term care insurance costs are determined by the insured’s gender, age, maximum daily benefit, length of coverage, and coverage based on an individual or a couple. The annual cost can range from $350 on the low end to $9,000 on the high end.

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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