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Overcoming Longevity Risk: An Overview of Annuities and Long-Term Care Planning

Elderly couple on a bench

As a successful career comes to a close, many individuals find themselves facing tough questions about what comes next. What lies ahead after years of hard work and dedication? Do I have enough financial resources to sustain a comfortable retirement? And, perhaps more dauntingly, what will I do if I can’t take care of myself as I get older?


In a society that often shies away from thinking about the uncertainties of getting older, the reality remains that careful planning can provide a significant benefit. Long-term care (LTC) insurance and annuities are crucial components in this strategic planning, serving as financial instruments which offer peace of mind for both individuals and their families.


Longevity Risk


With medical advancements extending the average expectancy, individuals will need to be smarter and more strategic about how they spread their money out over retirement. Surprisingly, a significant amount of people underestimate how long they might live. In a study done by Jackson Financial Inc. and Boston College, one-third of participants underestimated their life expectancy, basing their guess on how long their own parents lived. Financial advisors are worried as well, with 25% expressing concern that their clients will outlive their assets.


There’s also the uncertainty of how those years in retirement will be spent. While most picture a future filled with beach trips and golfing, they may leave themselves unprepared for the realities of the sunset years of life. The truth is, 70% of people over age 65 will need LTC services at some point in their life, as noted by the U.S. Department of Health and Human Services.


Many adults have dealt with the toll of long-term care first-hand in taking care of their own aging parents. This responsibility can put a physical, emotional, and financial strain on the family, especially with a lack of preparedness for their long-term care needs. In response, individuals are taking proactive measures to purchase LTC insurance for themselves to spare their children the potential difficulties they faced.


The Many Options for Long-Term Care Insurance


The world of LTC insurance is changing. Costs are increasing, and the guarantees on cash value are decreasing. The myriad coverage options can be overwhelming, ranging from indemnity and reimbursement products to policies with varying elimination periods and inflation-adjusted policies. Despite the complexity, there's an opportunity to simplify the decision-making process. Taking a proactive approach and investing in LTC insurance now can provide a safety net against the uncertainties of the future.


Annuities as a Lifeline for a Secure Retirement


"While Life with LTC coverage insures you if you pass away too young or become in need of care, annuities insure you if you live a long time," says Eric Diaz, Case Design & Products Specialist at NFP Insurance Solutions (NFPIS). Annuities offer a steady stream of income, serving as a retirement vehicle not just for individuals, but also for their children and grandchildren. Annuities become particularly relevant for those individuals who outlive their expected life spans and need sustained income.


Some common misunderstandings pertaining to annuities include:


  • Only for older adults: While people tend to wait until they’re older to purchase coverage, annuities can benefit anyone seeking an ongoing payment - either a fixed payout or options which keep up with / surpass inflation - providing a reliable source of income over time.

  • Expensive: While annuities can be front-loaded, back-loaded or have ongoing charges, the costs can be made more manageable by choosing to back-load the charges and reduce ongoing fees, especially if the annuity is held over a long period of time. 

  • Inflexible: Although annuities are sometimes seen as inflexible, deferred annuities allow for postponed payouts and flexibility in timing, while single premium immediate annuities (SPIAs) ensure an immediate fixed income stream. These choices cater to various financial preferences and goals.


Annuities can be a preferable option compared to LTC coverage, because annuities don’t require underwriting. In contrast, LTC insurance requires some medical underwriting, which can uncover health issues as older clients seek to secure coverage.


As individuals get older, they may face mobility risk, where their health conditions affect their mental abilities, while still facing a long life ahead of them, with diagnoses ranging from arthritis to Alzheimer’s. Obtaining insurance coverage for these health issues can be challenging. Annuities can provide a reliable solution, as they have the capacity to replenish income streams and alleviate the worry of running out of money during retirement.


The Future of Long-Term Care Coverage


Recognizing the importance of preparing for the aging population, some states are taking legislative steps to mandate LTC coverage for employees. This shift towards public funding addresses the growing importance of long-term care planning in our society.


Summary


While LTC coverage and annuities may seem daunting, working in tandem with life insurance professionals to guide can simplify the process. Per NFPIS’s Senior Managing Director Howard Sharfman in a recent Money Magazine article, "Long-term care coverage is expensive when we only look at the premium. However, the value is exceptional…the premium is not expensive when compared to the financial cost of long-term care and home health care." By embracing proactive planning, individuals can secure a future that ensures not only their well-being but also the financial stability of generations to come.



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