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Options for financing long-term care

Dealing with care later in life is an important part of long-term planning for Michigan residents. Financing long-term care, however, is based on changing realities such as the steadily rising cost of long-term care insurance.

The cost of these policies doubled and maybe tripled in 2000. For many, this caused the cancellation of many policies, the loss of money paid in premiums and the absence of a means to pay for health care. Some policy holders accepted reduced benefits at the inflated cost.

One option to finance this care is a deferred annuity. This is an insurance product that is a way to save money. Consistent payments are received over time instead of one payment.

The holder can contribute to the account over time or make a lump sum payment which may grow through investment gains. These gains are tax deferred until the monthly payouts start.

Deferred annuities are used when other retirement accounts become depleted. Tax deferment is a major advantage and the growth of compound interest is not slowed down by taxes that cut into the principal deposit.

Income is also guaranteed. At the least, the principal investment is returned. These annuities usually include a death benefit component that transfers the principal investment and gains to beneficiaries if the holder dies before the annuity is used. This is taxable to the beneficiaries as ordinary income.

These annuities may be attractive for individuals who self-insure for long-term needs, cannot afford long-term insurance premiums or are ineligible for insurance because of pre-existing conditions or other risks after undergoing underwriting.

A deferred annuity may also finance other long-term needs other than health care. Hybrid policies provide riders for customizing benefits.

Disadvantages include the large amount of money required for the initial investment. Once invested, the money is unavailable for periods of five, 10 or even 20 years because of the steep penalties for early withdrawal. The guaranteed interest rate may not keep up with higher market returns such as stock investments.

An elder law attorney can help plan long-term care and other estate planning and retirement matters. They may provide reasonable options and draft valid documents.

Source: Wise Bread, "Why a deferred annuity may be a smarter buy than long-term care insurance," By Aja McClanahan, Feb. 19, 2018

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