ANNUITY
Defusing The Annuity Tax Time Bomb How a provision of the Pension Protection Act can help your clients take income from their annuity tax-free to pay for longterm care. By Jennifer Lang
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mericans are living longer than ever before — about 30 years longer, on average, than a century ago. This was the word from leading scholars who participated in the Century Summit, a four-day virtual conference convened in December 2020 by The Longevity Project and the Stanford Center on Longevity. But because people are living longer, they face the likelihood of dealing with more health issues later on in life. According to the Administration for Community Living, a part of the Department of Health and Human Services, about seven in 10 people (69%) turning 65 today will need, at some point, some type of long-term-care (LTC) services — either at home, in their community or in a facility. Typically, women need care longer (3.7 years, on average) than men do (2.2 years). Long-term care needs are unpredictable. Some diagnoses can require many years of care. A more detailed look at long-term care, published in 2015 by Health and Human Services and revised in 2016, looks at the risk of people developing a disability and needing help with “activities of daily living,” such as bathing, dressing and eating. The study estimates that about half (52%) of Americans turning 65 today will “develop a disability serious enough” to require long-term services and support — and about one in six (17%) will end up spending at least $100,000 out of pocket for such services. So what’s your client’s alternative to spending down their savings? Liquidating other investments is an option, but that 36
might put a surviving spouse at risk. It’s a safer bet to use life insurance and annuities with LTC provisions. Nearly three in four nonqualified annuity owners intend to use their annuity to cover the potential expense of a critical illness or nursing home care, according to a survey conducted for The Committee of Annuity Insurers. Congress realized that we have an extended health care crisis in the U.S. So in 2010, the Pension Protection Act (PPA) became law. However, one of the most important and powerful provisions of the PPA Act has been entirely overlooked by many over the years. In retirement, retirees depend on their assets to generate income. Reallocating an existing asset that they won’t need
InsuranceNewsNet Magazine » October 2021
to use for income can help protect them against an unexpected LTC event. An LTC annuity can help clients convert taxable assets to tax-free assets when they are used for qualifying LTC. Clients can use a single premium deferred annuity to help protect their retirement income stream if the need for care arises. A one-time premium can provide a tax-efficient way to help pay for LTC. And the issuing life insurance company may credit a higher interest rate to amounts withdrawn for qualifying LTC expenses. By choosing to pay with a single premium, clients are guaranteed that no more payments will ever be required. Also, there are no unexpected premium increases sometimes seen with traditional long-term-care insurance.
Ellen, 78, nonsmoker, in good health With a single premium of $125,000, Ellen is guaranteed $3,000 per month to help pay for qualifying LTC expenses she may incur. And by selecting the lifetime continuation of benefits option, Ellen can receive $3,000 per month for her entire lifetime.
$125,000
Initial premium
$3,000/month
Total initial LTC benefit balance
$3,000/month
Lifetime continuation
Source: Jennifer Lang Financial Services
