The Pension Protection Act (PPA) which went into effect on August 17, 2006, included a provision which allows insurance companies to develop tax-deferred annuity products which include a tax-free long-term care rider.
The new product, like old products, still allows an owner/annuitant to invest a single premium amount with any growth on the product not being subject to immediate income taxation. Then, in the event that the owner/annuitant needs long-term care benefits, the product allows the cash value to be made available to the owner/annuitant, without any of the growth being subject to income taxation. This was totally unheard of in the annuity industry, prior to the enactment of PPA. Additionally, for those clients who have an existing tax-deferred annuity, they may want to exchange it for one of the new products by way of an IRC Section 1035 tax-free exchange.
I am now aware of one insurance company that has released a product, which includes a fixed rate of return during the build-up phase, and pays up to three times the annuity's value when necessary long-term care benefits are required by the owner/annuitant. The product has a 90 day wait period for long-term care benefits, and covers all levels of long-term care, including: home health, assisted living, and nursing home care. Additionally, if the owner/annuitant does not need the long-term care benefits, the product will continue to grow tax-deferred until the owner/annuitant either: (1) elects to take a withdrawal, (2) annuitizes the product, or (3) dies.
The new product is a win, win, win situation for those clients who:
- cannot afford to pay for traditional long-term care insurance,
- like the idea of being able to use discounted or leveraged dollars to pay for potential long-term care; and
- need to know that their cash value is readily available in the event of a financial emergency.
Note: Even though the PPA went into effect on August 17, 2006, the payments for long-term care benefits made by the annuity contract will only receive the favorable tax treatment if they are paid on or after January 1, 2010. The reason for the delay relates to the fact that only a health individual may obtain a tax-deferred annuity with the long-term care rider. Thus, it was presumed that it will take several years for the healthy individual to be in need of long-term care benefits.
