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(gain of $50,000) and exchanged for a long‐term care policy; then the whole amount, including the $50,000 gain could be withdrawn on a TAX‐FREE basis to cover long term care, like assisted living, nursing home or even for care at home.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.