UNDERSTANDING ANNUITIES

You first step when looking at an annuity is to examine fees carefully before making a purchase. Some people sell misleading or outright fraudulent products to unsuspecting people—so be sure that you ask questions and compare options before buying.

An annuity is a contract between you and an insurance company. Based upon the amount you pay in premiums, the company pays you income on an agreed upon schedule. As a general rule, you can't withdraw funds from the account before age 59 1/2. After that, you're only taxed on the earnings withdrawn.

First, decide how to make investments. Do you want to pay one lump sum or installments? Be aware that if you pay a lump sum—a "single premium annuity"—and later wish to invest more, you will have to buy another annuity. A "flexible payment annuity" allows you to invest more at any time.

If you want payments to begin immediately, you can get an immediate annuity. Otherwise, you could buy a deferred annuity, which will begin payments at a later date. Even with deferred annuities, you can buy one that matures in just a few years (although the payouts will likely be smaller).

• Payment schedule. You can select from a variety of payout options: monthly, quarterly, or annual payments starting immediately or starting some time in the future. Annuities are tax-deferred, not tax-deductible. Your money earns interest without your having to pay taxes. However, when you do start drawing from the annuity, you will pay taxes on the interest so consider the tax implications of your payout choice. For example if you are under 59 1/2 and make a withdrawal, you will pay a 10% penalty.
  
• Length of time. You'll need to determine if you want payments for as long as you live, for as long as both you and a survivor live, or for a fixed time. You will probably hear these options referred to as a "life annuity," "joint and survivor annuity," or a "period certain annuity." The longer the time the insurance company must make payments, the less each payment will be.

The two main categories of annuities are fixed and variable.

• Fixed. If you want pure predictability, buy a fixed annuity. It lets you set a guaranteed schedule of payments for a fixed period of time. Consider products that include cost of living adjustments (COLAs), as a way to keep up with inflation. Be aware that there may be fees, such as mortality and expense charges, deducted. Study so-called "bonus" offers on fixed annuities that make it look like you're getting a higher than usual interest rate. The bonus rate may only be good for a limited time—like a teaser rate on a credit card, the good terms that attracted you to the annuity may expire and you may end up with worse terms.
  
  
• Variable. If you're willing to take some risk in exchange for the opportunity to increase your future income, you can buy a variable annuity. You control how the money is invested from among a variety of mutual funds. Your income, therefore, will be variable, subject to the success of the mutual funds that are in your annuity. There may be a guaranteed minimum you will earn, with an unlimited upside; but there may be no minimum guarantee at all.
  
  Variable annuities are generally not for those already retired or near retirement, because their purpose is to grow retirement savings tax-deferred over an extended period of time. Furthermore, the minimum rate guarantee may be as low or close to as low as what you could earn with a CD—but you'd be paying much higher fees for the annuity.

Pay attention to fees. Before buying an annuity, be sure you know how much you will be paying for the annuity. Here are some things to look for:

• Surrender charge. There's a charge if you want to cash out of the annuity. The amount is clearly stated in the annuity contract and differs from company to company. Usually, the surrender charge will go down each year until it completely disappears. Pay close attention to surrender charges; they can have a big impact on the value of your annuity.
  
  
• Withdrawals. Annuities have different withdrawal rules. Try to find a contract that allows for partial withdrawals. This would allow you a one-time right to take out up to 10% of the accumulated cash value without a fee or penalty (imposed by the contract, not the early withdrawal penalty imposed by the government, explained below). This can be useful if you need to tap the annuity during the years the surrender charge is in effect. In addition to the penalties imposed by the contract, taking money from an annuity may result in taxation and penalties.

As a general rule, if you withdraw money from an annuity prior to age 59 1/2, you'll pay a 10% early withdrawal tax penalty. This applies to earnings, not the amount you deposited. The IRS thinks of your withdrawals as automatically taking your earnings first and the amount you invested last.

