For some time, insurance buyers have been able to buy annuities or life insurance that included a long term care benefit. Here’s how the policies generally work. In many cases, some of the earnings from the cash value in the life policy or the cash value of the annuity are used to pay premiums for long term care insurance protection. A hypothetical example might look like this:
Our hypothetical investor, a 65-year-old man, pays a premium of $50,000. He obtains a life policy with a death benefit of $74,718. He also gets long term care insurance amounting to $149,436, to be used at a rate of $3133 monthly when the policy owner qualifies for long term care benefits. So far, this may look attractive because there are no annual pout of pocket premiums—the only payment is the single payment of $50,000. Additionally, assuming that there are no prior withdrawals or payments for insurance benefits, the insurance company will guarantee the $50,000 which can be withdrawn at any time.
The $50,000 cash value is credited with interest each year at a gross and guaranteed minimum rate of 4%. But from the accumulated cash value, deductions are made to pay for the life insurance and the long term care insurance. Currently, the deductions from the policy to pay for the long term care insurance are taxable to the policy owner because the IRS views them as payments from the life policy (and because this policy was purchased with one large premium, IRA classifies it as a modified endowment contract and taxes the first withdrawals as ordinary income).
Good news. The Congress would like everyone to have long term care protection so that as of 1/1/10, these combination policies where a life policy or long term care annuity is funding the long term care insurance will no longer generate taxable income to the owner. The change applies to policies purchased after 1996, but through 2009, owners of these combination policies will need to make the tax payments each year but no payments thereafter. Also, one may consummate a tax-free exchange an annuity or life policy after 2009 for one of these combination polices.
If you have been interested in long term care protection without annual out of pocket costs, these single premium annuity or life policies may be the answer. Check the enclosed coupon or call of our office and we can get you a sample policy.