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Navigate the PPA Act to consider all long-term care planning options

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Based on preliminary sales figures, 2010 is proving to be a successful year for the sales of linked benefit product offerings, such as life/long-term care (LTC) and annuity/LTC programs. Why? One reason is that the long-term care insurance (LTCI) provisions of the 2006 Pension Protection Act (PPA) clarify the tax treatment of linked products.

The basic provisions of the PPA include the following for products that feature tax-qualified LTC:

  • Effective 2010, LTC rider charges within life/LTC or annuity/LTC products are not considered a 1099 taxable distribution, but instead simply reduce the basis in the policy.
  • LTC benefits paid out of a non-qualified LTC/annuity plan are tax-free — which was not the case prior to 2010.
  • The PPA allows for some interesting 1035 exchange opportunities from existing life and annuity plans into combination products or stand-alone LTCI.

These newer products, along with stand-alone LTC offerings (including single pay) and group LTC available from employer groups, provide consumers with more choices than ever when planning for future LTC needs.

Of course, with choices comes confusion. How can an advisor assist a client to find the best solution for them? Don’t jump right into proposing a product type and carrier. Instead, keep an open and creative mind and start with these steps:

  • First, estimate the exposure based on current and future care costs. Using cost of care surveys, such as this one by Genworth Financial, helps to get an idea of the financial impact of LTC.
  • Estimate the monthly and overall exposure based on the cost of care and the fact that an average care event may last between three to five years. For example, if the client is located in Colorado and the costs average $80,000 per year currently, you may want to design a plan that will cover $6,666 of monthly LTC costs and have a total benefit available of $400,000 (five years of care).
  • Compile some preliminary health information to determine if certain planning/insurance types or insurance carriers may be filtered out.

Once the client has designed a plan, they need to decide how to fund it! Here are some strategies for specific client situations that are possible — thanks to the PPA and 1035 exchanges. Of course, along with the benefits there can be tradeoffs in exchanges that need to be considered.

  • Someone who owns a non-qualified annuity out of the surrender charge period. There is almost $100 billion of annuity dollars in this situation. If the client wants to, they can turn 1035 exchange into a linked LTC/annuity product and leverage the initial deposit two or three times to pay for LTC costs. Remember, benefits are then received tax-free out of the annuity.
  • Someone who has an existing life contract and wants to plan for LTC. If the need for LTC planning is greater than the life insurance need, that policy can be exchanged for LTC coverage. For example, it could be exchanged for a single-premium LTC policy. Or, it can be exchanged for a life/LTC policy that can leverage a face amount by three times or more.
  • Someone with a non-qualified deferred annuity who wants to buy traditional LTC coverage. Traditional LTC plans can qualify for state partnerships and have a lot of flexibility, so they may be desired. Some annuities can facilitate an annual partial 1035 exchange to pay the annual LTC premiums — without creating a taxable event for the owner. Again, if benefits are paid from the LTC plan they will be tax-free.

With careful guidance from their advisor, clients interested in LTCI can navigate through the many possibilities to find the LTCI solution that makes the most sense for their situation.

Tom Riekse Jr., CEBS, ChFC is managing principal at LTCI Partners, a brokerage general agency specializing in long-term care insurance. E-mail him at [email protected].