Leon Mehl

On August 17, 2006, the President signed into law The Pension Protection Act of 2006 (the “Act”)*. Individuals owning certain annuity contracts can now have long-term care benefits either contractually or by purchasing a rider for an additional premium. Effective January 1, 2010, the Pension Protection Act allows the cash value of annuity contracts to be used to pay premiums on long-term care (LTC) contracts. The payment of premiums in this manner will reduce the cost basis of the annuity contract. In addition, the Act allows the purchase of an annuity contract with such a rider to utilize a tax-free transfer under Section 1035 of the Internal Revenue Code of 1986, as amended (“IRC”). This provision may prove beneficial to individuals who own annuities with a low cost basis (low original premium paid) and those who are not in the best of health. Another option is to utilize the cash value of an annuity to purchase long-term care insurance. This provision is effective for exchanges which take place after 2009. Premium sources for this type of policy can be by way of a 1035 exchange or any after tax money, such as savings or money market accounts and/or CDs.

An example of how an annuity-based long-term care strategy could help someone is illustrated on the right. For this example, we will call our client Bob, age 70, and recently widowed. His children live out of town and they were very concerned about what would happen if dad needed some additional care in the future. Since Bob had some health concerns and was recently diagnosed with diabetes, along with a history of heart disease, he was not a good candidate for traditional long-term care insurance. However, by taking advantage of an annuity based long-term care strategy that takes advantage of the Pension Protection Act, Bob could likely be insured. By taking his $200,000 fixed annuity with a cost basis of only $100,000 (i.e. the premium he actually paid for the annuity) and using the IRS 1035 tax-free exchange from his existing fixed annuity to a new annuity that complied with the rules laid out in the Pension Protect Act, Bob’s $200,000 fixed annuity could continue to earn interest. However, if he needed long-term care to pay for qualifying health needs like home care, assisted living, or skilled care he now had a long-term care pool of money equal to $499,870.