Dolf Dunn Wealth Management, LLCDolf Dunn, CPA/PFS,CFP®,CPWA®,CDFA

Private Wealth Manager11330 Vanstory Drive

Suite 101Huntersville, NC 28078

704-897-0482dolf@dolfdunn.comwww.dolfdunn.com

Long-Term Care Annuities

May 19, 2014

When planning for the potential cost of long-termcare, you've probably considered long-term careinsurance. But premiums can be expensive and if youdo buy the coverage, you probably hope you neverhave to use it. The prospect of paying costlypremiums for long-term care insurance that you mightnever use might discourage you. Enter the long-termcare annuity.

What is it?This hybrid product, offered by insurance companies,is a nonqualified annuity that provides long-term carebenefits (it can't be used with IRAs oremployer-sponsored qualified retirement plans).These policies allow you to use the annuity proceedsfor long-term care, and if you don't use the long-termcare benefit, you still have typical annuity options. Forinstance, you can convert the annuity to a stream ofincome payments (annuitization), redeem the annuityat its maturity (e.g., cash in the annuity), or, at yourdeath, you can pass the remaining balance of yourannuity to your named beneficiaries.

While policy provisions may differ from company tocompany, generally you put money into the annuity,usually in a lump sum or through a series of premiumpayments. You may also exchange another annuity orcash value life insurance for a long-term care annuityvia a Section 1035 exchange. The annuity typicallypays a fixed rate of interest each year. In addition, theannuity provides a long-term care benefit amount,usually equal to two or three times your annuity cashvalue, subject to a maximum benefit period, which isthe maximum length of time that you may receivelong-term care benefit payments from the annuity.Long-term care annuity benefits are usually paidmonthly. There is usually a charge for the long-termcare component (generally ranging from 0.4% to1.25% of the annuity's cash value) that is deductedfrom your annuity each year.

How does this product work?Typically, long-term care annuities have the same

qualification requirements as most stand-alonelong-term care insurance policies. You first have to beconsidered "insurable" by the annuity company, whichmeans you have to answer questions relating towhether you have suffered any major illness such ascancer or heart disease, or whether you have asignificant cognitive impairment like Alzheimer'sdisease. But you usually don't have to undergo aphysical, and the underwriting is generally lessstringent than with stand-alone long-term careinsurance, meaning it's a little easier to qualify for thelong-term care annuity.

Like most stand-alone long-term care policies, inorder to be eligible for long-term care benefits fromthe annuity, you must either suffer from cognitive ormental incapacity or be unable to perform at least twoof six activities of daily living that include feeding,bathing, dressing, transferring, continence, andtoileting. Thereafter, benefits are typically availableafter a waiting period of between 30 days and 2 years(depending on the particular product).

Example: Say you pay $75,000 to purchase along-term care annuity. You select a long-term carebenefit equal to 200% of your annuity's cash value,with a 5-year benefit period. Initially, your long-termcare benefit equals $150,000 ($75,000 x 2). Let'sassume the annuity earns 4.5% per year and the costof the long-term care provision is 0.5% per year. Atthe end of 20 years (presuming you take nowithdrawals) the annuity is worth about $163,622 andthe long-term care benefit amount is $327,244. Thiswill provide maximum long-term care benefitpayments of $5,454 per month for as long as 5 years.And even if cumulative long-term care paymentsexceed the annuity's contract value ($163,622), thelong-term care payments will continue until you eitherexhaust the long-term care benefit amount ($327,244)or you no longer need long-term care. (This is ahypothetical example. It does not represent a specificproduct. Product terms and conditions may differ.Check with the annuity issuer for specific productdetails.)

The prospect of payingcostly premiums forlong-term care insurancethat you might never usemight discourage you.Enter the long-term careannuity.

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Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2014

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for anyindividual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performancereferenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

The tax information provided is not intended to be a substitute for specific individualized tax planning advice. We suggest that you consult with aqualified tax advisor.

Securities offered through LPL Financial, Member FINRA/SIPC

What about taxes?Generally, withdrawals from an annuity areconsidered to come from earnings first and aresubject to income tax. With respect to long-term careannuities in particular, prior to 2010, payments oflong-term care benefits from annuities were alsodeemed to have been taken from annuity earningsfirst, then principal. Thus, each long-term care benefitpayment was taxed as ordinary income to the annuityowner until all earnings within the annuity had beenexhausted.

Beginning January 1, 2010, potentially favorable taxtreatment applies to certain withdrawals fromannuities purchased after 1996, if the withdrawals areused to pay for qualified long-term care insurancecoverage. This means you won't have to pay incometax on the benefits you receive from your long-termcare annuity used to pay for long-term care expenses.

More on exchangesPrior to 2010, you couldn't exchange your annuity fora long-term care insurance policy without incurringincome tax on the earnings portion of the annuity.Now you can exchange your deferred annuity foreither a stand-alone long-term care insurance policyor a long-term care annuity on a tax-free basis.However, with any exchange, be sure your currentannuity has reached maturity before exchanging it;otherwise surrender charges may reduce your currentannuity's value. Also, if you exchange your currentannuity for a long-term care annuity, you will likelyincur a new surrender charge period thataccompanies the new long-term care annuity.Surrender charges may apply to withdrawals you takefrom your annuity. However, surrender chargesgenerally do not apply to long-term care benefitpayments. Before entering into an exchange, youshould talk to your financial professional or taxprofessional to be sure the exchange will be tax free.

Pluses/minusesAs with most insurance products, there are plusesand minuses to consider in determining whether along-term care annuity is right for you. On the plusside:

• Long-term care annuities allow for tax-freewithdrawals if used to pay for qualified long-termcare coverage

• With typical long-term care insurance, if you don'tuse the coverage, you generally don't get a return

of your premiums; but with a long-term careannuity, at your death you can pass any remainingannuity balance to your beneficiaries

• If you're not in the best of health and you wantsome long-term care protection, you might not beable to qualify for stand-alone long-term careinsurance. But, it's generally easier to qualify for along-term care annuity (e.g., you probably won'tneed a physical)

• Once you put money in the annuity, you don't haveto make any more premium payments as youwould with stand-alone long-term care insurancepolicies

On the other hand:

• Most long-term care annuities are funded with asingle premium payment of at least $50,000, soyou may need to have at least that much availablein a lump sum

• Long-term care annuities, like most deferredannuities, come with surrender charges, so takingmoney out of the annuity that's not used forlong-term care expenses may be subject tosurrender charges, income tax, and a penalty of10% if taken before age 59½

• Currently, long-term care annuities do not qualifyas partnership plans, which otherwise afford someasset protection when trying to qualify for Medicaid

• If you don't deposit enough money into thelong-term care annuity, you may not have enoughprotection to cover your long-term care expenses

• There's a cost to purchase the long-term carebenefit which can range from 0.4% to 1.25% of theannuity's account value

• Since the cost of the long-term care portion of theannuity is deducted from your investment in theannuity (and not the earnings), you can't take thecost of long-term care as a medical expensededuction

Is it right for you?Whether a long-term care annuity is right for youdepends on a number of factors. But the long-termcare annuity is certainly a viable option available forlong-term care planning that might merit a secondlook.

An advantage ofstand-alone long-termcare insurance over along-term care annuity isthe fact that the medicalexpense deduction is notallowed for long-termcare charges within anannuity, while premiumsfor a stand-alone LTCIpolicy may be deductibleas a medical expense,subject to IRS rules andlimitations.

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