So if you withdraw money before you reach the contractual date for receiving income payments, it's likely that the entire amount withdrawn will be taxable. However, once your stream of income begins, the IRS will view each payment as a mix of earnings and the amount you invested. Only the earnings are taxable.

There are independent rating services that examine the financial health of insurance companies, such as A.M. Best, Weiss Research, and others. An annuity bought at a bank is not FDIC insured.

There are many reputable companies selling annuities. But annuities are a fertile area for fraud. One of the most common techniques is the switching, exchange or replacement of one variable annuity for another. A switch to an inappropriate variable annuity can cost you a great deal of money, but gives the salesperson a windfall. Be on the lookout if the proposal to replace the annuity comes from the salesperson, not from your own initiative.

Annuities sales people make very high commissions so there's pressure for them to sometimes force a sale. Be sure the agent is focused on your needs and doesn't simply come in and offer you a particular product without getting to know your situation first. Even so, don't trust too easily; sales training in annuities is intense, and the sales approaches can be tricky.

Long-term care insurance is something that seniors should also think about during retirement planning.

LONG TERM CARE INSURANCE

Long term care insurance is an insurance product sold through a licensed agent or an insurance broker. It helps provide for the cost of long term care of an individual beyond a pre-determined period. Long term care insurance covers care generally not covered by health insurance, Medicare, or Medicaid.

A common misconception about long-term care is that it is just for the elderly. Anyone of any age or occupation may need long-term care at any time. In fact, 45 percent of people receiving long term care are between the ages of 18 and 64.

People who require long term care are generally not sick in the traditional sense, but instead, are unable to perform the basic activities of daily living such as dressing, bathing, eating, toileting, getting in and out of a bed or a chair, and walking.

Also, long term care isn’t necessarily long term. A person may need care for only a few months to recover from surgery or illness.

As individuals age, there is an increased risk of needing long term care. In the United States, Medicare will not cover the expenses of long term care, but Medicaid will for those who cannot afford to pay.

Once a health condition occurs, long term care insurance may not be available as the health problem would be considered a pre-existing condition.

In the Unites States, Medicaid generally does not cover long term care provided in a home setting. Also, in most cases, Medicaid does not pay for assisted living. It will, however, pay for medically necessary services for people with low income or limited resources who “need nursing home care but can stay at home with special community care services.”

People who need long term care traditionally prefer care in their own home or in a private room in an assisted living facility.

If home care coverage is purchased, long term care insurance can pay for home care often from the first day it is needed. It will pay for a live-in caregiver, companion, housekeeper, therapist, or private-duty nurse up to 7 days a week, 24 hours a day.

Assisted living is paid for by long term care insurance as in adult day care, respite care, hospice care and more. This insurance can also help pay expenses for caring for an individual who suffers from Alzheimer’s disease or other forms of dementia.

Other benefits of long-term care insurance include:

· Many old people may feel uncomfortable relying on their children or family members for support and find that long term care insurance could help cover these expenses. Without the insurance, the cost of providing these services may quickly deplete the saving of the individual and/or their family.

· Premiums paid on a long term care insurance product may be eligible for an income tax deduction. The amount of the deduction depends on the age of the covered person. Benefits paid from a long term care contract are excluded from income.

· Business deductions of premiums are determined by the type of business. Generally, corporations paying premiums for an employee are 100 percent deductible if not included in an employee’s taxable income.

In the U.S., two types of long term care policies are currently being sold: Tax Qualified and Non-Tax Qualified.

The Non-Tax Qualified policy was formerly called Traditional Long Term Care insurance. This type has been sold for over 30 years. It often includes a “trigger” called a medical necessity trigger.

This means that the patients own doctor or that doctor in conjunction with someone from the insurance company can state that the patient needs care for any medical reason and the policy will pay. All benefits are taxable.

