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deferred income annuity for ltc

edited March 13 in Other Investing
Too late for many of us, probably, but perhaps of interest otherwise

https://humbledollar.com/2022/03/paying-for-aging/

Comments

  • I suggest you change the title. Deferred income annuities (DIAs) are essentially immediate annuities where the payments are deferred, in contrast to SPDAs, where annuitization is deferred.

    FINRA: "Think of DIAs as immediate annuities with a delayed payout phase."

    IMHO the deferred income annuities make sense for LTC, deferred annuities may not.

    It's important to read LTC statistics very closely. Some refer to care in facilities, while others include in-home care. Some refer to paid care (including in-home care), others include care provided by friends and family. The typical out of pocket costs are not small, but may be less than presented as "average". Still, if one does happen to live for many years needing care, the costs can be astronomical.

    I don't have time right now to sort through various numbers, so I'll just offer a few sources:

    https://www.consumeraffairs.com/health/long-term-care-statistics.html
    https://www.morningstar.com/articles/1013929/100-must-know-statistics-about-long-term-care-pandemic-edition
    https://acl.gov/ltc/basic-needs/how-much-care-will-you-need
    https://aspe.hhs.gov/reports/long-term-services-supports-older-americans-risks-financing-research-brief-0

    Recognizing that most people either use long term care for just a few years or not at all, the Partnership for Long Term Care program can be a good alternative. These are regular long term care policies (with some government imposed conditions, like incorporating inflation adjustments), but with an added benefit. You buy policies that last for a few years (exact terms set by your state), and should you need more care, you can be covered by Medicaid without spending down all your assets.

    It's hard to find a decent description that is not state-specific because these programs partner with state run Medicaid. I did come up with one reasonable page. A brief excerpt:
    Medicaid is the single largest payer of nursing home bills in America. Although it's intended to be the last resort for people who have no other way to pay for long-term care services, more and more Americans with moderate incomes are relying on Medicaid, due to the rapidly rising cost of long-term care.
    ...
    Partnership policies include incentives to encourage individuals to purchase long-term care insurance, instead of relying on Medicaid. Although any resident of a state in which Partnership policies are offered can purchase such a policy, state Partnership programs primarily target individuals with moderate income and assets. These are individuals who can afford reasonable long-term care insurance premiums but who can't afford to pay for long-term care out-of-pocket for more than a short period of time, and thus may eventually need to rely on Medicaid after their assets are exhausted. (Wealthier individuals often don't need to rely on Medicaid in the first place, and individuals with very limited means will likely qualify for Medicaid right away, and may have few assets to protect.)
    https://pksadvisors.com/long-term-care-partnership-policies/
  • Deferred income annuities (DIAs) can be used for any purpose, LTC included. DIA from IRA, 401k/403b are called QLAC - there used to be a thorny RMD issue for DIAs from deferred accounts and laws were streamlined a few years ago to eliminate those complications (but their amounts are limited).

    True, deferred annuity is just an accumulation annuity with tax deferral. So, the subject line of the OP doesn't reflect the point of the linked article.
  • Did not intend to mislead or confuse; Fidelity e.g. makes little distinction.

    Create future retirement income
    This Fidelity Viewpoints article explains how deferred annuities work and the role they play in a retirement income plan.

    which is the teaser for

    https://www.fidelity.com/viewpoints/retirement/deferred-income-annuities

    Am not thoroughly familiar w the sets and subsets. SP is nowhere mentioned here:

    https://www.investopedia.com/terms/d/deferredannuity.asp

    but (of course) income is.

    Some of the comments at
    https://humbledollar.com/2022/03/paying-for-aging/

    dive a little deeper than the article.

    The general Partnership link (I believe!) is

    https://www.aaltci.org/long-term-care-insurance/learning-center/long-term-care-insurance-partnership-plans.php
  • Between marcom babble, poorly informed writers, and sometimes well intentioned attempts at "simplification", some of what's written about annuities winds up as confusing and contradictory as it is enlightening.

    Basic annuities (ignoring bells and whistles), while not as simple as bank accounts, are not as complex as they may seem. There is what annuitization means, and then a few parameters to think about.

    Annuitization is where you give an insurance company a lump sum and in exchange it promises to pay you a stream of checks. When you choose to annuitize, when the checks start after that, and how long those checks keep coming - those are some of the basic parameters.

    One often (not always) buys an annuity with a lump sum. That is called a "single premium" annuity.

