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Ta Changes Would Give LTCI Buyers More Fleibility

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Proposals are being drafted by the ACLI for Ways and Means


Tax law changes that would provide incentives for long term care insurance offered in combination with other insurance products and benefits are being developed for consideration by House Ways and Means Committee staffers, National Underwriter has learned.

The American Council of Life Insurers confirmed it is drafting a proposal for consideration by the committee. The proposal will suggest changes in tax laws needed to allow an LTC contract to be combined with other insurance contracts to provide cash value to the consumer in the event LTC coverage is not needed, an ACLI staff official confirmed.

The proposal, which many in the industry are hoping will soon be submitted to Rep. Bill Thomas, R-Calif., chairman of Ways and Means, also would outline changes in tax laws that would facilitate transfer of funds, without paying taxes, between LTC contracts and such other industry products as life insurance, annuities and disability contracts.

A draft of the proposal states that changing tax laws to add a cash value feature to long term care by permitting LTCI riders on annuity contracts, LTCI riders on life insurance contracts that provide comparable benefits to stand-alone LTCI contracts, and tax-free exchanges of life insurance and annuity contracts for LTCI contracts “will provide Americans with the flexibility they desire.”

The industry is enthusiastic about the intra-industry talks being held under the auspices of the ACLI to develop proposals making LTCI more attractive to consumers.

One industry lobbyist, who asked not to be identified, characterized the proposals on LTC “as providing a good opportunity to develop new products that really help people.” This person said the chances of getting something done are “very real,” adding the proposals “provide new flexibility to people who need to manage their risks.”

But the task is daunting. Currently, LTC contracts are not subject to taxation when they are treated as accident and health insurance contracts, and benefits received are treated as A&H insurance benefits.

But those LTC contracts that provide a cash value or other monies that can be paid, assigned, pledged as collateral, or borrowed, are not treated as “qualified” LTC contracts, an industry official said. As a result, any benefits received under a cash value LTCI contract or rider may be fully taxable.

Inside buildup in a life insurance policy with an LTC rider is non-taxable under a 1996 change in the law, the IRS has ruled, but only under limited circumstances, an industry official said.

And, although life insurance, endowment and annuity contracts can be exchanged without tax consequences under certain circumstances, there is no similar provision for exchanges to LTC contracts.

Moreover, the National Association of Insurance Commissioners’ LTC Insurance Model Act and several state laws and regulations also contain limitations on cash value LTC insurance, a lobbyist said. In other words, changes will have to be negotiated with the NAIC and certain states as well as legislation to win the support of Congress and President Bush before the new offerings can be marketed.

The industry also is lobbying for other retirement savings provisions to be included in the package in order to spur greater interest in life offerings.

At the same time, one downside is that the package being drafted by Thomas is likely to include creation of Lifetime Savings Accounts, a Bush administration favorite that many in the industry, including insurance agents, strongly oppose.

The critics within the industry are concerned because they view LSAs as tax-favored savings accounts with few limitations that will compete favorably with deferred annuities.

These proposals are being offered in response to suggestions by Rep. Thomas that he would be amenable to including strong incentives for Americans to increase retirement savings as part of legislation that would include reform of the Social Security system–legislation that presumably would include private accounts, an issue on which the industry is neutral.

Some industry officials say the proposals could be presented to Rep. Thomas’ staff very soon, but others caution that it could be weeks, at best, before any legislation sees the light of day, especially because of the reluctance of Republicans to sign on and the adamant opposition of Democrats.

Other components of the package which Thomas is considering include the so-called “paycheck for life” program, which would allow half of the proceeds of an annuity, variable or fixed, up to $40,000, to go to the annuitant tax-free if redeemed in equal monthly installments after retirement.

Additional provisions of the industry’s broad retirement security agenda of which Thomas seems supportive include automatic enrollment in 401(k) plans for new employees, and more flexible distribution rules for 401(k) and IRA accounts. For example, under current law the industry seeks to change, money must start to be withdrawn from 401(k)s and IRAs at 70 1/2.

The industry also is encouraging Thomas to include language in the broad package that would make all of the retirement savings and pension reforms contained in the 2001 tax relief law permanent.

Numerous proposals for changes in tax law are being developed by the industry for consideration by House Ways and Means Committee Chairman Bill Thomas, R-Calif., whose staffers are drafting a broad Social Security reform/retirement security package.


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