New Tax Changes Provide More Long-Term Care Insurance Options

Americans will soon have more tax-advantaged options for long-term care insurance protection according to the American Association for Long-Term Care Insurance.

 Approved changes to the Pension Protection Act included some key provisions that take effect January 1, 2010.  The changes provide significant enhancements to nonqualified annuities that are coupled with tax-qualified long-term care riders.   Starting with the new year, benefits paid out of these plans are received income tax-free. 

This is unprecedented according to financial industry experts and is expected to make long-term care planning highly attractive for an increased number of individuals.   Prior to the new law, payments of tax-deferred gains within an annuity were taxed when paid to the individual.  

Some 8.25 million Americans currently own long-term care insurance purchased on either an individual basis from an insurance professional or through an employer-offered plan.  Financial planners anticipate heightened interest by consumers intrigued by the concept of an insurance vehicle that can provide protection against the risk of long-term care, but that can also provide cash values even in the event that no long-term care services are ever needed. This overcomes one of the major concerns of consumers regarding standalone long-term care insurance; the fear of a “use-it-or-lose-it” proposition.

In addition, the law also allows for 1035 exchanges into combination plans. This is noteworthy in light of the many trillions of dollars deposited in existing annuities.  The Association reports that given the new tax advantage and the compelling need for long-term care planning, there will be a significant number of insurance companies who will be introducing combination annuities on or after Jan. 1, 2010. 

Annuities that provide the tax-free long-term care benefit will generally allow the individual to withdraw a limited percentage of the account on a periodic basis.  For example, withdrawing two percent month from a plan with $250,000 of value would provide roughly a $5,000 monthly benefit.  

As a result, financial planning professionals believe the new combination annuity products will be suitable for those with substantial assets already deposited in annuity contracts or those with liquid funds available for transfer.  For millions of others, traditional long-term care insurance remains the most cost-effective and affordable planning strategy.

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