    Buying an annuity with a lump sum and waiting to annuitize is to buy a single premium deferred annuity (SPDA). See Investopedia:
    https://www.investopedia.com/terms/s/single-premium-deferred-annuity.asp

    Until you annuitize (give the money to the insurer in exchange for that promised income stream), an annuity is like a nondeductible IRA. Tax sheltered, growing in value. This is called the "accumulation phase".

    If you wait before annuitizing, i.e. if there is an accumulation phase, the annuity is said to be deferred. Otherwise the annuity is immediate.

    One you annuitize (exchange the money in the annuity for a promised income stream), you can start getting checks immediately, or you may postpone the income stream. That's deferred income.

    Annuitization may be deferrred and income (post-annuitization) may be deferred. People are so used to the idea that when one annuitizes one starts getting checks at once that they tend to conflate the two types of deferral.

    Regarding Partnership for Long Term Care policies: one can find official state sites (each state runs its own program), but I do not believe there is any official national site. The AALTCI site looks solid. Recognize though that this is a website of an insurance trade group with a mandate of promoting all types of long term care coverage.
    The national trade association for professionals dedicated to serving the long-term care planning needs of individuals, businesses and organizations.... Request a free, no-obligation cost comparison from an Association member today.
    Your state doesn't have an official Partnership site because yours is one of the few states that hasn't legislated to implement Partnership plans. The most recent bill (not passed) was proposed by the 2019-2020 legislature, not the current one.

    Sample official state sites include New York (I'm disappointed to read that no new policies are currently being written), Kansas, and South Dakota.
  • a good primer

    weird that investopedia does not include SP on that deferred page I linked; a taxonomy of this stuff at the level of your writeup would be excellent, and distinction b/w deferred and deferred income would be clear.

    I knew Mass. did not have a Partnership but did not know the process was stalled. One rep is a college classmate; I should ask her.
  • In an annuity, your money becomes THEIR money (!!!) for the sake of the guarantee of future income. And that guarantee means not so much if the rate is variable. No, thanks...
  • Then there are annuities with GMWB/GLWB riders. Idea is that that one could have the cake and eat it too - one can withdraw at 4-7% forever (i.e. until death) without annuitizing (i.e. holders may also tap principal). But these are VERY expensive and tapping the principal is also NOT very favorable to the holders. For a while, these sold like hotcakes.

    At one time, Vanguard wanted to be a disruptive force in this area with Vanguard GLWB with the lowest ERs in industry (but those were still high). But in a huge embarrassment, Vanguard soon had to raise the ERs on VG-GLWB, and eventually it decided to dump its entire annuity business on Transamerica. I think that they have stopped issuing any new Vanguard/Transamerica GLWB.
  • My parents bought LTC insurance that reimbursed my mother about $45,000 for the last year in Assisted living ( not a nursing home or SNF) at a max $108 a day out of a total allowable benefit of $130,000.

    I don't know when they purchased the policy so I do not know how much it cost, but is was more than $45,000, and if that money had been in the SP500 would have accumulated far more than $130,000. I am sure they started the policy in the 1990's, so they paid on it for over 25 years.

    I think there are two lessons

    1) one of the reasons her LTC costs were so low was she lived in Texas, where the Assisted Living was "only" $4500 a month. IT was a high quality well run institution. If she had been in CT where we lived it would have been up to $10,000. Most of this is due to lower labor costs and much less regulation. SNF is far higher.

    This would seem to recommend moving to Texas, but while I have not checked into it, Title 19 in Texas likely does not cover much in LTC, as it covers very little anything else.

    In CT ( once you have exhausted all your money) the state will pay for your nursing home (only skilled nursing, not Assisted Living)

    2) either way if your family can't keep you at home it is very expensive.
  • edited March 20
    https://www.bogleheads.org/forum/viewtopic.php?f=10&t=370245

    The above link is must reading for anyone considering purchasing an immediate annuity. Immediate annuities are beginning to make some sense now that the 10 year Treasury is no longer in the 1% range. What you receive from an immediate annuity is dependent on your age and the 10 year rate. I would think an immediate annuity also makes more sense for a very healthy retiree in their mid to late 70s as opposed to someone younger and still in the accumulation phase. Anyone with health issues shouldn’t even consider an immediate annuity.

    Except for a QLAC, I don’t believe you can buy a deferred annuity if you are over a certain age (70?). I would think the biggest benefit for purchasing an annuity is peace of mind. I realize there are many cons against buying an annuity. I would also suggest sticking with only the soundest of insurers aka Massachusetts Life or New York Life. The former pays more than the later.

