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Using Annuities for Long-Term Care Planning (The Pros, The Cons and Everything Inbetween)

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There are many uncertainties that people face in their future and two of the most uncertain factors are their health and finances. While an individual can be proactive to counter some of the concerns with both of these items, with diet and exercise for health and cost control and saving for finances, you can never be certain of either.

There are a number of challenges to face; a sudden injury or illness can wipe you out financially even if you carry health insurance as you may be faced to leave your job, thereby losing your source of income. State or company funded short or long-term care can only carry you so far and you will need to find other sources of income. One of these sources can be annuities. Annuities will provide you with known income levels through the annuity in exchange for an up-front cash payment.

These payments will be made based on the terms of the annuity but often to the end of your life, with potential survivor features for a couple. However, if you pass away prematurely your estate will have no value remaining under the annuity arrangement. As such, annuities for long-term care are hotly debated for their pros and cons with different considerations playing into whether these are a good idea to pursue.

Pros of Annuities for Long-Term Care Purposes

The main benefit of an annuity is the predictable cash flow that it provides. Stocks that pay dividends can potentially decrease their dividend payments, as many did during the financial crisis in 2008 to 2009, and it can take a significant amount of time for even a diversified stock account to recover. Bonds can default or sometimes pay really small amounts of payments, as is the case with some government bonds. Annuities provide some significant amounts of income that is known and predictable and is guaranteed by the annuity provider as well as by the insurance that these annuity companies are required to provide.

Having predictable income is a great comfort for individuals, particularly those who are not all that familiar with how stock markets work and don’t have the time and effort to put into monitoring their stock accounts. Older individuals who don’t want to take risks during their retirement may be apt to prefer the comfort that an annuity can provide. Individuals who are incapacitated with a long-term injury and need long-term care can benefit from annuities. If you know a person who needs regular nurse care at a certain cost level. You can see how a predictable sort of income will benefit them greatly. Some annuities are even inflation adjusted so that they won’t diminish with time and can, therefore, provide you with comfort when planning for the long-term.

Cons of Annuities for Long-Term Care Purposes

The most significant disadvantage of an annuity is that after a person who is receiving an annuity passes away, their heirs won’t recover any funds from the investment. This means that in the case where you are purchasing an annuity to cover someone from a major injury, if the injury leads to premature death, the family may end up suffering financially. Further, while an annuity may provide a more significant amount of money initially, over a long period of time this benefit may diminish. Many stocks will increase their dividends annually and provide more money over a longer period of time.

In fact, stocks historically have outpaced other investment types including annuities. While annuities provide individuals with security and safety, which can be particularly helpful for long-term care planning, it can be a real disadvantage financially over the long term as this security is very costly. You will also have to pay more for annuities that provide you with financial security in the form of inflation protection. If you don’t have this inflation protection, then you can see your annuity payments being significantly lower than your costs. Further, many annuities only start paying when you reach a certain age and you may find yourself in need of money earlier than that due to an injury, leading you to renegotiate, often at a higher cost, new terms. Annuities can be a useful tool for long-term care planning, but due diligence and care is needed when doing so.