Skyrocketing healthcare costs. People living longer lives. And a population that owns annuities, but usually doesn’t turn them into an income stream.

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If you’re not familiar, a hybrid LTC annuity can stem from an existing, non-qualified or qualified annuity that creates an LTC plan; offering the potential for significant tax advantages, LTC benefits, and even death benefits. A new annuity with these benefits can also be purchased, particularly beneficial for those who can't qualify for other types of plans due to medical issues.

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The Annuity Marketplace

 

As you probably know, most people tend to buy annuities due to the tax-deferral, or because they can become an attractive income rider later on. On the other hand, many people that own annuities have no intention to turn them into an income stream.

 

According to a Gallup survey of non-qualified annuity owners:

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• 73% intend to use their annuity as an emergency fund in the case of a catastrophic illness or for nursing home care

• 79% intend to use their annuity as a financial resource to avoid being a financial burden on their children

 

Why Consider Hybrid LTC Annuities?

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Sounds like a pretty nice setup to turn those annuities in LTC coverage. The Gallup survey results alone argue a case for hybrid LTC annuity policies.

But, factor in these health- and LTC-related statistics, and the hybrid LTC annuity really distinguishes itself:

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• 33% of seniors die with Alzheimer’s disease

• In less than 15 years, a memory care unit will cost about $175,000 each year

• More than 6 million Americans had Alzheimer’s disease in 2017—and each day 10,000 baby boomers turn 65

• 90% of Americans agree that financial advisors should discuss LTC care plans with clients, but only 14% have talked to an advisor about how they’d pay for LTC if they needed it

 

In theory, income that you won’t outlive is massively important in retirement, right? It’s critical to have contingency plans in place in the event that your income goes down, or your expenses, up.

 

However, the largest and most concerning retirement cost is extended health care. And, without any additional income to counteract these expenses, the consequences put on you and your families can potentially be disastrous.

 

Two Ways to Offset LTC Expenses

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Funding for extended care can be a hefty expense; and one that many may not be willing to pay. It all depends on the route you take to get that funding. Here are two main ways:

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1. Buy a traditional LTC insurance policy. This route will require you to pay hundreds of dollars each month now, only to possibly receive benefits later if they need care.

2. Convert a current, non-qualified annuity to create a tax-advantaged LTC plan. This hybrid LTC annuity is payable for your entire lifetime, and provides a death benefit if needed. Sounds like the more useful offer, don’t you think?

 

The hybrid LTC annuity may sound too good to be true, but thanks to the Pension Protection Act (PPA) that went into effect in 2006, it’s a real option.

 

The PPA allows any non-qualified annuities to move from tax-deferred to tax-free status when used for LTC insurance. Most likely, the annuity being used is your “rainy day fund” and it’s not going anywhere. Essentially, it’s a “dead annuity”. So, why not make it live again?

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With the Pension Protection Act, there are products out there that’ll give you triple tax efficiencies. Yep, triple the tax advantages. Just by repositioning these non-qualified annuities, they can provide these three efficiencies:

1. Tax-free transfer.

2. Tax deferrals.

3. Tax-free distributions for qualified long-term care (LTC) expenses.

 

What Does This Mean for You?

 

These tax efficiencies, which everyone loves, can take your money and possibly double or triple it; or even provide lifetime benefits for LTC (depending on the carrier). Think about what this could mean!

 

Stand-alone LTC could be a good option, but it can be pretty expensive, and underwriting becomes more difficult the more you age.

 

With the annuity option, you get tax-free LTC for qualifying LTC expenses and additional leverage on day one. If you don’t use it, the remainder annuity value goes to your beneficiary.

 

Most people don’t realize that by not putting a plan in place, their money is their plan by default.

 

Determining if an annuity is the right product and if so, finding the optimal annuity type for you, is the most important part of achieving your financial goals.

 

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