Long-term care insurance (LTCi) options have grown a great deal in market share and popularity. But for annuities, disappointingly, not so much. Hybrid annuities (a.k.a. LTC annuities) may be the best option for some clients. Thankfully, a handful of insurers offer them, most notably Global Atlantic, One America, EquiTrust, and Guarantee Income Life Insurance Company.

Long-term care insurance (LTCi) options have grown a great deal in market share and popularity. But for annuities, disappointingly, not so much. Hybrid annuities (a.k.a. LTC annuities) may be the best option for some clients. Thankfully, a handful of insurers offer them, most notably Global Atlantic, One America, EquiTrust, and Guarantee Income Life Insurance Company.

Hybrid annuities marry an annuity with LTCi. They provide leveraged payouts for LTC expenses while also offering many advantages of a fixed annuity or indexed annuity. For example, a $100,000 investment could provide $200,000 or $300,000 in LTC benefits. They are also known for their simplified underwriting process (minutes, hours, or days), when compared to other LTCi solutions (days, weeks, or months).

What is intriguing about the annuity market is the size and opportunity. In June 2023, The Investment Company Institute reported that Americans' total combined retirement assets was $36.7 trillion, of which $2.3 trillion in non-qualified (NQ) annuities. We expect NQ annuities to be a small piece of this pie when we consider qualified assets (401ks, 403bs, IRAs, defined benefit plans, etc.). But $2.3 trillion in NQ monies is still absolutely staggering. Include over 75 million aging Baby Boomers who are increasingly concerned about long-term care and one wonders, "How many of them own an existing NQ annuity with a low-cost basis and high gain (subject to unavoidable taxation)?"

Pension Protection Act

Beginning in 2010, the Pension Protection Act (PPA) provided for income tax-free withdrawals from specially designed NQ annuities to fund LTC expenses. Distributions used to cover qualified LTC expenses are tax-free provided they come from a PPA-eligible NQ annuity—regardless of the cost basis and gain (i.e., not taxed subject to the normal LIFO/last in first out rules). This can be accomplished with new money (cash) from the onset by investing directly in a PPA-eligible hybrid NQ annuity. Plus, it can be accomplished via a 1035 exchange. For example:

“Regular” NQ Annuity
$75,000 cost basis + $100,000 gain = $175,000 cash value
Taxes owed on gain first when withdrawn to cover LTC expenses

PPA-Eligible NQ Annuity—Hybrid LTC
1035 Exchange or Cash
$175,000 HIPAA-qualified PPA-eligible annuity
Income tax-free distributions when withdrawn to cover LTC expenses

The Sound of Hybrid Annuities

Your clients are concerned about long-term care, and they are talking about it, even if you don’t bring it up. States are talking about LTC, too; a number of them are considering long-term care legislation to help meet their budgetary concerns for LTC Medicaid expenditures. Some states may even decide to provide exemptions from a payroll tax for residents who can demonstrate that they own private LTC solutions like a hybrid-LTC annuity.

We’ve all heard the saying, “If a tree falls in the woods and nobody hears it, does it make a sound?” Following the same line of thinking, if a hybrid-LTC annuity is the best option for the client, yet the producer never offers it, does that meet annuity best interest standards? The very regulations which may have stunted the growth of the hybrid annuity market (when compared to growth of the hybrid life), could be the very regulations that cause agents to offer hybrid-LTC annuities moving forward. And rightly so.

Source:
Release: Quarterly Retirement Market Data, Second Quarter 2023 Investment Company Institute (ici.org)
Author Bio:
Ramona Neal, CLU®, ChFC, CLTC®, REBC
Ramona has 30 years of experience in the life insurance industry with roles in field sales, competitive intelligence, advanced sales, and policy administration. She has extensive history helping advisors and wholesalers position insurance products. Ramona is president of Living Benefit Review, LLC. The company provides impartial competitive intelligence services for life insurance with LTC solutions: hybrid products, chronic illness, critical illness, and LTC riders.