Introduction to Annuities: Guaranteed Minimums, Long-Term Care

In recent years, there have been new additions to the world of indexed and variable annuities. If you're buying an annuity, look into these benefits. And if you're considering acquiring long-term care insurance, investigate whether an annuity would meet your needs better than the straight insurance.

Guaranteed Minimum Withdrawal Benefit Riders

One of the most recent developments in the indexed and variable annuity arena is the introduction of Guaranteed Minimum Withdrawal Benefit riders. These riders provide guaranteed lifetime income to annuitants while allowing them access to the principal in their contracts.

As with other types of guaranteed income riders, the amount of the withdrawal will not decrease even if the cash value in the contract goes down or is depleted. This flexibility allows contract owners a great deal more freedom in how they choose to receive their income. For example, they may opt for straight life payout because they know that they can withdraw any remaining contract proceeds before they die, thus guaranteeing the return of all of their principal.

What's more, the income paid by the GMWB rider is based on the initial amount of premium that was invested. For example, if you purchase a $200,000 variable annuity contract with one of these riders and you choose to begin taking a 10% payout after ten years, then the rider will compute the payout based on $200,000. If the actual value of your annuity has dropped to $175,000 during the ten-year waiting period, the rider will still base your payout on your initial purchase amount.

Some GMWB riders also guarantee a payout based upon a guaranteed minimum rate of growth that increases irrelevant of the performance of the mutual fund subaccounts in the contract. If your GMWB in the previous example had a minimum guaranteed rate of 3%, then your payout in ten years would be based on $268,783 ($200,000 x 3% x 10 years) even if the actual cash value in the contract is less than that. 

Long-Term Care Annuities

Another relatively recent innovation in the annuity industry is the advent of annuity contracts that will pay additional benefits to annuitants who require long-term care or become unable to perform at least two activities of daily living, such as eating, bathing, toileting, transferring, etc.

There are two basic types of annuities in this category. The first is with “regular” annuities that will double or triple their monthly payouts for at least a minimum period of time if the annuitant requires long-term care. However, this form of protection will also exhaust the cash value of the annuity two to three times faster than normal, and the increased payout may only last for a certain period of time, such as 36 months.

The other type of annuity has a long-term care protection feature built into the contract. This type of annuity may stipulate that the annuitant can receive a benefit that it equal to two to three times the amount of the initial premium that is placed into the contract. For example, a $100,000 LTC annuity premium could provide the annuitant with $300,000 of LTC dollars that are usually spread out over a minimum period of years. If the period is six years, then the annuitant would receive $50,000 per year in LTC protection for six years. Even better, the income paid for LTC expenses in this case is tax-free, thanks to a measure passed by Congress in 2010.

This can be an attractive alternative to paying for long-term care insurance, as the owner will still have the contract to spend from or pass on to beneficiaries if LTC is never needed. However, most LTC annuities pay lower rates than conventional contracts, and there is still some medical underwriting required by the majority of carriers. The underwriting guidelines are usually less stringent than those for LTC insurance, and many carriers do not require a physical. But LTC annuities may not always cover all types of long-term care, such as home health care. Buyers need to understand exactly what they are getting when they purchase this type of contract.

For more on this topic, see The 4 Best Alternatives to Long-Term Care Insurance and An Overview of Hybrid Long-Term Care Policies.