Public Law 109-280, better known as The Pension Protection Act (PPA), was signed into law into 2006 and it is one of the most important pieces of legislation Congress passed for retirement planning in recent history. For retirement planners and people mapping out their self-directed retirement financial plans, annuity solutions to retirement income are more popular than ever.
Specifically, I’m going to discuss qualified long-term care insurance, and not simply long-term care insurance, in general. In order to known the difference between qualified and non-qualified LTC insurance, we need to travel back to 1997 (with an effective date of December 10, 1998) and The Health Insurance Portability and Accountability Act (HIPPAA). If you’ve been to the doctor or dentist lately, you undoubtedly have heard the term “HIPA” because of the rules created in terms of medical privacy.
A lessor known portion of HIPPA is that it created standards and criteria for long-term care insurance policies to be qualified and created two separate classes of long-term care insurance, qualified and non-qualified. In order for a policy to meet the qualification standards, the insurance contract must offer certain benefits to the insured (buyer of the policy) and must have certain restrictions on its use.
In order to call a long-term care insurance policy qualified it must restrictions that include:
- Only provide long-term care insurance services
- Cannot reimburse expenses incurred for services or items to the extent that such expenses are reimbursable under title XVIII of the Social Security Act or would be so reimbursable but for the application of a deductible or coinsurance amount (in other words, no double-dipping of benefits)
- The contract must be guaranteed renewable (that in of itself doesn’t mean the contract’s premium can’t go up)
- The contract cannot have a cash surrender value that can be borrowed, paid, assigned, or pledged as collateral.
- Dividends and refunds of premium can only be applied as a reduction of future premiums.
- Used to pay for QUALIFIED long-term care services. It’s beyond the scope of this article to go into what type of long-term care is considered qualified.
The bulk of the Pension Protection Act focuses on reforms and changes to pension governance. One part, namely Section 844 of the Pension Protection Act opens the door to new and exciting ways to leverage your retirement savings, protect it from rising health care costs (namely long-term care), and allow you to pass more of your estate to your loved ones.
Effective January 1st, 2010, cash value withdrawals from specially designed annuity contracts to pay for qualifying long-term care expenses or to pay qualified long-term care insurance premiums, are no longer taxable income, but now considered as a reduction of cost basis. It gets better though.
Benefit payments from long-term care insurance riders on annuities (and qualified life insurance products) will not be taxable at the federal level or states that participate. To be clear, “a reduction of cost basis” means distribution withdrawals for long-term care (or long-term care premiums) from the annuity contract are non-taxable and will continue to reduce the owner’s annuity cost basis down to zero. The cost basis will not fall below zero.
The new PPA (Code Section 7702B(e)(1) allows insurance companies to sell annuity contracts with long-term care insurance riders as part of the contract. From a legal and tax practical view, the long-term care rider is considered a separate contract from the annuity contract. This opens the gate for cash to flow from the long-term care rider tax-free.
As you can imagine, not all annuity contracts available for sale will meet the very narrow qualification requirements. It’s important to speak with an insurance professional that is knowledgeable in both annuities and long-term care insurance. Many insurance agents and financial planners understand and sell annuities, but very few understand annuities and long-term care.
One way for you to be confident the advice you receive is correct and appropriate is to find out what advisor’s designations are. You want to speak with someone that holds the CLTC or Certified in Long-Term Care insurance.
Just because an annuity contract includes language such as “nursing home waivers” and/or “surrender charge waivers” doesn’t suggest it’s designed to be a qualified annuity contract. You want to read contract terms and language that includes “For taxable years beginning on or after January 1, 2010, this contract is intended to be a federally qualified long-term care insurance contract under Section 7702B(b) of the Internal Revenue Code of 1986 as amended”
The Internal Revenue Code Section 7702B(e)(4) restricts pre-tax dollars from funding qualified long-term care insurance policies. While after-tax dollars can fund a qualified long-term care insurance policy, the gains, and often significant gains are tax-free. It’s one of the only ways to grow your money and spend it without paying income tax on your gain. While that may mean there’s no such thing as a totally free lunch, it’s the next best thing.
Many companies offer long-term care insurance, but I only know of one company that offers a qualified annuity contract with a long-term care rider (and this part is so important) that have the flexibility to offer clients a lifetime long-term care benefits option as part of their retirement plan. You may not know how long you’re going to live, albeit with OneAmerica’s Annuity Care products, it’s possible to ensure you will never outlive your ability to pay for long-term care needs.
Because insurance in general and annuities specifically are regulated on a state by state basis, you will not want to rely solely on the information here, but rather, you will want to talk to someone licensed in your own state that has reviewed and understands your situation and needs.
One last note about long-term care insurance and financial planners. I remain critical of many financial planner practices, “advice”, and often high fees relative to their clients portfolio performance. But I’m especially disapproving of any planner that dismisses out of hand the role long-term care insurance can play in protecting your retirement lifestyle and plans.
Unfortunately, too many attorneys and financial planners haven’t taken the time to fully understand the solutions available. One notable exception to the typical financial planner is Travis Kraker at US Bank in Wisconsin. After getting to know Mr. Kraker, I’ve come to the conclusion that he places his client's interest ahead of his own. Or at a minimum, he understands that in the long-run, placing his client's interests ahead of his own short-term interests is in his best interest. In other words, he’s the kind of financial planner I would recommend to my friends and family (I have on many occasions).
Don’t just take my word for it, ask yourself if you have an illness and given a choice of staying at home and receiving care or going to a nursing home and receiving care what you would rather do?
If you answer is like most people, stay in the home, then ask the next question, how will I pay for the care? Even if you qualify for Medicaid, it doesn’t pay for in-home care, but long-term care insurance can.
The last question to ask is if your attorney or financial planner can guarantee you will be able to stay at home and receive care while not destroying your retirement portfolio? Only a long-term care insurance policy can guarantee someone that they will be able to meet all their obligations and their loved ones can maintain their standard of living regardless of long-term care costs.
All while leaving the possibility of staying home and away from a nursing home if that’s your desire.