Long term care annuity pros and cons

If you’re worried about your retirement income covering future health-related expenses, a deferred annuity with a long-term care (LTC) rider could be the  solution. LTC riders are designedto provide coverage for things like nursing homes, assisted living facilities (ALFs), and in-home nursing. An annuity with long-term care rider couldmake a great supplement to your health insurance policy — all while providing a guaranteed income in retirement. 

What is a long-term care rider?

When you buy an annuity for retirement, you may have the option to add a long-term care (LTC) rider to help cover future long term care costs. If a licensed healthcare provider certifies that you’re unable to perform two or more activities of daily living (ADLs) or that you’re cognitively impaired, the LTC rider activates after a short elimination period — even if you haven’t yet reached retirement age. 

Depending on your policy, the rider may double or triple your annuity’s value or income payouts to help cover qualified care expenses. Once those enhanced benefits are used up, your regular annuity payments may continue, providing income throughout retirement. 

Facts about long-term care riders

• Long-term care riders can be added to annuities to help cover high long-term care costs.
• These riders allow immediate access to long-term care funds and can significantly boost monthly payouts when care is needed.
• Long-term care annuities are appealing because they use a single upfront premium and avoid annual premium increases, unlike traditional LTC insurance with rising costs and a use-it-or-lose-it model.

How does a long-term care rider annuity work?

To understand how you can use an annuity for long-term care, let’s look at the LTC annuity rider lifecycle:

• Initial investment: While some annuities allow for smaller, ongoing contributions, most annuities with a long-term care rider require a sizeable lump-sum payment upfront — often $50,000 or more.
• Accumulation phase: Over time, your annuity grows in value based on a fixed interest rate, market performance, or an index — it all depends on the type of annuity you choose. Most annuities with LTC riders are structured as deferred annuities, meaning your money has time to grow before you start receiving income.
• Benefit activation: If you develop a qualifying medical condition, your LTC rider can activate, usually after certification by a healthcare provider and a short elimination period. Once activated, the rider may double or even triple your available funds to help cover the long-term care expenses.
• Payout phase: When you reach retirement age (or the age you’ve chosen to start receiving income), your annuity provides guaranteed monthly payments, provided the account value has gone to zero from excess withdrawals. These payments can continue until the funds run out, until the contract ends, or — if you purchased a lifetime annuity — for the rest of your life. 

If you do wind up needing long-term care, your LTC rider can activate so the annuity can help cover qualified-care expenses. Depending on how your rider is structured, your regular annuity payments will either continue or pause temporarily while the rider uses your annuity’s value to pay for care. Please refer to the annuity and rider contract to see how it functions. 

Long-term care rider example

Suppose you make a one-time premium payment of $100,000 to buy an annuity with a long-term care rider. Once you reach retirement age, in this example the annuity starts providing $2,000 in monthly income.

A few years into retirement, you become unable to bathe or dress independently. After a doctor certifies your condition and the elimination period passes, the LTC rider activates, increasing your available benefits to $300,000. The extra funds can help cover your qualified long-term care expenses until they’re fully depleted. This is just one example of how the rider may work. Alternatively, the LTC rider could double or even triple the monthly payment for a certain number of years to help cover the LTC expenses. It is important to know the terms and conditions of the rider. 

Long term care annuity pros and cons

While both LTC riders and long-term care insurance help cover the cost of care later in life, they work differently — and each has pros and cons. Here’s a closer look at how LTC riders compare to a traditional insurance policy.

Pros of a long-term care rider

• Dual-purpose investing: Traditional long-term care insurance may pay out if you need care, but it’s not a source of income. With a long-term care rider on an annuity, the insurance company can provide a steady payment stream as retirement income while ensuring that an unpredictable healthcare event doesn’t destabilize your financial position. If your main goal is to cover LTC expenses, then LTC insurance may be a better fit. 
• Simplified approval: It’s usually easier to qualify for a long-term care annuity rider than for long-term care insurance, which can require extensive medical underwriting. Many insurance companies may offer guaranteed acceptance with only a few health-related qualifications. 
• No income loss: With traditional LTC insurance, you lose your premiums if you never use the coverage. But an annuity with an LTC rider can still generates the expected income even if you don’t end up needing long-term care. And if your annuity has a death benefit, the unused portion of your funds can pass to your beneficiaries. 
• Tax advantages: The tax treatment for LTC riders and insurance policies are similar: Under the Health Insurance Portability Accountability Act (HIPAA), payments for qualifying long-term care expenses like a nursing home or assisted living are tax-exempt.

Cons of a long-term care rider

• Large initial lump-sum investment: Most annuity companies that offer an annuity with a LTC rider require a large single premium payment. This can be a barrier to entry for anyone who doesn’t have tens of thousands of dollars to invest, plus any fees and charges accompanying the long-term care rider. In contrast, traditional LTC insurance often involves potentially smaller, recurring premium payments.
• Lower returns: Because a long-term care rider could require the insurance company to pay far more than the amount you invested, they may balance that risk by offering more conservative growth or payout rates. As a result, your income payments may be lower than if you purchase an annuity without an LTC rider.
• Limited coverage: Most long-term care riders cover nursing homes, ALFs, and in-home care, but many exclude services like home modifications or custodial care. In addition to this, a LTC rider may not cover all your LTC expenses. 
• Taxable payouts: Benefits from traditional long-term care insurance are usually tax-exempt, but LTC riders are a little more complex. While long-term care benefits from your rider are typically tax-free, the regular income you receive from the annuity itself may still be taxable. Only the earnings are taxed if you purchased a non-qualified annuity (with after-tax dollars). But if you bought a qualified annuity (with pre-tax dollars), 100% of your annuity payment is subject to income tax.

Who should consider a long-term care rider?

In general, an LTC rider could be a good fit if you:

• Are in your early 50s to late 60s: This age could be ideal for investment because it can give the annuity time to grow. Starting even earlier could open the door to more options and help you secure potentially better long-term annuity rates. 
• Have substantial retirement savings available: An annuity with a long-term care rider usually requires a large lump-sum payment. It’s often a better fit for those with enough retirement savings to allocate a portion toward future care needs.
• Prefer a simplified health screening: Compared to traditional long-term care insurance, annuities with LTC riders often require less medical underwriting — sometimes only a telehealth check and cognitive assessment.
• Want coverage that doesn’t go to waste: If you’re uncomfortable with the “use it or lose it” nature of traditional long-term care insurance, an LTC rider may appeal to you because it provides income even if you never need long-term care.

Still not sure if a long-term care rider is right for you? Gainbridge also offers a nursing home confinement waiver, an alternative that can provide extra support in certain situations without reducing your annuity’s growth rate.

Secure your future health and wealth

Want to learn more about what a long-term care rider is and whether it’s the right fit for you? Explore the many annuity options available from Gainbridge and see if they suit your financial goals.

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This article is intended for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. For advice concerning your own situation please contact the appropriate professional.  The GainbridgeⓇ digital platform provides informational and educational resources intended only for self-directed purposes.