For you history buffs, the Pension Protection Act (PPA) was signed into law in 2006 by President George W. Bush on August 17, 2006. The statute enacted numerous changes to the tax law provisions affecting tax-exempt organizations.

About 1035 Exchanges

The provisions that apply to long-term care insurance became effective on January 1, 2010, and allow the tax-free exchange of existing cash value in annuities or life insurance policies to fund a new policy that includes long-term care benefits without creating a taxable event. These transactions are commonly referred to as 1035 exchanges. The governing rules are found in Section 1035 of the U.S. Internal Revenue Code.

New PPA Annuities?

PPA annuities have been around for the last 15 years. They really are not a new shiny object, but we are seeing long-term care insurance carriers introduce new PPA compliant annuity options. And lots of ink about these product offerings might make one think they are brand new. No. Just additional options with different nuances.

Cash value can be exchanged in a number of ways without creating a taxable event. These include the cash value in one non-qualified annuity to another annuity, cash value from life insurance to an annuity and life insurance to life insurance. In all cases the exchange must include an upgrade to a product providing long-term care benefits.

Tax-Free Withdrawals

Annuity withdrawals from a PPA compliant annuity for LTC expenses are also tax-free. Where this is especially attractive is exchanging funds from an old, non-qualified deferred annuity with a lot of gain in the contract and therefore a large tax liability. This is due to a PPA provision that considers the withdrawal for LTC expenses as non-taxable income and considers it a reduction of cost basis. And long-term care insurance riders are also not taxable. This is a simplified explanation. There are many other regulatory requirements to make a PPA annuity compliant.

Depending on carrier and product design, these annuities may include:

• LTC benefits paid in cash.
• Joint contract options for spouses.
• Age eligibility can up to age 87.
• Underwriting accomplished in a phone call.
• Guaranteed crediting interest rate.

A PPA compliant annuity can combine an attractive funding option for long-term care expenses and a smart tax strategy.

Get Started Today

We know the nuances so you don’t have to. Long-term care funding is all we do! Contact us today to get started.