The Pension Protection Act: How it Changed Combination Products

When it comes to combination products, the Pension Protection Act changed the rules on taxable distributions, allowing policyholders to withdraw money from the base policy to fund long term care without having to worry about taking a tax hit.

“What used to happen was when the long term care portion of the policy collected money from the base policy, that was considered a taxable distribution from the policy,” said Jason Goetze, an LTCI specialist in the greater Milwaukee area. “If the total premium for the life insurance was $2,000, and the long term care portion was $1,000, then in essence, what’s happening is you’re putting $2,000 in the life insurance and the life insurance is paying $1,000 to the long term care. The IRS viewed that as a taxable distribution.”

Another benefit of the PPA is that it may force insurers to redevelop their combination products. Before the PPA, said Goetze, most products tied a long term care benefit to the base policy values — meaning a policyholder with a $250,000 life insurance policy would have $250,000 in long term care benefits. Many companies began redesigning existing products and rolling out new ones after the PPA was passed in 2006, and Goetze expects even more innovation over time.