What do you do if you don’t want to go through underwriting or are declined during the underwriting process? Perhaps you’ve already been diagnosed with early signs of dementia, Alzheimer’s disease, Parkinson’s disease, a stroke or similar, what now?
In some instances, an annuity with an income accelerator may be helpful. Basically, you have an underlying annuity that has cash value. If you need more income during retirement to cover your living (or long-term care) expenses, you can decide that it’s time to annuitize your policy and start receiving monthly checks from it. Generally, you would choose to annuitize your policy so that you will receive income payments for life (let’s call these the “base income payments”).
If the annuity has an income accelerator, then upon a triggering event, you have the option to receive income faster—usually double your regular monthly income (let’s call these the “accelerated income payments). You’ll continue to receive the accelerated income payments until your cash value in the policy is gone. However, the insurance company is still on the hook to pay you the base income payments for as long as you live, so you’ll continue to receive the base income monthly until you’ve depleted all of your cash value. When your cash value is depleted, the monthly payments don’t stop though.
There are some policies available where the income accelerator is triggered by needing assistance with 2 or more activities of daily living or having severe cognitive impairment. If you had just used your funds to self-pay, after you’ve spent them all you’d have no funds remaining. With the annuity with income accelerator option, the insurance company would still continue paying you the base income payments each month so you still have some funds coming in to help pay for your living and care expenses.
Case Study: Bill, Age 75
Let’s take a look at an example. Bill is 75 years and he was recently diagnosed with early-stage Parkinson’s disease. His doctor has estimated that it will likely be 5 years before Bill needs significant long-term care assistance. Bob’s social security and pension cover all or most of his regular living expenses. Bob has $140,000 in his checking account, $300,000 in CDs, and $137,000 in stocks and bonds.
Bob could potentially reposition the $300,000 in CDs to an annuity with an income accelerator. This particular insurance company offers a bonus when the policy is funded, so the account value immediately goes from $300,000 to $321,000. The annuity will earn a guaranteed interest rate so in 5 years, this particular annuity is expected to be worth $450,000. If Bill were to annuitize the annuity at age 80, the base income payments would be $28,000 per year for his life (paid as a monthly income of $2,333.33). If Bill needs more income to pay for caregiving expenses, he can trigger the income accelerator and he’ll receive $56,000 per year of income ($4,666.66 per month) until the $450,000 account value has been used up (about 8 years), at which time the annual income will revert back to $28,000 per year (or $2,333.33 per month).
If Bill dies before the annuity account value is fully depleted, then the remaining account value will pass as a death benefit to his beneficiaries. However, if Bill fully depletes the account value, then no cash value remains and there will not be a death benefit to his beneficiaries.
We Can Help You Develop a Long-Term Care Plan
Having assisted many Wake County clients with long-term care planning, our team at Carolina Family Estate Planning understands that developing a long-term care plan is about not just protecting your own independence and dignity, but also protecting those you love from the physical, emotional, and financial toll that caring for a loved one can take.
We’ve helped many clients take an interdisciplinary approach to their long-term care planning by exploring both legal and financial options. Usually, a well-rounded long-term care plan will involve a combination of legal, health care, and financial tools to meet your goals and maximize your protection. To get started, register an upcoming seminar to learn more or call our office at 919-443-3035.
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