Some fixed index annuities offer optional benefit riders addressing lifetime income streams and health-related benefits. These benefits are either built into the contract or added as a rider for a cost. Although fixed index annuities guarantee no loss of premium due to market downturn, deductions from your accumulated value for additional optional benefit riders could under certain scenarios exceed interest credited to the accumulated value. For example, if the annuity does not have the rider built in, during a down market when the annuity doesn’t experience growth, the rider cost may be subtracted from the value. The annuity would experience a deduction from the accumulated value, lowering the value in proportion to the cost of the rider.
Optional benefit riders generally help address the need for guaranteed lifetime income and health-related benefits. The guaranteed lifetime income rider payout is calculated based on the individual’s age, the accumulated contract value, and the insurance company’s payout percentage determined upon the inception of the contract. Some contracts offer a level payout, some offer an increasing payout, and some offer a choice of either payout options. Once the payout option is established, it is irreversible. A level payout option provides the same income for the life of the annuitant, while the increasing income option can create a potentially larger payout each year depending on the growth of the index allocation. The initial payout with a level option is generally larger than the initial payout from the increasing option.
In general, optional health-related benefits, also referred to as an additional/enhanced benefit rider, address the need for help when the annuitant lacks the ability to perform two of the activities of daily living (ADLs). In general, ADLs are bathing, continence, dressing, eating, toileting, and transferring. Not to be confused with a traditional standalone long-term care insurance policy, this benefit/rider can work in conjunction with the income rider, providing additional funding that can be used for care when the annuitant meets the criteria set in the contract. Some contracts offer a multiplier, most commonly two times the income at the time when the annuitant is declared in need of care. Some annuity contracts with health-related benefits accommodate skilled nursing facilities only, while some annuity contracts allow this option to be used when paying for in-home services and assisted living communities, as well as skilled nursing facilities.
In order to utilize the health-related benefit option, usually:
- the contract must maintain funds in the accumulated value; once the accumulated value is exhausted, the multiplier stops, and the income stream reverts back to the initial income option payout amount;
- the annuitant must have maintained the contract for a stated period of time;
- the annuitant must be declared unable to perform two ADLs.
Although the health-related benefit rider references long-term care issues, it does not offer the comprehensive, focused, customized coverage a long-term care insurance policy offers and should not be used to replace or in place of a long-term care insurance policy.
An optional health-related benefit rider differs from a traditional standalone long-term care insurance (LTCI) policy in several ways:
| Standalone LTCI Policy | Health-Related Benefit Rider | |
| Insurance Type | Health insurance | Life insurance |
| Inflation (Cost of Living Adustment, or COLA) | Choice of percentage Increases, commonly from no increase to 5%, depending on the contract, with variations | Not available |
| Baseline Benefit | Customized to individual needs, determined by age, health, objective, affordability, geographic market location, level and length of care | Premium(s) and interest growth |
| Benefit Payout | Baseline benefit plus the added COLA adjustment up to the daily or monthly benefit limit | Premium multiplier, usually 2 times the accumulated value of the annuity |
| Elimination Period | Choice of 0 to 365 days; home health oftentimes waved via a paid-for option | Generally 2 years |
| Benefits Stop | When policy funds are exhausted | Multiplier ends when accumulated value is at zero; income reverts back to original income payout |
| Premiums Stop | Upon claim and after the elimination period is satisfied. Elimination can be based on calendar days or days of service. | Some annuities accept premiums throughout the life of the annuitant, some for the first 12 to 18 months |
| Tax Qualified | Yes, 1099 LTC or 1099 Misc. | No |
| Underwriting | Health underwriting required | No health underwriting |
| Agent Licensing Requirements | Health insurance license, long-term care designation or certification | Life insurance license |
Although the health-related benefit rider could help with long-term care issues, it does not offer the comprehensive, focused, customized coverage a long-term care insurance policy offers and should not be used to replace or in place of a long-term care insurance policy.
Some of what separates a health-related benefit rider from a traditional long-term care insurance policy are purpose, objective, language within the contract, underwriting, and agent licensing, training, and certification. Although an annuity is an insurance product, it is not an insurance policy; it is an annuity contract. These are two different types of insurance products designed for different purposes that can cross over and potentially work together.
When discussing long-term care programs, a licensed health insurance agent with the designation or certification of Long-Term Care Specialist is recommended.
Please feel free reach out to Mark at 508-353-2524 or mark@mcardoza.com with any questions. I love what I do, and I would enjoy helping you with your own situation.
Information presented in the post is for educational purposes only and is general and not to be considered complete. For in-depth specific information pertaining to an individual situation, it is advised to contact a qualified licensed insurance professional in your state.