Use Annuity Proceeds to Pay for Long Term Care Premiums

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.

Alternatives to Traditional Long Term Care Plans

As an advisor, you help guide your clients on a responsible path toward protecting their families, businesses, assets and estates. Unfortunately, an unexpected health crisis can disrupt even the best-laid plans, forcing clients to deploy assets they had hoped to save for other purposes. At least 70% of people over age 65 will require some long-term care services at some point in their lives.* So despite the uncertainty of the long term care industry as a whole, insuring the risk is still the most cost-effective way to protect oneself from the potentially devastating expense of long-term care. As an alternative to the traditional long term care insurance plan, several carriers have introduced Life/LTCi and Annuity/LTCi combinations that DO provide some long-term care guarantees.

MoneyGuard® is a linked benefits policy from Lincoln National Life Insurance Company; it combines universal life insurance and long-term-care in one policy. The MoneyGuard® policies provide benefits no matter what the future brings — a death benefit, long-term-care benefits or both. One version of the MoneyGuard product has various funding options and Return of Premium is provided automatically with every policy. Compare MoneyGuard Reserve Plus to MoneyGuard Reserve.

John Hancock has a Long Term Care Rider that can be added to their permanent life insurance policies. This optional LTC Rider allows policy owners to accelerate their death benefit to help pay for long term care expenses, should that need ever arise. Any portion of the death benefit not used to cover LTC expenses remains in the policy, and is later paid as a death benefit. They also have LifeCare which is a single-premium whole life plan with long term care benefits that addresses the need for guaranteed life insurance protection and LTC coverage.

Genworth Financial's Total Living Coverage (TLC) links universal life and long term care insurance into one product. It provides a pool of benefits to cover long term care expenses and a death benefit for beneficiaries. Even the entire death benefit amount is used to pay for long term care expenses, a Residual Death Benefit is available. The Return of Premium (ROP) rider is an optional rider that is available for purchase at the time of application. If the client decides not to keep the TLC policy before the end of the 15th year, the owner will get back at least their initial premium (less any LTC benefits already received). The ROP rider automatically terminates on any Partial Withdrawal or Loan from the policy.

United of Omaha has a single-premium deferred annuity with long term care benefits that is guaranteed to pay up to three times the annuity value at time of first claim for long-term care benefits. The Living Care Annuity provides a guaranteed rate of interest and tax-deferred growth and pays clients if they need long-term care and if they don't, the annuity value will pass to beneficiaries without probate of funds.

MVP Financial Services has the LTC solutions your clients need. Give us a call.

*Statistics taken from www.longtermcare.gov. Administration on Aging: 202 619-0724.