Another option is to pay for your long-term care premiums from your existing permanent life insurance policy or annuity. The Pension Protection Act of 2006 altered the Section 1035 rules to allow traditional annuity and insurance policies to be exchanged on a tax-deferred basis for the newly approved long term care hybrid (life insurance or annuity) policies.
Here’s how it works:
For Annuities; The transfer (called a 1035 exchange) must be made directly from the annuity to pay premiums. If you withdraw the money from the annuity rather than making a tax-free transfer, you have to pay income taxes on the gains, which are taxed first, before you recover your principal.
For Permanent Life Insurance; You can also make a tax-free 1035 exchange from a cash-value life insurance policy to pay long-term care premiums, either for a traditional long-term care policy or a policy that combines life insurance and long-term care benefits. The money can come from the policy’s cash value, or you can use the policy’s dividends to pay the long-term care premiums. This strategy can be useful as you get older and your primary needs change from life insurance to long-term care.
It’s important to work with a specialist that understands both the tax advantages and the policies that qualify. Please let me know if I can answer any of your questions related to 1035 exchanges. I am here to help!
Sincerely,
John F. King, CLTC
