You probably haven’t heard of this annuity

As annuity companies hastily reduce rates and payouts on existing annuities, there's one commonly overlooked annuity that not only hasn’t changed, but makes more sense than ever in today’s environment.

When Congress passed the Pension Protection Act back in 2006, it created the long-term care qualified annuity. The act stipulates that any withdrawals from a nonqualified long-term care annuity used to pay for qualifying long-term care expenses would be allowed to come out of the annuity tax-free.

More importantly, the act allows someone to do a 1035 exchange from an existing nonqualified annuity into an LTCQA. This created an opportunity to eliminate two financial problems: the growing tax liability on an existing annuity and the need for LTC protection. 

So what is this LTCQA, and how does it differ from a regular annuity? Think of it as asset-based LTC life insurance, but on a fixed-annuity chassis. The handful of designs that exist in the marketplace are mostly fixed annuities. Like all fixed annuities, they will credit a certain amount of interest each year — typically about 1% — and there will be a surrender charge for the first seven to 10 years. However, the LTCQA will offer LTC coverage of typically three times the amount of the premium, like an asset-based LTC life policy. Also like asset-based LTC life insurance, there is a limit on how much you can take out each month to cover LTC expenses, as well as a maximum number of months benefits will be paid, typically 60 months or more. The initial withdrawals to cover LTC expenses will come out of the client’s account value, and the enhanced LTC coverage will kick in once the account value is depleted. 

Why does this concept make more sense than ever? While these annuities should always be positioned as an LTC solution first and an accumulation vehicle second, some people have balked at the low rates of return. Given today’s interest rates, there is little reason for clients who don't have an LTC plan in place not to consider this option. 

While I think it certainly makes sense to review all of your old, nonqualified annuities in order to see if this concept will work for those clients, there are a few things to consider.

 •   What is the minimum guaranteed interest rate? If the contract is old enough, it might have a rate of 3% or higher. 

 •   Compare the minimum annuitization rates on the old contract to what is available today. Older contracts are based on older mortality tables and higher assumed interest rates. Even the minimum guaranteed income rates may be 20% or more higher than anything on the market today.    

 •   The old annuity is likely to be out of surrender charges. Therefore, you would be exchanging a liquid annuity for one that has charges if an unexpected liquidity need emerges. 

 •   Because of the enhanced LTC coverage, there is a minimal amount of underwriting that will apply when purchasing an LTCQA. It is important to know whether your client is likely to qualify before submitting an application, to avoid a formal decline of LTC coverage.

With these four caveats in mind, I think this is a good time to approach your more conservative clients who could benefit from LTC protection with this concept – especially if they are sitting on an underutilized annuity or highly liquid positions that pay little, if any, interest. 

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Scott Stolz is president of Raymond James Insurance Group and author of “Unlocking the Annuity Mystery: Practical Advice for Every Advisor.”