The Tax Qualified long term care insurance policies do not have a medical necessity trigger. In addition, they require that a person be expected to require care for at least 90 days and be unable to perform two or more activities of daily living without substantial assistance and that a doctor provides a Plan of Care.

The other part is that for at least 90 days, the person needs substantial assistance due to a severe cognitive impairment and a doctor provide a Plan of Care. Benefits are non-taxable with this type of policy.

Fewer and few non-tax qualified policies are available for sale these days. One reason is because consumers want to be eligible for the tax deductions available when buying a tax-qualified policy.

The tax issues can be more complex than the issue of deductions alone and it is advisable to seek good counsel on all of the prods and cons of a tax-qualified policy versus a non-tax-qualified policy. This is because the benefit triggers on a good non-tax qualified policy are better.

Once a person purchases a policy, the language cannot be changed by the insurance company. If the policy is an individual policy, it is guaranteed renewable for life. It can never be cancelled by the insurance company.

Most benefits are paid on a reimbursement basis and a few companies offer per-diem benefits at a higher rate. Most policies cover care only in the continental United States. Policies that cover care in select foreign countries do so at a rated benefit.

Group long term care policies may or may not be guaranteed renewable. Most group policies are non-tax qualified and the benefits are taxable. Many group plans include language allowing the insurance company to replace the policy with a similar policy but allowing the insurance company to change the premiums at that time. Some group plans can be cancelled by the insurance company. Those types of policies are not recommended.

Retirement systems or funds sometimes offer long-term care insurance. These organizations are not regulated by state insurance departments. They can increase rates and make changes to policies without state scrutiny and approval.

Long term care insurance rates are determined by four factors:

1. The person’s age

2. The daily or monthly benefit

3. How long the benefits are for

4. The health rating (preferred, standard, or sub-standard)

Most companies will give spousal discounts of ten to twenty-five percent.

Many companies offer multiple premium modes: annual, semi-annual, quarterly, and monthly with automatic money transfer. Companies add a percentage for more frequent payment than annual. Options such as non-forfeiture, restoration of benefits, ad return of premium are expensive and generally not recommended.

Some states, such as California, have a program called the Partnership for Long Term Care. This program contains, among other benefits, a lifetime asset protection feature in long term care policies. The Deficit Reduction Act of 2005 makes the Partnership program available to all who states who want to participate.

Many policies have a waiting period – also called deductible period – or elimination days that may differ from 20 to 120 actual calendar days. Many policies also required intended claimants to provide proof of 20 to 120 service days of paid care before any benefits can be paid.

In some cases, the option may be available to select “zero” elimination days when covered services are provided in accordance with a plan of care. Some may even require that the policy for long term care be paid up to one year before you become eligible to collect benefits. The reason to choose a higher deductible period is for a low cost premium.

Long term care insurance, just as with any other insurance, is a way to protect yourself in the event of an emergency. And, just like any other insurance policy, you can pay premiums for years and never have to use the policy. What you need to do is gauge how valuable a policy like this will be to you and go from there!

As you review each possible policy, ask yourself these questions:

• Do I need this policy?
  
  
• Is the maximum coverage adequate for my situation? For example, many people find that they never increase the replacement cost coverage on their house, even as the value of the house rises dramatically.
  
  
• Am I getting the best value for the premium I'm paying? For example, would I save money and still keep adequate coverage if I raised my deductible (which will lower your premium)? Should I spend a little time searching for the same coverage at a lower price with another insurance company?
  
  
• Are there gaps in my coverage? In other words, are there situations that very possibly could occur but that my policy wouldn't cover?
  
  
• How much of a discount would I get if I bought all of my policies from the same insurance company (assuming I could get coverage as good as or better than I have now)?
  
  
• Does my current insurance agent understand my needs and provide good service? If I don't have an agent, is the insurer's customer service helpful when I need them?

There are some great websites that can help you with your retirement planning. So much so, that they get a whole chapter devoted just to them!