'Doublers' are worth consideration

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Andrew Murdoch, President of Somerset Wealth Strategies
Andrew Murdoch, President of Somerset Wealth Strategies

Steve Gregory is a big fan of long-term care insurance. His mother paid $1,700 a year for a LTC policy and after 10 years wound up in a nursing home in upstate New York. She survived there for two years, accumulating a tab of more than $100,000. For every dollar she paid, she got about $6 in benefits.

So Gregory bought a LTC policy in 2002 for himself and his wife from a now-defunct insurance company, then bought another one from John Hancock in 2007, after his former insurer exited the business.

“I see the value that an LTC policy provides,” says Gregory, unperturbed that his bill increased from $4,500 annually to $6,000.

Gregory is a noteworthy exception to the negative trend gripping the LTC insurance market. Stung by inadequate pricing and low interest rates, LTC insurance has been slowly fading away. Only about a dozen insurance companies sell these policies today, down from 100 a decade ago. Prices, meanwhile, have been rising sharply as former no price increase guarantees have vanished. Gregory represents a small minority who can afford rising premiums and isn't worried that his insurer will disappear again.

For most people, though, a relatively new development in the insurance industry – so-called annuity nursing home doublers – may represent a better alternative. About 10 insurance companies have rolled them out. They typically double payments for up to five years or until the cash value of the annuity is drained. Doublers are offered for free or minimal cost as a tool to gain market share.

Technically, the term “doublers” is imprecise. Depending on the insurer, the supplemental payments may increase only 50%. In one case, payments triple. Regardless, they help customers who cannot afford long-term care insurance foot the bill at a troubled time in life when they are already overwhelmed with health problems. Doublers help mitigate the fear of exhausting savings in retirement.

The fact that most annuities do not charge for the doubler benefit is particularly noteworthy. Consider, for example, a couple, ages 58 and 61, that buys a $300,000 annuity with a doubler from one insurance company and defers payments for seven years. After that, they will receive $19,580 a year in payments, a 4.2% income stream, which is fully competitive with annuities without doublers.

If the older partner winds up in a nursing home at age 75, the income stream increases 150% to 6.3% and the couple's annual annuity income jumps to $29,370.

In another example at another insurer offering a doubler, assume a 70- and 71-year-old couple buy a $600,000 immediate annuity. They will immediately receive $29,388 a year, or 4.9% of their money  -- again, fully competitive with annuities without doublers. If one of them winds up in a nursing home after a mandatory waiting period of two years after their annuity purchase, their annual income will triple to $88,164.

For all their appeal, doublers do not rival the benefits of long-term care insurance. A stint in a nursing home can cost as much as $9,000 a month, far beyond most doubler payouts. That is why most people who buy annuities with doublers cannot afford long-term care insurance.

Like Steve Gregory, James Davidson, a retiree who lives with his wife Nancy in Georgetown, TX, has LTC insurance and sticks with it despite stiff rate increases. In fact, his insurer hit the couple with more than a 75% increase this year, boosting their annual premium from $1,750 annually to $3,100. He stayed with the company after shopping around and learning the new insurer would charge the couple at least a third more than their new premium.

“LTC insurance still makes economic sense to me,” Davidson says.

But, tellingly, neither he nor Gregory dismisses the appeal of annuity nursing home doublers. Davidson already owns an annuity and says he would not buy another one simply for the doubler benefit. But if he were in the market for an annuity, he adds, he would seek an annuity with the doubler and if he liked what he saw, he would consider cancelling his LTC insurance.

“If you wind up in nursing home, a bigger annuity payment is a lot better than nothing,” Gregory adds.

The bottom line is that doublers provide some measure of relief at a crucial juncture in a person's life. Without financial resources, a nursing home resident winds up on Medicaid. That's the view of Eileen Dunn, who grew up in a family-run nursing home and is the owner of Trinity Eldercare in upstate New York, which advises clients about long-term health planning and insurance. “Without financial resources, the person has overwhelming sadness that he or she worked all their life and then had to exhaust their resources on healthcare,” Dunn says.

Annuities with doublers have either home healthcare riders or confinement riders. The former provides a person with professional at-home care or a stay in a nursing home or other qualified care facility if they cannot perform two of six activities of daily living, such as eating, bathing and dressing. A confinement rider covers a person if they are simply confined to a nursing home or other qualified care facility.

There are some drawbacks to some doublers. In joint annuities, for example, only one spouse is entitled to the benefit. And while the exercise of a doubler does not impact the amount of post-doubler payments, it does impact the cash value of the annuity and hence the amount of money left for beneficiaries.

These are minor issues, however. Most people who want to buy an annuity and who do not have LTC insurance – which is the majority – would be wise to consider buying an annuity with the doubler.

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