In August of 2006, President Bush signed into law the Pension Protection Act of 2006. The Act had one great element: it helps individuals to get Long Term Care protection. This is achieved by providing tax advantages to those who exchange existing deferred annuities contracts or life insurance policies for new linked-benefit annuity contracts or life policies that provide the usual benefits you expect from a Life Insurance policy or an Annuity. These in return will also offer Income-Tax-Free LTC benefits.
This little-known law allows what is known as a 1035 exchange of an existing annuity or life insurance policy for a new policy that includes tax-advantaged LTC benefits. The Pension Protection Act allows individuals to plan for future needs and take advantage of tax incentives to purchase Long-Term Care protection.
If the tax advantages are not immediately obvious, let me give an example – You bought a deferred annuity for $40,000, many years later the value is $140,000, if you withdrew from this annuity or passed away there is $100,000 of taxable gain. Alternatively, you could take advantage of this new law and potentially do a 1035 tax free exchange for a new Annuity that conforms with the Pension Protection and create a $420,000 pool of money (at age 85) to pay for care on a tax free basis – this could be available to cover qualified care costs such as Home Care, Assisted Living, Skilled Care, Adult Day Care or Nursing Care. If you think you may be in need of LTC and are troubled about how to cover costs, this may be a great solution for you and your family.