Using Immediate Annuities To Pay For Long-Term Care
ContentsWhat Is An Immediate Annuity? Medically Underwritten Immediate Annuities Estimating The Costs Of Long-Term Care Alternative Options To Immediate Annuities Things To Consider Before Purchasing An Immediate Annuity Purchasing A Single Premium Immediate Annuity FAQs About Immediate Annuities To Pay For Care
For many seniors and their families, the health-care costs associated with long-term care planning are a major concern—whether they are currently receiving care or simply anticipate needing it in the future. Depending on the type of care and the services needed, the cost of qualified long-term care can be substantial and many seniors find themselves turning to Medicaid planning and/or their children for assistance when their savings run out.
The good news is that there are resources available for seniors who are looking to maximize their savings and leverage their assets to help cover the cost of long-term care.
This article provides a comprehensive overview of immediate annuities (also known as single premium immediate annuities (SPIAs) and how they may be used to cover some or all of the health-care costs of qualified long-term care planning for seniors.
What Is An Immediate Annuity?
An Immediate annuity or SPIA (sometimes also called an income annuity, single-premium immediate annuity, or payout annuity) is a long-term annuity contract between individuals and insurance companies. They operate much like a long-term care insurance policy, but in reverse.
With a life insurance policy, the purchaser makes regular payments to an insurance company with the promise of a sizeable lump sum payment made to one’s family or other beneficiary(ies) upon one’s death.
With a single-premium immediate annuity, the purchaser makes an initial one-time lump-sum payment (called the premium) to an insurance company and in exchange receives regular monthly payments. With most SPIAs (particularly those purchased by retirees), these payments are guaranteed to continue until the purchaser dies although some insurers offer SPIAs with payments lasting a specified period of time such as 10 or 20 years.
For seniors who may be concerned about outliving their savings or running out of money, a SPIA may be able to provide an added level of financial security and peace of mind. Once the initial payment is made, the monthly care annuity payments usually continue until the purchaser passes away providing guaranteed income which may supplement Social Security, pension payments, and other forms of retirement income.
If a family member is looking to convert a large portion of their savings into immediate and ongoing guaranteed monthly income, a SPIA may be a good option.
The amount one can expect to receive from a SPIA depends on a number of factors, including:
- The amount of the initial investment.
- Interest rates at the time of the investment.
- The individual’s age and gender.
- Whether or not the individual is suffering from a serious medical condition (see “Medically Underwritten Immediate Annuities” below).
As a general rule, the older an individual is when they purchase a SPIA and the more they invest, the higher they can expect their monthly payment to be. Since women tend to live longer than men, the monthly payments women receive are usually slightly lower than the payments received by men of the same age. Online care annuity payment calculators such as this one may be used to give investors’ a general idea of how much they can expect their monthly payments to be.
Medically Underwritten Immediate Annuities
If an individual is suffering from a serious medical condition, they may qualify for a medically underwritten SPIA. Medically underwritten SPIAs offer the same benefits as a regular SPIA but offer higher monthly payments due to the decreased life expectancy associated with many serious medical conditions.
In order to qualify, an insurance company must determine that a purchaser’s actuarial (“rated”) age is older than their chronological age (in other words, that their life expectancy is less than that of the average person their age). In such cases, the insurance company will usually offer higher monthly payments based on this rated age because they expect to make fewer total payments.
The following conditions are often considered “ratable” by insurance companies and may qualify purchasers for medically underwritten SPIAs:
- Alzheimer’s disease
- Amyotrophic Lateral Sclerosis (ALS) or Lou Gehrig’s disease
- Angioplasty or heart surgery
- Congestive heart failure (CHF)
- Diabetes with complications
- Emphysema, including chronic obstructive pulmonary disease (COPD)
- Heart attack
- High blood pressure
- Hodgkin’s disease
- Injury due to falls or imbalance
- Liver disease
- Mental illness
- Multiple sclerosis (MS)
- Muscular dystrophy
- Obesity with complications
- Organ transplant
- Paraplegia or quadriplegia
- Parkinson’s disease
- Renal failure
- Vascular disease
If a person is suffering from one or more of the above conditions (or some other serious illness or medical condition), they may qualify for a medically-underwritten SPIA which may significantly increase the amount of the monthly payments they receive. In fact, qualifying for a medically-underwritten SPIA can increase a purchaser’s payments by 25% - 30%.
Insurance companies differ in how they conduct their assessments and it is important to keep in mind that the process may take up to 30 days or longer. Some insurers require applicants to participate in an in-person assessment conducted by a nurse or other medical professional while others simply require them to submit detailed medical records and fill out a health questionnaire.
Estimating The Costs Of Long-Term Care
Figuring out how to pay for long-term care fees can be a complex and stressful process for both seniors and their families. The cost of long-term care options differs greatly from person to person based on their unique needs and circumstances, however, the U.S. Department of Health and Human Services (HHS) estimates that the average person turning 65 years today can expect to incur approximately $138,000 in total long-term care costs as they age. It is also worth noting that women generally require long-term care services for a longer period of time than men. On average, women require care for 3.7 years while men only require care for 2.2 years.
The amount one can expect to pay for long term care will depend on a number of factors which may be difficult or even impossible to anticipate or predict. Some factors to consider include:
- Type and level of care required (in-home care, independent or assisted living care, nursing in-home care, memory care, etc.)
