Help your clients protect all of their assets by taking a partial withdrawal from their non-qualified annuities to pay for long term care insurance. Under the Pension Protection Act of 2006, money can now be transferred from a non-qualified annuity (SPDA) to pay for long term care premiums tax-free. The tax savings from this strategy effectively reduces the cost of long term care insurance in comparison to funding it with taxable income or withdrawals. The tax is only deferred, however, until the annuity is surrendered and then taxes will need to be paid pro-rata on any gains. Income payments from a SPIA can also fund a LTC insurance policy tax-free.
Example: If your client has a non qualified deferred annuity worth $100,000 with $20,000 in gains and $2,000 is used to pay for a long term care premium, 80% (or $1,600) will be subtracted from the principal and 20% (or $400) will come from taxable gains in the annuity. If enough money is transferred over time from the annuity to pay for long term care premiums, the taxable gain could be erased completely.
The process of transferring the money from the annuity to pay for the long term care premium is a Partial 1035 Exchange. If the annuity and the LTC policy are with the same carrier this process is made very easy by providing a form that will automatically initiate the annual partial 1035 exchange process to fund a LTC policy. If two different carriers are involved it is important to check with them to find out what their requirements and restrictions are regarding partial 1035 exchanges.
Prior to participating in any 1035 exchange, you should help your client carefully consider factors such as the features, provisions, and crediting rate(s) of their current product, applicable surrender charges, any new surrender charge period on the purchase of a new product, as well as the various features and crediting rate(s) of the new product.
Get 1035 Exchange FAQs answered here.
View Funding Long Term Care Insurance Using an SPDA Case Study.
MVP is not offering legal or tax advice. Your clients should consult independent tax and legal professionals for advice based on their particular circumstances.
Example: If your client has a non qualified deferred annuity worth $100,000 with $20,000 in gains and $2,000 is used to pay for a long term care premium, 80% (or $1,600) will be subtracted from the principal and 20% (or $400) will come from taxable gains in the annuity. If enough money is transferred over time from the annuity to pay for long term care premiums, the taxable gain could be erased completely.
The process of transferring the money from the annuity to pay for the long term care premium is a Partial 1035 Exchange. If the annuity and the LTC policy are with the same carrier this process is made very easy by providing a form that will automatically initiate the annual partial 1035 exchange process to fund a LTC policy. If two different carriers are involved it is important to check with them to find out what their requirements and restrictions are regarding partial 1035 exchanges.
Prior to participating in any 1035 exchange, you should help your client carefully consider factors such as the features, provisions, and crediting rate(s) of their current product, applicable surrender charges, any new surrender charge period on the purchase of a new product, as well as the various features and crediting rate(s) of the new product.
Get 1035 Exchange FAQs answered here.
View Funding Long Term Care Insurance Using an SPDA Case Study.
MVP is not offering legal or tax advice. Your clients should consult independent tax and legal professionals for advice based on their particular circumstances.
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