When Deferred Annuities are Better Than Long-Term Care Insurance
One increasing concern among the aging American public is ensuring that our financial situation will be able to sustain us in our later years. As medical breakthroughs continue to increase the life expectancy of Americans, many people are finding themselves facing the fact that they are going to outlive their retirement nest egg. While I am not one, many people look forward to reaching the age of retirement where they will be able to sit back and enjoy a lot of the moments they missed while they were working constantly during their youth. In order for this to become a reality, it is essential that people effectively plan for retirement to ensure that they will have the financial capacity to afford the lifestyle they desire to live in their golden years.
Having a solid retire plan requires more than simply saving money. The idea is to create passive streams of income that continue to pay you after you retire, such as rental properties and stock investments. Another popular choice for individuals who are attempting to fortify their retirement lifestyle is the purchase of long-term care insurance. However, one increasing challenge associated with long-term care insurance is the fact that the premiums have steadily increased over recent years. In fact, the increase in premiums has many insureds questioning whether it may be time to pull out of the long-term care insurance game and invest their money elsewhere.
As far back as 2000, long-term care policy premiums doubled and even tripled for policyholders, causing many of these policyholders to cancel their policies — losing the money they had invested in premiums to that point. The problem is that the need for long-term care has not disappeared but the options to ensure long-term care are minimal.
One alternative to long-term care policies is what is known as a deferred annuity. A deferred annuity is also an insurance product that can be used as a savings mechanism — allowing the recipient to receive consistent payments from their investment over a certain period, instead of receiving a lump sum payment. In addition to helping to cover long-term care expenses, the payments from a deferred annuity can also be used to pay other expenses that arise during retirement.
A deferred annuity is distinct from an immediate annuity in that you are allowed to contribute to the account over time or make a lump sum invest and wait for the maturity required to be met. Additionally, the gains achieved through a deferred annuity are not taxed until the payments begin.
As a general rule, most people will use a deferred annuity as an option when all of their other retirement accounts have reached their maximum limits under IRS tax laws for retirement plans. One of the most appreciated benefits of a deferred annuity is the ability to grow assets without having them diminished by taxes. The money is not taxed until it is paid out.
While many people are beginning to use a deferred annuity as an alternative to long-term care insurance to help offset the rising cost, it is important to understand that deferred annuities are not for everyone. It is a vital part of the retirement strategy for individuals and families that plan to self-insure their long-term care. Another obvious situation in which a deferred annuity is a more viable option that long-term care insurance is when the payee is not likely to pass the medical screening that is required to be insured. Preexisting conditions can make it difficult for individuals to survive the underwriting process or they can cause the premiums to drastically increase.
Another situation in which a deferred annuity will be better than long-term care insurance would be when the person has a large sum of money to make the initial deposit. Lacking a substantial amount of upfront money is also one of the reasons that deferred annuities are not the right fit for everyone one. It is important to understand that the money placed into an annuity will have a maturation period in which it must be allowed to grow and produce gains, during this period, you will not have access to it. This maturation period can last anywhere from five to 20 years.
Because there are so many variables at play, it is in your best interest to sit down with a reputable financial advisor and discuss which options will be best for you and the goals you have set for your retirement.
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