Turn Idle Nonqualified Annuities into Meaningful Tax-Free LTC Benefits
For clients with nonqualified annuities just sitting there, planning for a potential long-term care event might be simpler than you think.
Paying for care is NOT an asset issue – it’s a cash flow issue. Every $1 used to pay for care, is $1 less they have in income to pass onto the surviving spouse or the next generation. It becomes a question of how they want their money to be spent. And, if asked, most will say they’ve rather it not be spent on taxes.
A select few linked benefit annuity products allow you to do a 1035 exchange (tax-free event) from an existing nonqualified annuity to a linked-benefit annuity that is qualifies as Pension Protection Act (PPA) eligible. PPA eligible annuities allow clients to take long-term care (LTC) benefits tax free should they have a qualifying need.
Benefits of Exchanging to a Linked-Benefit Annuity
The benefits of utilizing this type of strategy go beyond the initial relief of knowing there’s a plan in place to protect retirement. Additional benefits include:
- The ability to use the gain within the existing nonqualified annuity tax free for qualifying LTC expenses
- The ability to create additional leverage – up to two or three times more on the new linked-benefit annuity
- The ability to take an existing annuity that’s on one spouse and create a joint pool that either or both could tap into for LTC-related expenses
- Limited underwriting to obtain these types of linked benefit annuities for LTC protection
And, for some clients, perhaps one of the biggest benefits is that their LTC plan is funded by an idle annuity and doesn’t require any additional out-of-pocket funding.
Who to Approach
According to a survey conducted jointly by The Gallup Organization and Mathew Greenwald & Associates for the Committee of Annuity Insurers on owners of nonqualified annuity contracts, there are over $2.8 trillion currently sitting in annuity contracts.
And, for owners of nonqualified annuities, the survey found that:
- 79% see it as a financial resource to avoid being a financial burden to children
- 73% see it as an emergency fund in case of catastrophic illness or nursing home care
In addition to owning an annuity, ideal prospects are also in need of a plan for LTC and interested in the tax advantages available. Consider the two examples below while thinking of clients who would benefit from this strategy.
Example 1: Couple in their 70s
John is 74 years old, and his wife Mary is 73. Years ago, John put $115,000 into a nonqualified annuity. Today, that annuity is worth $316,539. The annuity is in John’s name only.
John and Mary don’t need this annuity for income during retirement, but they haven’t yet addressed the potential need for care.
By exchanging the existing annuity for a linked-benefit annuity, John and Mary can both have access to the funds for long-term care.
Although streamlined, there is some medical underwriting involved for the above-mentioned solution. They’ll need to answer “NO” to nine knockout questions. And, for clients 70-80 years old, there will be a short cognitive screen. No exams. No labs. No medical records.
If you have clients that may not qualify for the linked benefit annuity that provides added leverage due to age or health (as shown above), here’s another option.
Example 2: Single Woman in Her 80s
Julie put $180,000 into a nonqualified annuity that has grown to $354,000 today. She doesn’t need the annuity for retirement income, but she is frustrated that she didn’t act years ago to plan for potential long-term-care-related expenses.
Based on her age, we’ll exchange her existing annuity for a linked-benefit annuity with minimal underwriting. Instead of focusing on leverage, this solution offers Julie the ability to accelerate the $354,000 income-tax free for a period of 24 months if she has qualified long-term care expenses. Not only is there a tax savings involved, but she also gains access to resources for obtaining care.
This policy is available clients between the ages of 40-85. (And even at ages 86 or 87 with pre-approval from the carrier.) And there are only four knockout questions:
- Do you currently use any of these mechanical devices: wheelchair, walker, dialysis machine, oxygen equipment, respirator, stair life, chair life, or motorized scooter?
- Do you currently need or receive help in doing any of the following: bathing; eating; dressing; toileting; transferring into and out of a bed, chair, or wheelchair, and/or maintaining continence?
- Do you currently have, or have you ever had a diagnosis of, or been treated for: Alzheimer’s disease, dementia or memory loss? Multiple sclerosis, muscular dystrophy, ALS (Lou Gherig’s disease), or Parkinson’s disease?
- Have you ever been diagnosed as having or been told by a medical doctor that you have AIDS, HIV, or ARC disorders or tested positive for antibodies for the AIDS virus?
If your client can answer “no” to each of the four questions, they qualify.
Putting the Plan in Action
Start by uncovering opportunities. Pull a list of clients who:
- Own in-force nonqualified annuities they don’t plan to use for retirement income
- Are between the ages of 50-87
- Have accumulated values of $50,000+
When it comes to planning for LTC, don’t let funding or health issues be an obstacle. If you’re not sure where to start, give Ash a call. We’ll help you figure out if this solution — or something else – makes sense for your client.
