The Problem with Annuities and How to Solve It (Part 3) #ProblemwithAnnuities
Last week I outlined for you the advantages of the Pension Protection Act (PPA), #PensionProtectionAct which became effective in 2010. The government has provided some pretty significant tax advantages as an incentive for Americans to self-fund their long term care. As a result, insurance companies have created varied products to take advantage of the law. Let’s look at some examples.
Bob is 70 and has an existing IRA annuity. He looked at traditional long term care insurance and didn’t like the “use it or lose it” aspect and the uncertainty of increasing premiums in the future. If he or his wife needs long term care he intends to start drawing the money out of the annuity.
By repositioning the annuity to one with a long term care rider, if either he or his wife needs long term care they’ll use the cash in the annuity but they’ll also have additional coverage under the LTC rider. Bob designates his wife as an “eligible person” for coverage. If he dies first, his wife can continue the policy for the rest of her life and get the same coverage. If he survives his wife any cash remaining in the annuity is passed on to his beneficiaries. Also, because this is an annuity based policy, the underwriting process is less restrictive. It is possible to buy these policies into your mid 80’s in some cases.
Let’s take a look at another example. Joanne has a non-qualified annuity and wants long term care coverage for herself and her husband. She can make a tax free 1035 exchange of her existing annuity for a PPA annuity. This means she does not pay any tax on the annuity when she exchanges it. She designates her husband as an eligible person to get coverage for him. Even better, any funds withdrawn for qualifying LTC (home, assisted living, or nursing home care) for either spouse are income tax free under the PPA. It is possible for Joanne to avoid tax on all the growth in her annuity, which could be pretty substantial.
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