The Pension Protection Act of 2006 affected a lot more than just pensions. One of the biggest impacts is being felt in the long-term care insurance options.
The provision of the PPA most likely to affect your current LTC insurance or future purchase choices is what is often referred to as "Hybrid" LTC. There are two main forms of hybrid LTC insurance options you may encounter:
Annuity-based: Annuities that include a LTC rider.
Life insurance-based:
How does a hybrid plan work? The annuity option.
Under the terms of part of the PPA, distributions from annuity contracts used to pay premiums for the annuity's LTC rider are excluded from taxable income. Since part (or all) of most annuity distributions is taxable as ordinary income this can represent a tax savings of 25-36 percent of the distribution, depending on where you live and the tax basis of your contributions to the annuity.
The hybrid option has been available for at least the past five years, but the tax advantage conferred by the PPA is likely to enhance the appeal of an annuity with the LTC rider.
Some annuities have traditionally waived any surrender charges when the funds are taken out to pay eligible LTC expenses, and some have gone even farther. In a few plans, you may be able to get LTC coverage for up to three times the amount you've built up in the annuity. And with the advent of the PPA provisions (taking effect in 2010) annuity companies are certainly looking at ways to make their plans even more attractive from a LTC perspective.
The life insurance option.
Life insurance policies will also be able to offer LTC riders that can be paid with tax-free withdrawals from the insurance policy's cash value, again beginning in 2010.
Policies that combine whole-life and LTC insurance already exist. These policies allow "acceleration of death benefits" to pay LTC benefits on the now standard tax-free basis but the premiums you pay are still taxable.
The downside.
Hybrid annuity or life insurance policies with the LTC rider do face a major potential problem: Older policyholders who may no longer need or want the life insurance/annuity component might have to keep the entire policy in force in order to maintain the LTC rider.
And the full tax benefits aren't available until 2010.
Looking ahead. Although the tax-free benefits don't begin for two more years, looking at annuities and life insurance with LTC riders can still be a good option, provided:
You have a need for the other benefits of life insurance or annuities.
You are in your 50s or 60s with several years to accumulate the funds in either life insurance or an annuity to allow the tax-free benefits to become significant.
If you already own life insurance and/or annuities without the LTC rider, consult your financial advisor before making any changes or trying to surrender a policy. Sometimes good old traditional LTC insurance is still the best choice.
Web sites for LTC laws and changes
www.eldercare.gov – The federal Eldercare Locator can put caregivers in touch with local senior services.
www.familycaregiving101.org – Two associations teamed up to help new caregivers learn the ins and outs of their roles.
www.longtermcare.gov – This new federal website spells out senior living alternatives and the various payment options.
www.medicare.gov/nhcompare – Compare nursing home quality data and find state inspection agencies at this federal Web site.
www.strengthforcaring.com – Connect and chat with other caregivers at this site, sponsored by Johnson & Johnson.
This column is provided by Anthony Engrassia, ChFC, LUTCF, is a financial advisor with Wealth Management Strategies in Rocky Mount.
