9 minute read
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
Americans are living longer than ever before — about 30 years longer, on average, than a century ago. is was the word from leading scholars who participated in the Century Summit, a four-day virtual conference convened in December 2020 by e 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. e 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 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 e 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 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
$125,000
Initial premium
$3,000/month
Total initial LTC benefit balance
$3,000/month
Lifetime continuation
is provision can work with any cash asset like a savings account, but it works exceptionally well with in-force annuities and here’s why.
Interest in an annuity grows taxdeferred. Indeed, that’s one of the excellent features of the annuity.
But when annuitants begin to take money from the annuity, the interest acts as ordinary income. is causes their total income to increase, potentially putting them in a higher tax bracket. is scenario is often referred to as a tax time bomb. e PPA allows retirees to take the income from their assets tax-free.
Reallocating existing assets such as cash, savings, certificates of deposit or other annuities into an LTC annuity can help maximize those assets if they’re needed to pay for qualifying LTC expenses. And any funds not used for LTC can pass on to heirs.
Annuity-based products feature two accounts: the accumulated cash value and the long-term care accumulated cash value. Money is credited interest each month in both accounts, with a higher rate applied to the long-term-care accumulated value (LTCAV), allowing higher growth to provide more assets to help pay qualifying LTC costs.
Withdrawals are allowed from the LTCAV to help cover qualifying LTC expenses, subject to the monthly LTC limit.
Clients can exchange an existing nonqualified annuity for one that is eligible for the PPA advantages via either full or partial 1035 exchange.
Here’s an example: Ellen is 78 years old, a nonsmoker and 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 a lifetime continuation of benefits option, Ellen can receive $3,000 per month for her entire lifetime.
Underwriting for LTC annuities is slightly more flexible when compared with traditional LTC insurance. e application consists of several health questions and a brief telephone interview. No medical exams are necessary.
Benefit Triggers
Benefit payments are triggered in one of two ways: If the annuitant cannot perform at least two of six activities of daily living, which include bathing, maintaining continence, dressing, eating or feeding, toileting (including getting on and off a toilet) and transferring (such as from a bed to a chair), or the annuitant requires care as a result of a severe cognitive impairment (such as Alzheimer’s disease).
LTC Withdrawals
Actual LTC expenses will be paid from the LTCAV, up to the stated monthly LTC benefit limit. The client will receive the lesser of the monthly LTC limit or the actual charge for care.
Jennifer Lang is a financial services professional with Jennifer Lang Financial Services, specializing in annuities and long-term care solutions, with offices in Houston and Atlanta. She may be contacted at jennifer.lang@innfeedback.com.
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Delta Started It. Will Others Follow?
Delta Air Lines became the first major employer in the U.S. to impose a monthly surcharge for employees who have not been vaccinated against COVID-19.
Delta CEO Ed Bastian said that as of Nov. 1, the company will charge all unvaccinated employees an additional $200 per month, noting every Delta employ-
ee hospitalized with COVID-19 has cost the airline an average of $50,000 per stay and that “all Delta employees who have been hospitalized with COVID-19 were not fully vaccinated.”
With 68,000 employees, Delta self-insures, setting aside employee premiums and company contributions in a separate fund to pay for health care. Employers that self-insure are not subject to state regulations regarding health insurance.
According to Kaiser Family Foundation, 67% of those who have employer-sponsored health insurance plans are covered by self-insured plans.
PERCENTAGE OF UNINSURED REMAINED STEADY
Despite the economic ravages of the COVID-19 pandemic, the percentage of adults in the U.S. without health insurance held steady at approximately 11%, according to a study by The Urban Institute.
Researchers found that between
March 2019 and April 2021, the percentage of U.S. adults reporting they had employer-sponsored coverage declined from 65% to 62.3%, a decrease of approximately 5.5 million
adults. The share of adults reporting public coverage increased from 13.6% to 17.5%, an increase of approximately 7.9 million adults.
Medicaid and the health insurance marketplaces provided many people with a safety net that allowed them to maintain coverage, researchers said.
HEALTH INSURERS SHOW DECLINE IN PROFITS IN 2Q
Five of America’s largest health insurers reported more than $11 billion in profits in the second quarter — a decline from the same period last year.
UnitedHealth Group reported $4.37
billion in profit and increased its earnings outlook after beating expectations for profit and revenue. Anthem reported $1.8 billion in profit and said COVID-19 variants and slowing vaccination rates added uncertainty to the second half of the year, but still raised its earnings forecast.
Humana, which provides coverage to a large share of seniors, had the most dramatic drop in earnings compared to the same period the year before — with a 68.7% drop to $588 million. CVS Health reported $2.78
billion in profits and said starting next summer it would raise wages to $15 an hour — at a cost of $600 million over three years.
Cigna reported $1.47 billion in prof-
it, but its stocks fell after the company reported costs for providing medical services were starting to increase.
UNITED HEALTHCARE REACHES $15.6M SETTLEMENT OVER MENTAL HEALTH
United Behavioral Health, United Healthcare and Oxford Health have agreed to pay a total of $15.6 million to settle allegations that they violated the federal mental health parity law.
An investigation by the U.S. Department of Labor’s Employee Benefits Security Administration found that, dating back to at least 2013, United reduced reimbursement rates for out-of-network mental health services, thereby overcharging participants for those services, and flagged participants undergoing mental health treatments for a utilization review, resulting in many denials of payment for those services.
QUOTABLE
One college kid popped off and said, ‘This guy used to play in the major leagues?’
— Corey Koskie, former Minnesota Twins third baseman, who now sells health insurance
The companies, which administer employer-sponsored health plans, are accused of systematically reimbursing out-of-network mental health services more restrictively than they reimburse out-of-network medical or
surgical services. Under the Mental Health Parity and Addiction Equity Act, mental health treatments must be covered on the same terms as medical and surgical benefits.
DID YOU KNOW ?
About 1.6 million more Americans had some form of health insurance coverage in 2020 than in 2019. Source: Centers for Disease Control and Prevention
