Do you have long term care insurance (LTCi), or are you looking at purchasing LTCi? Would you like to possibly save money on the premiums? If so read on:
Many people have annuities as part of their investments. Many more have CDs. These investments may be housed in either tax qualified vehicles such as 401Ks or IRAs or they may be housed in non-qualified annuities. For those who have non-qualified annuities - As of January 1, 2010, a non-qualified immediate annuity directly funding a Long Term Care insurance policy (LTCI policy) as defined in Section 7702B of the Internal Revenue Code will be reported as a non-taxable 1035 Exchange.
So what does this mean to you? Most people pay LTCi premiums with after tax dollars, even though these policies are most often “tax qualified”. To deduct LTC premiums, the premiums when added to medical expenses must exceed 7 1/2 % of your adjusted gross income, and you must file a long form to take advantage of any possible deduction. Therefore, as a practical matter, most people are not able to deduct their LTCi premiums.
However, as of 1/1/10, if you have a non-qualified annuity you may be able to use annuity income or proceeds to pay tax qualified LTCi premiums. If one was in a 15% tax bracket and received $3,000 in distribution this year and if they are in a 15% tax bracket, they would pay $450 on this distribution. However, if one used their annuity to pay $3,000 a year for a tax qualified LTCi policy, in a 15% tax bracket, may save the $450 in taxes. ($3,000 x 15% = $450). Depending on how much the client has earned from their annuity, and their tax bracket, the actual savings will vary, but the more the annuity has grown in value, the greater the potential tax benefits. (Note: you cannot use IRAs or 401Ks qualified annuities.)
In fact, people who have CDs coming due, they may consider moving this money into a single premium non-qualified annuity. This annuity could then pay your premiums for you by using a 1035 exchange (premiums would be paid from directly from the annuity to the LTC insurance company). While paying LTCi premiums in this manner is new, the 1035 exchange procedure has been around for years. Even life insurance policies with large cash values can be used to pay LTCi premiums. Seek advice from professionals when gathering information about this issue and be sure to understand how this would work including any surrender charges. Details are most important, and your savings may be fairly significant.
No one wants to dwell on the statistics of the percentage of people that will use LTC services, but they are staggering. For example 70% of all couple will have need for LTC services. If you wish to protect your “nest egg” and/or help provide funds to pay for these types of services it is prudent to gather information and consider LTCi. This is just one way you may be able to buy a plan to meet your needs and meet your budget.
Always seek professional assistance when considering investments, LTCi, or any insurance products. Feel free to contact our office for information concerning the possible use of non-qualified annuities to pay LTCi premiums and save tax dollars.