Legal Law

Tax-free planning opportunity for long-term care expenses

The aging demographic of the United States, along with the Pension and Recovery Act of 2006 (the “PPA”) and the Deficit Reduction Act of 2007 (“DRA”) have provided an excellent planning opportunity to create efficient vehicles since the tax point of view to solve customer planning needs. Beginning January 1, 2010, a tax-free planning option will be available to individuals who wish to provide long-term health care by utilizing an existing life or annuity insurance contract purchased after 1996. Although it is not a new concept (dating back to 1997), the 2010 tax-free planning opportunity may be beneficial for a person with a larger than necessary life insurance policy death benefit, inaccessible monthly or annual premiums, an expired or underperforming deferred annuity contract, or a desire to incorporate term health care into your estate plan.

Under the provisions of the PPA, annuity funds can be withdrawn completely tax-free on a FIFO (first in, first out) basis for long-term care benefits (amending Section 72 (e) of the Code Internal Revenue). The PPA also includes a “1035 exchange” option that allows tax and penalty-free withdrawal of the full value of the annuity for qualified long-term care expenses. However, no income tax deduction will be allowed for any payment made from the cash surrender value of a life insurance contract or the cash value of an annuity contract for coverage of a care insurance contract. long-term qualified (Section 213 (a) of the Code).

This benefit is reinforced by the modification of the Medicaid “look-back” period from thirty-two (32) months to sixty (60) months for transferred assets, and the authority for all states to adopt “health care insurance plans. long term in partnership “. under the DRA. Qualified association plans allow an insured to “exclude an amount of assets equal to the value of the benefits purchased in a long-term care association policy from Medicaid qualification.”


The benefits of converting an existing annuity or life insurance contract include (i) no surrender charge will be applied to account withdrawals for qualified expenses; (ii) withdrawals for qualifying long-term care expenses will be classified as a tax-free base reduction; (iii) a spouse can be added to a policy for care purposes; (iv) ten (10%) percent free withdrawal provision for non-long-term contract withdrawals; (v) the possibility of acquiring an optional provision for life with guaranteed premiums; and (vi) the annuity cash will remain available if the long-term care portion of the policy is never used. However, the conversion will also result in (i) the beginning of a new surrender charge period for the contract; (ii) medical underwriting (at a time when people’s health may be deteriorating); (iii) health care benefits of limited scope and for a specified number of years; and (iv) the cost of the long-term care rider that reduces the tax-deferred income stream from the annuity. Additionally, the typical policy will contain a two-year waiting period from the time the annuity is purchased before benefits can be activated and a 90-day “wash-out period” once a claim is filed.


A hybrid policy of this nature should not be used as a substitute for comprehensive long-term care insurance. It is recommended that these policies are only used when an individual cannot afford or is not interested in comprehensive long-term care insurance.

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