- Services and amenities included with the level of care received
- Geographic location
- Private or shared room
- Specific care needs
- Any specific medical conditions
It is also worth noting that seniors’ care needs often change over time and as they age which may affect long-term care costs as well.
Alternative Options To Immediate Annuities
Seniors pay for long-term care fees in a variety of ways and although some individuals are able to pay for all long-term care options costs out of pocket, this is certainly not the norm. Most seniors find that they require assistance from public programs such as Medicaid or from private insurance plans when paying for care. Common sources of funding for long-term senior care include the following:
- Social security
- Proceeds from the sale of assets (such as the sale of a home)
- Pensions, individual retirement accounts (IRAs), 401(k)s, and other retirement planning savings programs
- Medicaid planning and other public programs
- Reverse mortgages
- Home equity lines of credit (HELOCs) or traditional home equity loans
- Long-term care insurance
- Veterans assistance (including the Aid and Attendance benefit)
If a person has substantial savings and/or other assets or if they are looking to convert their retirement savings into a steady, dependable income stream, a SPIA may be a good option to help cover some or all of the cost of long-term care.
Things To Consider Before Purchasing An Immediate Annuity
Under the right circumstances, SPIAs can be a great option for seniors looking to turn their savings into a steady stream of income that provides financial security and peace of mind for those concerned about outliving their savings or running out of money.
SPIA payments can help cover the cost of long-term care, medical bills, and other expenses. And because payments are usually guaranteed to continue for the rest of the purchaser’s life, individuals who invest in SPIAs don’t have to worry about running out of money or the policy expiring.
However SPIAs are not a good option for everyone. Investing in a SPIA requires purchasers to make a large lump sum payment upfront, and once the premium is paid, it can be difficult or even impossible to get it back. For this reason, it is a good idea keep some extra cash on hand when paying for care, emergencies, medical bills, etc. before purchasing a SPIA.
If a person does not have a significant amount of savings, it may not be possible to purchase a SPIA and still have enough money left over to cover other unexpected expenses.
SPIAs are also not the best option for people whose life expectancy is very short since the likelihood of them receiving most of their money back in the form of monthly payments is low. For people who are only expected to live a few more months, paying for long-term care out-of-pocket may be a better option.
It is also important to carefully consider all of the options discussed earlier prior to purchasing a SPIA.
Purchasing A Single Premium Immediate Annuity
Once an individual has determined that a SPIA is the right option for them, they will need to figure out where the money for the premium is going to come from. Depending on their situation, they may be able to pay for a SPIA using cash savings.
However, investors may also use money they have currently saved in an IRA, 401(k) or other retirement planning savings account.
They may also choose to sell their home or other substantial assets and use the proceeds from the sale to purchase a SPIA. This may be a particularly good option for single seniors who are currently living in an assisted living facility (ALF) or other residential community or those who plan to move into a long term care facility in the near future.
FAQs About Immediate Annuities To Pay For Care
1. How much will I receive as a monthly payment?
The amount you can expect to receive as your monthly SPIA payment will depend on a variety of factors including your age, your gender, interest rates at the time of your investment, and the amount of your initial lump-sum investment.
If you are suffering from a serious medical condition, you may also qualify for a medically-underwritten SPIA which will likely offer higher monthly payments than a traditional SPIA.
To get a general idea of how much you may expect to receive based on your state, age, gender, and the amount of your lump-sum investment, enter your information into an annuity payment calculator like this one. However, this calculator does not take medical conditions into account and therefore will not provide an accurate estimate for medically-underwritten SPIAs.
2. Can my spouse/partner and I purchase an immediate annuity together?
Yes. If you and your spouse or partner wish to purchase a SPIA together, you can buy what is called a “joint and survivor” SPIA. It is important to note that the monthly payment for a joint and survivor SPIA will be lower than that of a traditional (single life) SPIA with the same initial investment.
Different insurance companies offer different joint and survivor annuity options. 50% and 100% options are the most common. With a 50% joint and survivor annuity, the monthly payment received will be 50% less after the first spouse/partner dies. You can also purchase a 100% joint and survivor SPIA, which guarantees that the monthly payment will stay the same until the second person dies.
3. How do I know if qualify for a medically-underwritten immediate annuity?
As previously discussed, medically-underwritten immediate annuities offer higher monthly payments than traditional SPIAs. In order to qualify, you must be able to prove that you suffer from a “serious medical condition” and an insurance company must determine that your actuarial age (your age for insurance purposes) is lower than your chronological age. In other words, a life insurance company must determine that your life expectancy is lower than the average person in your age group. Insurance companies will generally offer higher monthly payments if they have reason to believe they will make fewer total payments.
In order to apply for a medically-underwritten SPIA, most insurers require a person to submit medical records and fill out a detailed health questionnaire. Some companies also require you to participate in a one-on-one assessment with a nurse or other medical professional.
Proximity of care is very important when considering options
Research care options that are nearby when thinking about the next step for your loved ones.
Leona J. Werezak RN, BSN, MN is a registered nurse and adjunct nursing professor. She has 24 years experience working in a variety of healthcare settings including such remote locations as the Arctic Circle. Her research in early stage dementia was published in the Canadian Journal of Nursing Research and re-published in their 40th anniversary issue which showcased exceptional research published since the journal began. Her work in dementia care has also been published in the Journal of Gerontological Nursing. She currently teaches surgical nursing care on a thoracic/vascular unit to baccalaureate nursing students. Her clinical work with nursing students involves extensive work with older adults who have multiple chronic health conditions.