My Annuity is a Substitute for
Long Term Care Insurance
This half truth does not come so much from
industry personnel; rather it derives from a
pseudo - comfort that many consumers feel
about their annuity that it should be utilized as the
"last resort" for long term care needs.
This is true, of course, and it can be used for this
I addition, I have always said that that an annuity can be represented by the acronym S.N.A.P.
Sickness - Available for Sickness and Long Term Care
INcome - Available for Income for Life
Asset Protection - Preservation of Lifelong Earnings
But despite the efficacy of an annuity for Long term Care needs, you can even do better with some of the new Pension Protection Act compliant annuities out there for the purposes of Long Term Care needs.
The Pension Protection Act of 2006 dealt primarily with the manner in which U.S. companies had to administer pensions for employees, but there were amendments that also dealt with the tax treatment of annuities and long term care policies. In light of the country's age wave tsunami, the Federal government authorized a new tax treatment for those specific annuities in the marketplace that contained language offering long term care benefits. Essentially, the withdrawals from such annuities for purposes of long term care expenses, effective January 1, 2010, became 100% federally tax - free, regardless of any taxable gain existing in the contract.
You can essentially have a $1,000,000 annuity that you bought for $100,000 twenty years ago, and transfer it to a Pension Protection Act compliant annuity free of charge (assuming there are no early cancellation penalties on the existing annuity). Every dollar taken out for long term care would be 100% federally tax free.
This is startling news for a portion of retirees who either hold annuities, or have annuities with gain in them, or for anyone keen to obtain long term care protection without obtrusive underwriting.
And the mass of mankind is unaware that that this new law even exists.
The result of this legislation from the federal governments perspective, of
course, is that Uncle Sam is now encouraging seniors to rely on
themselves to fund any potential long term care concerns. It is no secret
that there simply will not be a budget to fund Medicaid facilities for the
millions of aging boomers. Perhaps this is why they are foregoing
millions in tax revenue by allowing this legislative change.
The tax savings, however, are not the only gift that the consumer receives in this new arrangement.
Many of these "long term care annuities" actually have optional LTC riders built into them, called Continuation of Benefit Riders (C.O.B. riders) that extend the benefits usually on average by a factor of 2.
So in a $100,000 annuity for a 65 year old female, for example, without the optional COB rider, she would receive her $100,000, plus interest, in a tax free manner for any long term care needs she may have, regardless of any taxable gain in her annuity contract.
However, If she chose the COB rider in addition to the base
policy, the insurer would provide a grand total of $253,038 in
tax free long term care coverage if she ever needed it. That is
an additional $153,038 of long term care money. The insurer
breaks the benefits down on a monthly basis to about
$4,251 / month for no more than 60 months.
The COB rider charges an annual fee that comes out of her policy value
that pays for this additional LTC benefit. That fee's cost will depend
upon her age at policy issue. Because the COB fee often equals the interest
earned in the policy, this type of annuity will not grow much for
purposes other than long term care.
However, for Long Term Care purposes, it is quite the annuity !
These LTC annuities are also written with minimal underwriting, usually a simply phone interview with some basic medical questions included.
For more information on a specific Pension Protection Act compliant insurance products, make sure you check out the Annuity Reviews under State Life Asset Care / Annuity Care.