Many clients discuss with me my thoughts and their concerns, especially the costs, regarding purchasing long-term care insurance. In a recent previous article I discussed new innovative long-term care policies known as hybrid policies that provide long-term coverage and a death benefit; so, either the client, or their heirs will receive a benefit during life, or death, from the policy. Not a “use it or lose it” traditional policy that may also have future rate increases.
In 2010, the Pension Protection Act went into effect. Basically, this federal law provides for a major tax loop-hole so consumers will buy more, and insurance companies will insure and pay more, for long-term care to help relieve the burden and cost on government programs, such as Medicaid; which is the government program that typically pays much of the long-term costs for those who qualify.
In a nutshell, consumers can take an existing non-qualified annuity and exchange it to purchase a long-term care policy, including a traditional or hybrid policy (see previous blog on my website or article in Maturity Journal re: hybrid policies). A NON-QUALIFIED annuity is one which the investment is made with post-tax dollars; unlike a QUALIFIED annuity that is held in an IRA/403b/401k and funded with pre-tax dollars.
The major benefit is the gain in the non-qualified annuity can now be used on a tax-free basis to either fund or purchase a traditional or hybrid long-term care policy. For example, the consumer has a non-qualified annuity that they purchased for $100,000 but now is worth $150,000 (gain of $50,000) and exchanged for a long-term care policy; then the whole amount, including the $50,000 gain could be withdrawn on a TAX-FREE basis to cover long term care, like assisted living, nursing home or even for care at home.
This can be a very good strategy for those who wish to self-insure or have a non-qualified annuity earmarked for their future long-term care needs. Not only do these dollars come out tax-free, but coverage is typically 2–3x more long-term care benefits than just the original non-qualified annuity by itself.
Remember, consumers need to purchase long-term care insurance when in reasonably good health, and usually be purchased up to age 80.