| New Tax Breaks Available for Long-Term Care Insurance |
 |
 |
|
The federal government has offered many incentives to purchasers of Long-Term Care insurance over the years. The latest of these will make it easier and more lucrative for some annuity and life insurance owners to purchase Long-Term Care insurance (LTCi). The Pension Protection Act became law in 2006, but its broad-based LTCi tax break became effective on January 1, 2010. As of January, many owners of either annuity or life insurance policies will have the ability to use cash in these contracts to pay Long-Term Care insurance premiums, with no tax bill due. This will apply to new or existing policies. The mechanism is called a 1035 exchange, named after the section of the Internal Revenue Service code section in which it's found (IRC Section 1035). For decades, Section 1035 has allowed for a tax-free exchange between life insurance contacts, and between annuity contracts. As of January, this benefit will be available to allow funds in life or annuity contracts to pay Long-Term Care insurance premiums. In order to be eligible for a 1035 exchange into Long-Term Care insurance, the original contract must have been purchased with after-tax (non-qualified) money. What kind of Long-Term Care insurance (LTCi)? The quick answer is almost any kind. The LTCi must be tax-qualified, but almost all new policies are. In other words, traditional full-pay policies, limited-pay plans (such as 10-pay), and combo policies (annuity with LTCi, life with LTCi) are all eligible to be paid with 1035 exchange money. There are some restrictions, such as a life combo product cannot be purchased under a 1035 exchange from an annuity. Consumers should seek competent tax advice before completing a 1035. The advantages to the life or annuity contract owner are many. Among the advantages are: Someone may prefer to pay a LTCi premium with a 1035 to avoid paying all of their Long-Term Care insurance premium out of current income. Another advantage is the ability to take the gain out of an annuity contract tax-free, when used to pay Long-Term Care insurance. |