Use Annuities for Health-Care Costs
02/07/2012 5:30 am EST
There are ways to cover your everyday health-care costs with annuity vehicles, not just catastrophic or long-term expenses, writes Stan Haithcock of StantheAnnuityMan.com.
If you have read my previous columns or have seen me speak, you know that I always say annuities are “transfer of risk” products that solve for four specific problems.
The acronym I use is “PILL”: Principal Protection, Income for Life, Legacy, and Long-Term Care. Recently I have added an asterisk under Long-Term Care for current and future health-care costs.
Hundreds of years ago, annuities were designed specifically to provide a lifetime income stream. For the majority of situations I run across, lifetime income is still the main question that I use annuities to solve. However, more and more I am recommending clients to utilize annuity contractual guarantees to cover their day-to-day health-care costs.
None of us know what is going to happen with the current health-care legislation (i.e. “Obamacare”), but we are all smart enough to predict that any type of outside coverage is going to be more expensive every year. Because we are living longer and our life expectancies keep increasing, the time is now to put your own health-care “transfer of risk” plan in place.
There are annuities available now that solve for long-term care, but I think that it is also prudent to use annuities for your common health-care costs that would precede long-term care. The reality is that health-care costs will continue to rise, and annuities can be a good planning tool to combat this. You need to plan for the increasing costs that you and I both know are going to happen.
The Insured Retirement Institute (www.irionline.org) recently vetted this type of annuity strategy and showed in detail how health-care costs can affect your retirement savings. The overall conclusion was that annuities can “cushion” health-care costs during your retirement years. The researchers suggested some of the following strategies:
- Set up a base level of contractually guaranteed lifetime income that would further supplement your current Social Security income and pension income (if you have any).
- Put in place a deferred annuity with a contractually guaranteed growth rate utilizing a rider (added benefit) that can be used for a lifetime income stream at a future date to cover health costs.
- Put in place a deferred annuity with a contractually guaranteed growth rate utilizing a rider (added benefit) that can specifically used for long-term care. I call this Full Control Long-Term Care, because you have the coverage, yet still retain control of your money. Some of these riders can double the payout amount if you need long-term care coverage.
These strategies will reduce the investment that you will have to make to fund both current and future health-care costs. Single Premium Immediate Annuities (also known as Income Annuities) are a very efficient way to establish a baseline lifetime income stream to supplement your Social Security or current retirement income.
Most of the insurance companies offering long-term care riders are attaching these benefits to a fixed annuity or a indexed annuity structure. Some variable annuities offer this benefit as well, but the expenses are high when compared to the fixed annuity option.
Here’s an example of a fixed indexed annuity with a confinement care rider attached to the policy as an added benefit: A male age 65 places $100,000 in this type of annuity with a long-term care/lifetime income rider (attached benefit) that contractually grows at 7.2% annually during the deferral years, and that amount can be used for income/long term care.
He defers for ten years, and then turns on the lifetime income stream. The initial $100,000 has contractually grown to $200,000, and at age 75 produces a lifetime income stream of $13,000 per year.
This payment is based on the age you start taking income and your life expectancy. In this case, that actuarial payout was 6.5% of $200,000…or $13,000 per year for life.
The long-term care/confinement care benefit attached would double the income stream for life. So instead of receiving $13,000 per year, you would receive $26,000 per year.
Another good feature of this product is that it is “guaranteed issue” and doesn’t require any medical tests or doctor visits. Contact me for more details to this strategy…but this is a brief snapshot of how it works, and how it should be positioned within your portfolio.
My advice is to not just plan for long-term care costs, but also for the common, everyday health-care costs that you incur while you are healthy. The “transfer of risk” aspect that annuities bring to the table are the perfect way to provide yourself peace of mind to cover these ever-increasing health-care expenses.