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Deferred fixed annuities with long-term-care benefits vs. long-term-care insurance policies?

My wife has diabetes and the quotes we are getting for long-term care insurance policies are outrageous. I've heard that deferred fixed annuities with long-term-care benefits can be used in lieu of insurance. What are some things I need to look out for with this?

May 09, 2012 by Hugh from Kearney, NE in  |  Flag
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Hugh,

Oh, boy. This can certainly be a tough one!

OK, lets jump in. First - in my experience, many people who experience sticker shock on LTC policies have been overquoted - essentially, the agent (who tyically gets paid about 45% of the premium the first year, then a continuing smaller percentage every year after) may be trying to sell you a Cadillac policy when you might be well served with a Hyundai. Often, a smaller daily benefit, or a shorter benefit period - or a policy without the inflation rider - can provide you with much needed coverage at a lower price. Yes - the benefits may run out - or you might have to really tighten your belt to get the care you need, but it may also fit in your budget. So - a too-small policy is better than NO policy - if you need it. Just something to think about.

For example - I've seen agents quoting $200/day or even $250/day coverage for 10 years with inflation protection and, yes, the coverage is expensive. A $50/day or $100/day policy for 3 years, while not enough to completely pay for nursing home care, and would run out in 3 years - is still better than nothing. We all have limited resources, and, as such, have to prioritize and decide how to deploy those resources based upon our values and goals.

Next issue - Annuities. More likely a marketing tool than anything else. Most annuities that I have seen allow you to take withdrawals of SOME of your OWN MONEY - without a surrender charge - if you need it for long-term-care. Well... excuse my myopic thinking... but I couldn't I take 100% of MY OWN MONEY out of ANY account I had that was NOT in an annuity without a surrender charge?

These "Long Term Care" benefits attached to annuities only came about after enough insurance companies got sued by seniors who needed the money for long-term care, but couldn't get it out of their annuity without paying surrender charges. And the "benefits" are not really benefits at all - but just a little bit of a break on a surrender charge. A surrender charge, by the way, is merely a way the insuranc company makes up the commission they paid to the agent. If an annuity REALLY is what you want - there are NO SURRENDER annuities available through Fidelity, Vanguard, Schwab, and a few other companies - but guess what??? They don't pay any commissions. Thus... you never get offered them.

I suppose that it is possible that some annuities may offer a very limited ADDITIONAL benefit for long-term care, but I personally haven't seen any. The primary reason for this is that insurance is a way of transferring risk - For example, in your car insurance - you pay a known premium to offset the potentially devastating cost of wrecking your car and hurting yourself or someone else. Well, with Long-Term care insurance, pay a known cost (premium) to offset the uncertainty of a devastating unknown cost (long-term care costs). No insurance company will accept that risk without knowing something about the risks they are going to take - and then making an offer based upon the financials behind that risk. Thus the high price of Long Term Care insurance. Similarly, no insurance company will just "slap" a long-term care benefit of any real substance without underwriting and evaluating that risk - no matter how your insurance agent pitches it.

It sounds to me like you may be dealing more with someone trying to sell you one or more types of insurance instead of being a financial planner helping you make the smart decisions about all of your finances, which may or may not include a need for long-term care insurance. My suggestion is that you contact your local FPA (Financial Planning Association) or go to NAPFA.org to find a fee-only financial planner who you pay to help you make these decisions instead of someone whose vested interest is selling you an insurance product. If insurance or an annuity IS in your best interest (and it OFTEN is - we recommend it all the time) - then you will come away with knowing how much you need, and the best way to fit them into your overall financial plan.

Jon Castle http://www.WealthGuards.com

Comment   |  Flag   |  May 09, 2012 from Jacksonville, FL

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