How an Equity Index Annuity, aka Fixed Index Annuity, Can Help People Who Have Waited Too Late to Buy Long-Term Care Insurance

We have so many different ways to pay for long-term care today but equity-index annuities (also called fixed index annuities, or FIAs) haven’t hit main stream yet. I found them because I was searching for a way to help people who are totally uninsurable for any kind of traditional or combo LTC product. I have only used two, Security Benefit and F&G, as the only two that I have used as the other equity index annuities only pay if the policyholder is in a nursing home and that didn’t interest me one bit.

What is an equity index annuity?

It’s a type of deferred annuity that’s been around since about 1997 that protects policyholders from downturns in the market yet allows them to profit from upturns. It does this while providing a guaranteed growth rate for the money that will eventually be used to provide a lifetime income. This money is called the income base. This is also the base that determines the long-term care benefit, which is usually double the lifetime income.

Variable annuities are commonly sold to provide a guaranteed lifetime income by financial professionals who handle investments in the stock market. The huge difference between variable annuities and FIAs is that money in a variable annuity is in the stock market with corresponding fees to manage that money. Money in an FIA is not in the stock market and FIA fees are much lower. An FIA looks at the stock market via various indexes, some connected to the S&P 500 and many others that aren’t, and credits growth to the FIA accordingly, but the money is not in the stock market.

The important takeaway here is that in a variable annuity, your real money can drop like a rock when the market has a downturn! To repeat, money in an FIA is NOT in the stock market and can never decrease due to stock market losses.

Early FIAs capped the growth, commonly at 3-5% annually. You can see on p. 5 of a report from the Wharton Financial Institutions Center that even these older ones did not experience a loss in the years 1997-2010. Newer ones allow uncapped growth above a certain percentage; e.g. 1.25% annually and this growth could be measured annually or locked in over a 5 year period. If locked in over a five year period, this means you can keep all growth above 6.25% for that five year period.

There are two indexes I like best. One looks at the top 100 companies in the stock market and the other one looks at commodities like gold, silver, oil and gas, coffee, sugar, etc. I like them because when the stock market is down, commodities are usually up and vice versa, so it gives a balance to the growth. This index growth is in addition to the guaranteed growth on the income base. The one I’ve used recently with Security Benefit has an immediate 7% bonus and guarantees the income base will grow 4% compound a year up to the earlier of 20 years or whenever you start taking the guaranteed lifetime income.

The only health question is “Can you do your daily activities today?”, so it doesn’t matter if you’ve waited until you are no longer insurable. As a reminder, the daily activities when it comes to LTC are bathing, dressing, transferring, toileting, continence and eating.

Here’s how it works: When you turn the lifetime income on, that amount is guaranteed the rest of your life. If you need help with at least two daily living activities, it pays double the lifetime income up to five years. There’s a death benefit significantly larger than the initial deposit if the policyowner dies before turning the lifetime income on, so the beneficiary receives that money.

For example, a 65 year old friend of mine deposited $225,000 and in 20 years, she will have about $9,000 a month she can tap for lifetime income which will double to $18,000 a month if she needs LTC. If she needs LTC longer than 5 years, the benefit drops back to $9,000 a month for the rest of her life. She could access the money much sooner than 20 years but she is in great health today and has longevity in her family, so we made a 20 year plan for her.

If she needs long-term care at today’s costs of about $230 a day ($84,000 a year), her $225,000 wouldn’t even last three years. She is single with one child and knowing that she has lifetime income and at least 5 years of double protection for long-term care and an income she can’t outlive means so much to her.

The fee on the products I have used is zero on the base annuity and 1% a year on the lifetime income rider. (The 1% comes out of the index growth, not the guaranteed 4% on the income base.) The initial deposit can come from qualified money; e.g. 401(k), 403(b) or traditional IRA or non-qualified money (money on which you have already paid tax).

There is a surrender charge that grades down to zero after ten years so people don’t use it like a checking account. However, there is no surrender charge or penalty of any kind if you need the money for LTC during the first 10 years. Also, you can take 10% of the money out each year with no surrender charge or penalty of any kind. Of course, if you do that, it would impact the money available for guaranteed lifetime income and LTC.

When the money is paid out, the gain is taxed like ordinary income unless you started it with qualified money. OneAmerica is another company that provides FIAs and that FIA is the only one in the market that provides LTC benefits 100% tax-free as long as it is funded with non-qualified money. The pro and con here is that on the type that means you pay tax on the gain, you can use the money any way you like at claim time, so you can pay a family member, friend, neighbor or any informal caregiver. You could pay a bill with it…you get the idea. It’s your money. The tax-free version means you have to justify that the money is spent for eligible LTC expenses.

The best thing I like about FIAs is that the account value; i.e. the real money, can never decrease due to stock market downturns, to the point where my husband and I put some of our retirement money into an FIA, not because we need the LTC benefit, but because we wanted to protect our savings from another huge downturn like we saw in 2008.

If this idea is interesting to you or a family member, let me hear from you.