What kind of annuity designs make sense, especially in the variable annuity world, in view of the new Pension Protection Act of 2006?
As readers will recall, the PPA grants suitably designed long term care contracts sold within annuities the same favorable tax treatment accorded to LTC insurance contracts sold on a stand-alone basis.
Some key tax act considerations will help focus on the annuity opportunities.
One favorable treatment under the PPA is that annuity values used to pay for charges for qualified long term care insurance (Q-LTC insurance) are not taxable.
This enables gains in an annuity to escape, legitimately, income taxation under certain circumstances. If a consumer is funding a stand-alone contract, the person is likely to be explicitly or implicitly earning some interest income on the assets used to fund the contract. The tax has to be paid. By comparison, annuities with Q-LTC insurance features have an advantage over the stand-alone situation. This is due to the tax treatment under PPA, as noted above.
The Q-LTC insurance benefit payments are just as income-tax-free as those from a qualified stand-alone contract.
The framers of PPA didn’t just grant these advantages at no cost. We know that the annuity combination will have higher deferred acquisition costs than an annuity without attached LTC insurance. (This applies only to 2010 and later.)
Thus, the critical question is this: Can favorable annuity and Q-LTC insurance designs be built that take advantage of the favorable tax treatment?