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Hot New Product: Long Term Care Annuities

By Robert D. Cavanaugh, CLU Published 05/24/2007 | Finance

In the next few minutes you will learn about a new insurance industry product that provides long term care insurance coverage if you ever need it, but requires no policy, premiums or health qualifications.

Why Seniors Don't Buy Long Term Care

1. In my experience, over half the people who shun long term care insurance do so because they feel they will never need it. It is difficult to visualize going to a nursing home. Statistically, half of these people will be right.

However, there are a number of scenarios where the person may need some kind of assistance but never see the front door of a nursing home. In fact, most people who need long term care can receive care without ever leaving their home.

When you stop and think about it, the decision not to buy long term care insurance is a decision to self insure. This can be costly and possibly devastating.

The average cost of a nursing home today is 80,000 per year and rising. At that rate, it doesn't take but a few years to grind through a modest estate. If both the husband and wife need nursing home care, the time to dissipate an estate is cut in half.

A person can spend 40 years in a career building a retirement nest egg. They spend another 40 years conservatively managing their money while trying to keep up with inflation. If they need to go into a nursing home during the last five years of their life, it all could be gone quickly.

It doesn't have to be that way as you will soon see.

2. Many people think long term care insurance is too expensive. They may be right.

If a person waits too long to apply, they may have sticker shock. The rates are based on age.
However, long term care comes with a lot of bells and whistles. When you strip away some of the options that may be nice to have, but not essential, the premium is a lot lower.

If a person looks at a plan that covers home health care only, the premium is lower yet. This takes care of the 50% who never will need to go into a nursing home.

The only thing better is coverage without a premium, which I will get to in a minute.

3. Most people react to a problem only when the problem surfaces. If a person waits to apply for long term care insurance until they are experiencing health problems, any long term care insurance plan may be prohibitively expensive or altogether unavailable.

The Solution: The Long Term Care Insurance That is Not a Policy

The insurance industry is very competitive. This very competition engenders new thinking and creative policies. Enter "Long Term Care Annuities."
There are only a few companies offering this product and the structure differs from company to company. To give you a general overview of the concept and mechanics, I am going to describe the main aspects of one carrier's contract. Check with your financial planner for all the options.

The underlying base of an "LTC annuity" is an annuity. Nothing new here; annuities have been around for a hundred years. They are safe, the funds accrue at a competitive interest rate, and the account grows tax-deferred.

To form an LTC annuity, the insurance company has built in a "long term care option." It is not a rider. There is no premium. It is simply an option you elect if long term care is ever needed. Sweet.

To qualify, a person only needs to lose two of six ADLs (activities of daily living). ADLs are insurance companies' method of determining the qualification for levels of care. They are eating, bathing, dressing, toileting, transferring (walking) and continence.

The person doesn't have to be in a nursing home. They simply need to have demonstrated the inability to perform two of the six ADLs to qualify to put the long term care option in their annuity in action.

An Example

If a male, age 60, places 200,000 into an LTC annuity, assuming a conservative interest rate, the policy would grow to 300,000 in ten years. If the 300,000 were converted into a life income, the person would receive 2,200 per month for the balance of their life. An 8.8% return. Not too bad, considering it is guaranteed no matter what.

If this person needs long term care at age 70 by virtue of losing two of six ADLs and elected the long term care option, the life income would jump to 4,500 a month.


These new products, long term care annuities, provide the option to receive long term care benefits only if they are needed. There is no separate long term care insurance policy, no premiums and generally little or no underwriting.
Now there are no excuses. Those who feel they will never need long term care will simply never exercise their LTC option. Those who find long term care too expensive have an alternative with no premiums. Moreover, those who have health issues can obtain long term care benefits, as underwriting is simplified or non-existent.

Robert D. Cavanaugh, CLU is a 36-year financial and estate planning veteran and author of the free newsletter, "The Estate Preservation Advisor". For cutting-edge, easy-to-understand financial planning resources and techniques to increase your income, reduce taxes and preserve your estate and to claim the free video, "How to Sell Your Life Insurance Policy for More than the Cash Value", go to http://theestatepreservationadvisor.com/rd/subscribe.htm