At least six annuity companies are now offering deferred annuities that include qualified long term care benefits.
More such combination products are likely to debut, predicted Cary Lakenbach during a presentation here at a combination products panel discussion.
Why? This transforms a tax-deferred vehicle (the annuity) into a tax-free vehicle (when the annuity pays out LTC benefits), said Lakenbach, president of Actuarial Strategies, Inc., Bloomfield, Conn.
This is a “very powerful device,” he continued. “It is not available with other investments other than life insurance with long term care.”
The same demographic that buys annuities alone will be interested in combination products like this, Lakenbach said, especially since the combined annuity and LTC features addresses both longevity and catastrophe risk.
The Pension Protection Act of 2006 is what enabled the tax-free aspect, indicated John T. Adney, of Davis & Harman, LLP, Washington, D.C.
Under PPA, the combination annuity/Q-LTC products must offer qualified LTC benefits, said Adney, noting that “qualified LTC benefits are excludable from income tax as are accident and health benefits.”
Adney stressed that for the LTC benefit payments to qualify as tax-free, the benefits must be paid as insurance. This treatment applies even when the annuity’s cash value is reduced, he added.
He noted that the tax treatment of the Q-LTC benefit is much like that of life insurance policies that offer qualified LTC benefits. The Health Insurance Portability and Accountability Act of 1996 permitted such life/Q-LTC combination products to pay their qualified LTC benefits on a tax-free basis.
The effect of the PPA rules regarding combination annuity/Q-LTC products is to clarify that inside buildup of deferred annuities may be paid tax-free as qualified LTC insurance, Adney said.
These combinations are treated as distributions, but are not includable in income, he added. Such charges will reduce the basis or investment in the contract, but not below zero, he continued, noting these charges are not deductible.
The new rules apply to contracts issued after 1996, said Adney, but only in taxable years beginning after 2009.