What is a disadvantage of using a conventional deferred annuity for late-life long-term care funding?

• A. The annuity does not accumulate cash value
• B. The contract must be annuitized and payments must be made over a set period
• C. It leads to higher taxes on withdrawals
• D. It cannot be used to fund long-term care expenses

Answer: (B)

The disadvantage of using a conventional deferred annuity for late-life long-term care funding primarily lies in the requirement that the contract must be annuitized and payments must be made over a set period. This means that once the annuity is converted into an income stream, the policyholder has to accept regular payments for a predetermined duration, limiting flexibility. If an individual's long-term care needs arise unexpectedly or at a time when they might prefer a lump sum payment or different structure to cover those costs, the rigidity of the payout schedule can be a significant drawback.

While conventional deferred annuities typically have features such as accumulation of cash value and potential tax-deferred growth, the fixed payment structure limits the ability to access funds in a manner that might be more beneficial for long-term care expenses. Although higher taxes on withdrawals and the inability to fund long-term care expenses are considerations, they do not address the critical limitation of rigid payment terms upon annuitization, hence making the described contractual requirement a pronounced disadvantage for those specifically aiming to use the annuity for late-life care financing.