America’s senior citizens have their backs to the wall financially a new study confirms. Professor John Pottow, a law professor at the University of Michigan, reports that the rate of United States (U.S.) seniors entering into bankruptcy is on the rise.
Pottow’s study reveals that the U.S. recession has taken its toll on seniors. The number of seniors in bankruptcy already surpasses the 178% bankruptcy rate for Americans between the ages of 65 and 74 from 1991 to 2007.
With the threat of financial ruin so prevalent, seniors need to take concrete measures to protect their financial health. That’s not a luxury--it’s a necessity. According to the Center for Retirement Research at Boston College, the average married couple will need $197,000 to cover overall health care costs, and that doesn’t count nursing home care.
High health care costs are a big problem, but an annuity, properly used, can help seniors significantly mitigate the high costs associated with health care for the elderly.
What’s an annuity? In a word, it’s a contract between you, the annuity owner, and an insurance company. In return for your payment/investment, your insurance carrier agrees to give you either a steady stream of income or a lump-sum financial payout at some future time, usually after you retire.
What kind of annuity you need depends on myriad factors, none more important than your age.
Types of Annuities
In general, there are two types of annuities: an immediate or a deferred annuity.
- Immediate Annuities - With an immediate annuity, you start to receive payments immediately after making your initial payment. Immediate annuities are best for investors who require immediate income from their annuity.
- Deferred Annuities - With a deferred annuity, you’ll receive payments at a later date, usually at retirement. There is a caveat. Most deferred annuities allow for systematic withdrawal payments beginning thirty days after the purchase of your annuity, up to 10% per year, in most cases. With a deferred annuity you can invest either a lump sum all at once or make periodic payments, either fixed or variable. That money grows tax-deferred until you wish to start receiving payments. Studies show that deferred annuities comprise the vast majority of all annuity sales in the U.S., and are best suited for the long-term costs of health care for the elderly.
Advantages of Annuities
The good news is that new rules from the federal government make using deferred annuities to pay for health care for elderly seniors a simple proposition. As part of the Pension Protection Act of 2006, seniors can use such annuities to pay premiums for long-term care insurance.
That’s a big tax advantage for annuity users. Prior to 2006, annuity payments were considered gains by the Internal Revenue Service, and were thus taxed at ordinary-income tax rates. But with the new pension act, those withdrawals are now tax free.
Perhaps the easiest way to use annuities to pay for long-term health care costs is to buy a “hybrid” insurance policy that includes both annuities and life insurance that includes long-term coverage. That way, you can use the proceeds for health care costs if you need them or for other needs if you don’t.
Written by senior finance expert Brian O'Connell.