The House of Representatives passed pension reform legislation on Dec. 15, 2005, that contains clarifications and enhancements for combination insurance products providing long term care insurance coverage, including LTC insurance provided as part of an annuity contract.
The Senate already has passed pension legislation, albeit without any annuity-LTC tax provisions. Now, in early 2006, negotiators in a House-Senate conference are expected to seek to reconcile differences between the bills.
The House legislation is H.B. 2830. If it is enacted, annuity-LTC products would provide consumers with a valuable additional tool to use in planning for retirement and possible LTC needs. This tool would offer an efficient means of delivering LTC benefits as well as some attractive tax advantages. In addition, insurers would gain considerable flexibility in designing new products to meet customer needs.
Much attention has been given to annuity-LTC combinations in recent years, in part because such products may be a more attractive option than stand-alone long term care insurance for many prospective purchasers.
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Under combination designs, LTC insurance benefits after the onset of chronic illness often come partially from the annuity’s cash value. This is similar to the partial self-funding of benefits present under cash value life insurance and health savings account/high-deductible health insurance arrangements.
This use of the annuity’s cash value, together with other factors, often allows an insurer to provide a pure LTC insurance element–i.e., the insurer’s net amount at risk–at a substantially reduced cost relative to stand-alone designs.
In addition, the annuity’s cash value allows the product to be used for retirement income and emergency cash needs. It also ameliorates the “use it or lose it” concern that some people have with respect to stand-alone LTC insurance.
One of the most important aspects of the House’s annuity-LTC legislation is that it clarifies that an annuity contract–deferred or immediate–can be offered in conjunction with “qualified” long term care insurance.
Under current law, arguably this already can be done, especially where, for example, a long term care rider to an annuity is separately regulated as LTC insurance under state law. However, current tax law is unclear in this regard because, for example, the cash value under the annuity portion may violate the limitations on cash values that apply to qualified long term care insurance.
H.B. 2830 eliminates the tax uncertainty with respect to the annuity-LTC product. Thus, it removes this artificial barrier that currently inhibits insurers from exploring opportunities with this design.