The provisions of the Pension Protection Act of 2006 have made owning permanent life insurance and fixed annuities much more valuable by adding benefits and tax incentives. By extending tax benefits to their linkage to long term care insurance, these traditional low financial risk vehicles can now better serve multiple roles.
Our federal government is saying, we want you to solve your own long term care funding problem, here is another way to help you facilitate that.
Traditional cash value life insurance policies, with predictable guarantees have been used for over 160 years for death benefit protection and accumulation of cash wealth. Recently, amid the financial turmoil, they have been viewed as a safe, low correlation, low volatility asset alternative as have fixed annuities.
Fixed annuities have been popular as they typically pay higher returns that CD’s and have no taxes due while they accumulate value. They also can provide guaranteed income for one’s lifetime.
While long term care insurance has traditionally been purchased by the individual, companies are increasingly recognizing its importance and including it among the options in an employee benefit package.
There are four basic ways to fund long term care issues associated with an aging population.
• Government programs such as Medicare, which pays for up to 100 days of skilled nursing care which is not to be confused with custodial care, home care or assisted living.
• Medicaid, which requires that you spend down your assets and be impoverished before you can qualify for only nursing home care under Title 19.
• Self-insuring by having enough assets and income to afford the cost of care in your home, a nursing home or other community care setting.
• Purchase long term care insurance to pay the cost of long term care claims.
The alternative is to rely on family and friends to provide for your care in your final years, putting a huge burden on them.
If you look at a personal cash flow statement, long term care insurance is considered an expense with some age banded tax benefits for premiums paid. Granted there is a huge potential future liability that the expense protects against. Unless a long term care policy has a relatively expensive premium refund rider and policy didn’t pay claims, the policy expires when the owner does with no legacy value from the contract.
Linking long term care protection with a life insurance policy or annuity contract makes sense especially if the long term care is never needed. The legacy value becomes the death benefit or annuity contract value paid to the beneficiary.
For example, a female age 60 in good health who has $100,000 in CD’s or low risk mutual funds could reposition those assets into a linked LTC/Life product. Once approved, she could expect a death benefit of over $200,000 and a benefit pool worth over $600,000 in long term care benefits potentially paid out at $8,450 per month over 6 years, plus have a cash asset on her personal balance sheet.
In Connecticut, where $100,000 barely covers one year in a nursing home, positioning assets in these types of programs can leverage additional benefits from savings and reduce taxes.
For someone who would not qualify for a traditional long term care policy, long term care partnership plan, or a life linked long term plan for medical reasons, there is the annuity linked long term care option.
With these plans, the pool of long term care protection is typically two to three times the initial annuity premium. Even if the total cash value of the annuity is paid out in long term care claims, the total LTC benefit pool will continue providing benefits until exhausted. We are anticipating that these long term care- linked annuity policies will be approved shortly by the Connecticut Department of Insurance.
Prior to the recent Pension Protection Act changes, the internal policy costs of the long term care benefits associated with policies created with lump sums could be taxed to the policy owners, which is no longer the case. This makes the use of single premium policies a tax efficient means of providing long term care protection.
Additionally, rarely does the personal tax deduction for premiums equal the premiums paid, especially for younger policy owners. Mature policies can be exchanged without tax consequences using Tax Code Section 1035 for linked policies providing the long term care coverage as can other non-qualified assets. Using Section 1035, cash value from existing life policies or annuities can also be used to fund existing long term care policies.
People approaching retirement often evaluate their insurance needs and often the need for life insurance is diminished as dependents become financially responsible for themselves. This is an opportunity to reposition those policies to better reflect the protection needed.
The 2006 act also made provisions for using equity from tax deferred annuities to purchase long term care policies without tax consequences.
With the aging baby boomer population entering retirement years, the cost to society for funding their final years will be enormous if nothing is done. The pension reform act provides for additional long term care insurance options and creates a fresh opportunity to look at unlocking sources of accumulated wealth to address the situation.
For individuals who have mature policies, CD’s or other sums of capital that is on the sidelines waiting for a rainy day, now is a good opportunity to explore the new long term care funding options available.
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Thomas E. Brown, a resident of Simsbury, is an independent agent with 25 years of industry experience. Reach him at Marcus Insurance Agency in Wethersfield at 860-563-9353.
