The Pension Protection Act of 2006 ("PPA") brought favorable tax changes for long-term care insurance funding beginning January 1, 2010. These important provisions could have a large impact on consumer planning for long-term care events. New tax breaks were added that make long-term care insurance more attractive for many people. The new law permits long-term care riders on annuity contracts. Formerly, these riders were only allowed on life insurance contracts. Furthermore, one of the provisions permits the use of a non-qualified annuity to pay for long-term care insurance premiums tax-free. An annuity that has grown substantially in value will eventually incur taxes on the gain. However, the client may be able to take advantage of a 1035 tax-free exchange to fund their long-term care insurance premiums.
The PPA will likely spur an increase in the availability of life insurance policies and annuities with long-term care riders. Moreover, another provision of the PPA will provide tax breaks for acquiring such long-term care coverage. The big message in these changes is that congress realized that there needed to be incentives for individuals to plan for their future long-term care needs.
The PPA laid the groundwork for hybrid long-term care policies, which were developed in response to consumer and agent demand when traditional long-term care insurance just wasn't making the cut. Hybrid policies work in several ways. One type of policy links long-term care to a life insurance policy. The insured deposits a set premium into a policy. Depending on the age, gender, and health of the insured, an immediate pool of money is created for long-term care. At the same time, an immediate death benefit is created in life insurance.
Another example of these combination policies links long-term care benefits to a single premium tax-deferred annuity. This product begins as an annuity with either a lump sum direct deposit or structured deposits made over time. If no long-term care is needed the annuity gains interest and functions like any other fixed annuity. But if the owner/annuitant needs care in a nursing home or elsewhere, a formula will be used to determine the amount of the monthly benefit available to the owner/annuitant.
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Dale M. Krause, J.D., LL.M., has provided Medicaid Compliant Annuities to elder law attorneys, and their clients, throughout the United States. As a result of his practice, Mr. Krause has been labeled "The Pioneer of Medicaid Compliant Annuities."
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