    It has been said immediate annuities are best for those worried about outliving their nest egg in old age. I can make a case they are best for those not worried about outliving their nest egg. If you are in the later category why not buy an annuity where your expenses are pretty much paid till death and then with the remainder be more aggressive in investing or spending worry free,



  • SPIAs (immediate annuities) can be bought in 80s, even 90s (certainly beyond 70s) - depends on the vender. Quote screen at https://www.immediateannuities.com/ stops at 90.
  • edited March 20

    SPIAs (immediate annuities) can be bought in 80s, even 90s (certainly beyond 70s) - depends on the vender. Quote screen at https://www.immediateannuities.com/ stops at 90.

    Thanks Yogi. I was told, apparently incorrectly, that except for a QLAC, I couldn’t take out a deferred annuity in my IRA after age 70.

  • edited March 20
    Some dumb questions / considerations

    - In converting your pent-up investments (which are currently earning a return) into a stream of steady cash payouts in excess of what you have an immediate need for you are than faced with either (1) having to spend (or donate) that excess income or (2) having to reinvest it somewhere else. If you do reinvest it, it is no longer a tax exempt / tax deferred investment.

    - There may be rare periods in the future where a very large sum is required. Things like needing a new roof or well for your home, or having to buy a new motor vehicle or unexpected legal expenses. Aren’t you better off having a large pool of money invested somewhere for such occurrences than having to borrow the money if / when a need arises?

    - You would appear to be trading away your inflation protection (from staying invested) for that steady income stream. Most likely that isn’t too significant a consideration at an elderly age - but it might be.

    - Are you not somewhat at the mercy of the insurer? What if they become insolvent?
  • There's no requirement that an you annuitize the entire value of your annuity. And even if your particular annuity contract requires that, so long as you haven't annuitized you can do a 1035 (tax free) exchange in parts - transfer some value to one annuity and the remaining annuity to another.

    Lots of ways of generating just the income you need. The general advice is to annuitize enough to meet essential expenses, not more. If needed, you should be able to withdraw money that has not been annuitized, albeit with ordinary income taxes assessed.

    If you've got a fixed annuity, even pre-annuitization, you're at the mercy of the insurer. Fixed annuity includes index-linked annuities - anything that is a general obligation of the company.

    IMHO it's less important how sound your VA annuity provider is - those assets are segregated. But for fixed annuities or annuities that you have annuitized (does that sound redundant?), soundness is paramount.
  • hank said:

    Some dumb questions / considerations

    - In converting your pent-up investments (which are currently earning a return) into a stream of steady cash payouts in excess of what you have an immediate need for you are than faced with either (1) having to spend (or donate) that excess income or (2) having to reinvest it somewhere else. If you do reinvest it, it is no longer a tax exempt / tax deferred investment.

    - There may be rare periods in the future where a very large sum is required. Things like needing a new roof or well for your home, or having to buy a new motor vehicle or unexpected legal expenses. Aren’t you better off having a large pool of money invested somewhere for such occurrences than having to borrow the money if / when a need arises?

    - You would appear to be trading away your inflation protection (from staying invested) for that steady income stream. Most likely that isn’t too significant a consideration at an elderly age - but it might be.

    - Are you not somewhat at the mercy of the insurer? What if they become insolvent?

    Hank, correct me if I am wrong. But aren’t all your income needs provided by a pension and social security? If so I would see little reason to annuitize. Again, annuitization is very much based on individualistic financial situations/mindsets. Many as they age want nothing to do with investing/risk. Just a secure income stream till death do they part.
  • edited March 21
    Some here may be with TIAA. This link provides current annuitization payouts from TIAA plans; others interested in SPIA may use this for comparison. In general, annuitization from group plans at work may be more favorable than what may be possible from individual commercial quotes.
    https://ybbpersonalfinance.proboards.com/thread/142/tiaa-traditional-rates-monthly?page=2&scrollTo=525
  • +1 @Junkster

    You are correct re my status. Pension and SS cover basic needs. I had a better than average retirement package I guess. So the IRAs allow for travel, etc. and serve as reserves in case a large unexpected outlay comes along.

    Still, I keep an open mind on the subject. Good to hear the higher interest rates have led to better annuity payouts.. In the past, I couldn’t see any financial advantage - albeit one might increase their living standard a bit on the payments.

    Good thread.
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