How Annuities Could Be a Health-Care Cost Cushion

January 18, 2012

By Linda Koco
Contributing Editor, AnnuityNews

Most annuity agents don’t talk about using annuities to help pre-retirees and retirees with funding their health care expenses in retirement, but that could change.

“Earmarking an annuity for health care is a great idea,” says Brian Lipinski, director of fixed annuity marketing at Executive Brokerage Services, Inc., McKees Rocks, Pa.

In fact, he says, “it’s a discussion that planners should be having with clients, because it focuses attention on the reality that is coming—that medical costs will continue to go up, and people need to plan for that.”

Insured Retirement Institute vetted the annuity strategy in a report released this month. The report also details how escalating health care costs affect retirement savings and how those future costs can vary by gender, income bracket, pre-existing conditions, inflation and other factors.

How to use the annuities

Annuities can help consumers “cushion” retirement health care costs, the researchers say.

For instance, they write, at retirement, the consumer could use immediate annuities or deferred annuities with a guaranteed minimum withdrawal benefit (GMWB). This would provide a base level of guaranteed lifetime income that further supplements Social Security income.  “Even at today’s low interest rates, a 65-year-old male can purchase an immediate annuity that will pay $1,000 per month for life with 10 years guaranteed for less than $175,000. A fixed term annuity for 10 years would require a deposit of $110,000, and an annuity for five years would be available for less than 60,000, per”

Another idea is to purchase an annuity with a GMWB several years before retirement, the IRI researchers say. In this case, the pre-retiree would invest the GMWB amount into a separate account starting at retirement.

That approach “will reduce the investment that a pre-retiree will need to make today to fund future health care expenses,” the researchers say.

To illustrate, IRI cites data from HealthView Services, which studies retirement health-care expenses. Based on that data, IRI says a 55-year-old male earning $85,000 a year could reduce by more than 70 percent the total investment he needs to pre-fund his retirement health care if he sets up an annuity, IRI writes. This is assuming that the man retires at age 65 and that his total health care expenses for the remainder of his lifetime will be the $369,000 total estimated by HealthView. (Note: The HealthView projection reflects the consumer’s health status and gender, and it includes the costs of Medicare-related premiums for parts A, B, D and Gap coverage).

If the man does not buy an annuity, HealthView estimates that the man would need to invest $180,525 to pre-fund his retirement health care. The account would need to be set up at age 55 and yield a 3 percent return. By comparison, the man could prefund this care by purchasing, at age 55, a variable annuity with a GMWB for only $60,000, according to the IRI report.

A handful of annuities include riders that expand the guaranteed withdrawal amount in event of long-term care. One industry source says these riders can double or even triple the payout amount.

The products offering these LTC riders include a few indexed annuities and a traditional fixed annuity. A few variable annuities have offered such features, at least in the past couple of years, other sources say.

If the consumer buys an annuity with an LTC rider, the amount needed to prefund care in retirement—at least, long-term care in retirement—could be even less than that projected above for the 55-year-old man. Put another way, that man could get even a larger payout from the annuity if he should experience a long-term care event than if he doesn’t ever need long-term care. 

Target market

Lipinski suggests that the strategy of setting aside annuities to pre-fund health care would probably work best for consumers with annual incomes of $85,000 or more.  These are people who may have enough assets to make such funding financially feasible.

“This would not be a strategy for consumers whose household incomes average about $42,000 a year or less—because they don’t have anything left (for annuity investing) after paying basic expenses,” he explains.

This would also probably not be a top-tier strategy for consumers who have already have retiree health care funded through the retiree health care plans of their employers. (There are fewer and fewer of such plans available today, but big corporations, governmental bodies and some unions still offer them. Then again, many such plans have curtailed benefits or increased out-of-pocket costs, so individuals in this market may be receptive to annuity funding options too.)

Joe Olesky, a marketing rep at Executive Brokerage Services, points out that his firm is a broker in the traditional fixed annuity and fixed indexed annuity marketplace. Agents he works with “are offering guaranteed income riders with the annuities to enhance the income stream, not necessarily to fund health care expenses,” he says.

In some cases, they use these annuities to set up a stream of payments to pay for a life insurance policy that’s inside a trust, Olesky says. Other times, they use the products to cover basic expenses in retirement.  But they could use the products for funding health care, he allows.

In most cases, the agents with whom Olesky works use an indexed annuity that includes a rider with a 6 percent to 8 percent rollup on the income benefit.  “The longer a client delays taking the income benefit, the larger that benefit will be,” he points out.

For example, he says, at age 65, a woman could take $14,000 in annual lifetime payouts if she had bought a $150,000 fixed indexed annuity at age 55. The annuity he mentions has a 10 percent premium bonus for seven years and a 6 percent rollup on the guaranteed lifetime withdrawal benefit. If the woman waits until age 70 to start withdrawals from that annuity, her annual lifetime payout would jump to nearly $21,000 a year, and if she waits until age 75, it would jump to over $30,000 a year. There is a cost for the rider benefit, Olesky points out.

Using annuities with income riders to pre-fund health care or any expense is for people who want an income stream, not cash surrender value, stresses Lapinski. “They are great for lifetime income, for any purpose.”

Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].

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