Annuities that pay off for the sick

By Eleanor Laise, Kiplinger Retirement Report

The vast majority of seniors don’t have long-term-care insurance. For all but the wealthiest, deteriorating health or an imminent need for care can raise real concerns about running out of money.

One solution: a medically underwritten single-premium immediate annuity. Like traditional immediate annuities, these contracts offer a lifetime of monthly payments in exchange for a single up-front investment. But unlike plain-vanilla immediate annuities, which base payouts on your age and gender, a medically underwritten annuity throws your health into the mix: the sicker you are, the higher your monthly income.

That feature can make these annuities critical tools for seniors with serious health conditions. “When you’re sick, you can’t qualify for long-term-care insurance,” says Stan Haithcock, an annuity agent in Ponte Vedra Beach, Fla. If you are in that boat and need care, he says, a medically underwritten SPIA may be “the only hope you have of enhancing a payout to cover those expenses.”

Unlike long-term-care insurance, medically underwritten SPIAs don’t require any claims filing or ongoing assessment of your eligibility for benefits. And you can use the money for any purpose, whether it’s paying for care or covering other living expenses. But the annuities do have their drawbacks: You’re typically locking up a big chunk of money, and if you die shortly after buying the product, you may receive far less in benefits than you paid in premium.

Although medically underwritten SPIAs are niche products today, offered by just a handful of insurers, industry experts expect the market to grow as baby boomers age. One sign of fresh interest in the products: The insurance giant Genworth early this year launched its first medically underwritten SPIA.

Assessing eligibility

To qualify for the higher payouts offered by medically underwritten SPIAs, you’ll need to prove that your life expectancy is shorter than standard actuarial tables suggest. Some insurers, such as Genworth, require an in-person assessment by a nurse. Others may simply ask you to complete a detailed health questionnaire and provide medical records. At Mutual of Omaha, for example, applicants are asked to list all medications and disclose any cigarette use, cancer, heart attacks, lung disease, diabetes, strokes and other conditions, says D.J. Kohlhaase, an actuary at the firm. The underwriting process may take 30 days or more.

The payoff: People in poor health can get significantly more income than they would receive from a traditional SPIA. Consider a 75-year-old widower with heart disease, diabetes and dementia, who needs help with some daily activities such as bathing. He needs $30,000 in annual income to help cover his care expenses. If he opts for a traditional SPIA that pays income for his life only, with no inflation protection, he’d have to spend roughly $336,000 to get that much income. But Genworth’s medically underwritten SPIA, the Income Assurance Immediate Need Annuity, would give him $30,000 in annual income for just over $150,000. Generally speaking, “if someone is in poor health, they can get a quarter to a third more from this annuity than from a traditional non-underwritten SPIA,” says Debapriya Mitra, senior vice president for product and business strategy at Genworth.

While medically underwritten annuities aren’t for people in good health, they’re also not appropriate for the sickest seniors. If you have a very short life expectancy, it doesn’t make sense to pay the big up-front premium for this product.

Insurers offer optional features, such as inflation protection and enhanced death benefits. But these bells and whistles can take a big bite out of your monthly income. A 75-year-old man with heart and lung disease investing $100,000 in Genworth’s annuity would reduce his monthly income by 12 percent by opting for a death benefit that would guarantee him at least three years’ worth of income. (The Genworth annuity comes with a built-in early death benefit if you die within six months of buying the product.)