Often people who have decided to self-insure for long-term care have, in their own planning, designated a part of their retirement resources for this possible health care expense. However, long-term care services (at home or in an assisted living facility) can cost upwards of $50,000 per year.
Changes in taxation resulting from the passage of the Pension Protection Act of 2006 allow you to make a full or partial tax free “1035 Exchange” to an annuity or life insurance policy with a long-term care insurance rider attached to the account. If you exhaust the upfront funds in the account (your own funds), the attached long-term care insurance rider kicks in to protect you, and perhaps save most of your estate for your spouse and heirs. If the need for long-term care never arises, the full value of the annuity or life insurance policy passes to your estate.
Coverage for all levels of care usually apply, including home care, and the 1035 tax free transfer can be from a traditional IRA, or a non-qualified annuity.
Since your own funds pay for the initial long-term care need, the attached insurance rider is substantially less expensive than a standalone long-term care insurance policy. For people who have declined to purchase long-term care insurance out of concern they may never need it, and thus end up “wasting” the premiums, this new option provides intriguing possibilities. Another new benefit is some companies now offer the LTC insurance rider with the guarantee that premiums can never be increased in the future.
Traditional long-term care policies provide some strengths not available with these new riders, and may still be the more appropriate choice. But for many, the new possibilities opened up by these January 1st tax laws deserve a serious second look.