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Wealth ... Estate Planning

Long Term Care and the Pension Protection Act

by Joe Heverin, Multi-Financial Securities, Washington, N J

In 2010 the enactment of the Long-Term Care Insurance Tax provisions of the Pension Protection Act has placed a brand new light on Long Term Care.

The provisions of the Pension Protection Act of 2006 (P.P.A.) provided Federal Income Tax protection for Long Term Care Insurance products effective January 1, 2010.

This act opened the doors to combination products or hybrids. There have been universal life products with Qualified Long Term Care (QLTC) for 20 years there was no annuity counterpart until the P.P.A.

The current product design is now taking shape as more and more insurance companies now respond to the new legislation and baby boomer longevity.

The question today is why has the Federal Government encouraged the life insurance industry to create new products that have tax incentives and make much more sense in terms of estate and longevity planning.

There are several answers to this situation. The initial response to Long Term Care was two fold:

  1. You could spend down all your assets and become a ward of the state by using Medicaid as your Long Term Care provider. For those with little or no retirement assets this would work well and many pre baby boomers used this method until the financial burden placed on the states drove many to bankruptcy.
  2. Those with more assets would try other alternatives such as gifting assets out of their estate so at the time when Long Term Care was needed they too could apply to Medicaid.

Some insurance companies began to sell Long Term Care Insurance designed to provide long term care income in the event that this situation developed. The problem here is several fold:

  1. The earlier you purchase LTC insurance the lower the premium initially
  2. The coverage came with a use it or lose it factor.
  3. The recent government health care take over has made it impossible for insurance companies to estimate the future cost of Long Term Care.

The by product has been tremendous increases in Long Term Care premiums and a business decision by many companies not to offer new Long Term Care policies.

To date the best answer to many problems that current and future retirees may face is the P.P.A. and the new design of Universal Life.
For the individual concerned about a host of post retirement planning needs these new hybrid policies may be the best thing yet created. Like all creations some are better than others.

There are several things now happening in America that add value to the hybrid concept.

  1. Wealth Transferral – Approximately 1.8 trillion dollars will pass to the baby boomers in the form of inheritance.
  2. Life Expectancy will continue to increase adding longevity to singles and couples alike.
  3. The need for quality health care will be under greater demand and will be more expensive.
  4. The demand for Long Term Care will increase and government financing of such care will decrease.

The ideal Universal Life with L.T.C. should be designed to provide the following:

  1. To provide an estate enhancement immediately upon issue. This would provide incentive to transfer an asset from one investment to another, such as taking money from an IRA, 401(k) or annuity.
  2. Structured to take advantage of the current (MEC) provisions modified endowment contract where premium payments can be set for seven years or more. Policy loans and withdrawals tax free.
  3. Use an investment index strategy with investment options in four strategies. (No Cap in two) Guaranteed return 2.5%

For older clients this represents the opportunity to transfer assets from a taxable position to a current non taxable position. Thus we are creating a non qualified Roth IRA with no government restrictions. Our primary goal for older clients is to maximize the death benefit, which in turn maximizes the terminal and chronic illness factor. The outcome will provide estate protection of illiquid assets and relief from children having to provide Long Term Care benefits to parents.

The cash value element can be utilized by older clients as financial banking instrument for a variety of personal and family financing needs.

For our younger clients the primary use of this program will be advantages provided by the cash value accumulation. If we educate our clients to use the cash value as their personal bank we will help enable them to meet all future obligations that may have been relegated to banks or financial institutions.

They may use their cash values for loans to purchase autos or anything that may have been paid for with a time payment plan. The difference is they repay the loan and interest to themselves.

In my estimation you have created a family business that properly executed can be used for college funding as well as retirement planning. When one has been around as long as myself and involved in every type of retirement planning vehicle created by man and government one can conclude there is a better way.

The story of the very wise farmer who looked at all the government sponsored retirement plans and asked the question, “What would you rather pay tax on, the seed or the harvest?”

When you add in all the government restrictions that come with IRAs, 401(k), 403(b) and most pensions in general you conclude that you get a little tax break now for a whole lot of government restrictions on your savings and use of your money. So when you look at what the hybrid universal life brings to the table, especially with the Pension Protection Act incentive you begin to realize that a good thing just got better.

Part of the P.P.A. is an insurance exchange policy that should be noted. We have always had a 1035A exchange between insurance carriers, however these exchanges have been modified to meet the new rules under P.P.A.

The old 1035A exchange is still in force and allows a life insurance policy to be exchanged for another life policy or annuity without taxation.

The P.P.A. regulation allows the following, both life insurance policies and annuities can be exchanged for Long Term Care contracts, also in 2010 you may add Long Term Care riders to annuity contracts.

Rules of Exchange:

  1. A life insurance policy without a Long Term Care Rider can be exchanged for a life insurance policy with a qualified Long Term Care policy rider.
  2. Conversely a policy with a qualified Long Term Care rider can be exchanged tax free for a life insurance policy without a Long Term Care rider.
  3. A life insurance policy with a qualified Long Term Care rider can be exchanged tax free for an annuity contract without a qualified Long Term Care feature, or for a Long Term care stand alone policy.
  4. An annuity can be exchanged into another annuity with or without LTCI rider or a stand alone Long Term Care policy.
  5. However, neither an annuity contract nor a traditional LTCI contract can be exchanged tax free for a life insurance policy with or without a qualified Long Term Care rider.

The 1035A partial exchange has always been controversial; however you can use the partial transfer to pay for stand alone LTCI policy.

This provides a general overview of the subject matter. Before taking any actions on your financial decisions consult with a certifed CFP or Long Term Care Specialist to discuss your specific needs and options.


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