Imagine you are 75 and suffer a stroke. You have some financial assets but, suddenly facing a lifetime of unexpected personal care needs, you are worried about outliving your money. You never bought long-term care insurance and could never pass underwriting that would allow you to buy now.
What do you do? You could tap your home equity with a reverse mortgage or by selling your house. You could spend down what assets you have and turn to Medicaid once you are impoverished. Or you could consider a creative new product being offered by Genworth. It isn’t for everyone, and consumers need to be careful before buying, but it is intriguing.
The product, called IncomeAssurance, is an immediate fixed annuity where you make a single lump-sum payment to an insurance company and receive, in return, a steady monthly stream of income for as long as you live. But this one comes with a twist: The sicker you are, the higher your monthly payout.
Think of it as an inside-out version of traditional long-term care insurance.
Instead of buying at 50 and waiting until you are 75 or 80 to claim benefits, you don’t buy until after you need help. While someone who already needs personal assistance would fail underwriting for long-term care insurance, she is exactly who Genworth wants to buy this product.
There is no benefit trigger, as with long-term care insurance. You simply begin receiving an immediate cash payout.
You are not insuring against need—after all, you’ll already require help before you buy the annuity. But you are insuring against time. By purchasing a fixed level of lifetime income after you become sick, you can help protect yourself against outliving your assets when you know you’ll need high-cost personal care.
There are issues for consumers to watch for:
- How much should you buy? The general rule of thumb is you should not annuitize more than one-third of your financial assets. While Genworth allows a minimum purchase of $50,000, that amount would throw off a relatively small amount of income—maybe $1,000-a-month, depending on your age and health. Combined with, say Social Security and a 401(K) distribution, is it enough to pay for your care needs? Or would you be better off just spending down your assets and turning to Medicaid if necessary?
- Risk. Remember, like any single premium annuity, you risk losing some or all of your initial payment if you die soon after you buy. And since people who purchase are already ill, that is a real concern. The product returns a pro-rated share of your initial premium if you die within the first six months. You can also buy an optional enhanced death benefit–but at extra cost.
- Taxes. You may owe taxes on the monthly payouts, which could significantly reduce your income. This can get complicated. Check with a tax adviser.
- Complexity. This product is not easy to understand. And because many buyers are likely to be suffering from some dementia or other cognitive impairment, they and their families need to be especially careful. Genworth says it is training its brokers to recognize signs of cognitive limitations. If so, they will require someone with a power of attorney to sign off on the purchase. But identifying early dementia is not easy.
- Underwriting. Finally, because the size of your monthly payout is based on your health status, be sure that any underwriting accurately reflects your physical condition. In this case, the sicker you are, the bigger your monthly payment.
I asked a couple of fee-only financial planners what they thought. One liked it, especially for clients with moderate net worth who had done little or no planning for long-term care needs in old age. “You don’t have many choices,” he said, “This could really help.”
The other had a different reaction. “It’s pretty creepy,” he said.
Creepy or helpful—like most long-term care products, it really depends on your specific situation.