Why seniors need to know about this long term care insurance policy


Exchange 1035: Long Term Care Insurance Annuity

A 1035 exchange can allow you to pay long term care insurance premiums through a tax-free transfer from an annuity. This technique can save on taxes while providing you with desirable coverage to protect you from the financial impact should you ever need long-term care in a nursing home or other facility. However, not all long-term care insurance companies will accept payments through 1035 exchanges. And the procedure must be done correctly to avoid exposing yourself to potential tax liability. Here’s what you need to know.

A Financial Advisor can help you make a financial plan for your long-term care needs.

How 1035 exchanges work

The 1035 exchange was made possible by federal legislation, the Pension Protection Act, which was passed in 2006 but did not come into force for four years. The law gave people a tax-efficient way to pay for long-term care insurance by allowing funds from annuities to be used for insurance premiums.

In addition to providing annuitants with access to funds that can pay for long-term care insurance, a 1035 exchange offers significant tax benefits. It does this by giving annuity holders a way to avoid paying federal income tax on gains from investments made with their annuity funds. This is because transfers, if done properly, do not incur any federal income tax.

At the time the law was passed, 1035 exchanges already allowed tax-free exchanges of annuities purchased with after-tax dollars, called non-qualifying annuities, for different annuities. The 2006 change added annuity exchanges for long-term care policies to the law.

Long Term Care Basics

Exchange 1035: Long Term Care Insurance Annuity

Exchange 1035: Long Term Care Insurance Annuity

Long term care insurance helps people with a disability, chronic illness, age-related infirmity, or other long-term health condition pay for the cost of living in a nursing home or residence -services. It may also pay for other costs such as adult day care and home care.

Most of the expenses covered by long term care insurance are non-medical expenses, such as doctor visits and lab tests. Rather, they are costs incurred as a result of providing child care and personal care, as well as assistance with activities of daily living. Long-term care insurance can, however, cover nursing care, physiotherapy, occupational therapy or speech therapy.

Long term care insurance premiums can be a significant financial challenge. In 2020, the American Association for Long Term Care Insurance surveyed major long-term care insurance companies and found that the average annual premium for a healthy 55-year-old couple was $3,050. As policyholders age and develop health problems, premiums increase. The same premium would barely pay for a 65-year-old single woman with health problems, the association found.

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Risks and Limits of 1035 Exchanges

1035 Annuity swaps for long-term care insurance can defer and ultimately avoid tax on annuity investment gains, but they are not without risk and other costs. One of the problems is the loss of the revenue stream that the pension would otherwise provide. Many 1035 exchanges do not involve the full amount of the annuity. Instead, only a portion is redeemed and used for long-term care bonuses. However, even partial exchanges reduce the income generated by the annuity.

Additionally, people making 1035 exchanges may encounter redemption fee for taking money from their pensions to pay for long-term care policies. These surrender charges, which many annuities charge when money is withdrawn before a certain date, will reduce the amount available to pay for insurance.

Additionally, not all long-term care insurance companies will allow policyholders to use 1035 exchanges to pay premiums. Even if the insurance company agrees, the exchange must be for a tax-qualified policy, which most long-term care policies are, and must be from a non-qualified annuity purchased with after-tax dollars. .

More importantly, to obtain a tax deferral, the exchange must be made directly. Funds must be exchanged from the annuity directly to the insurance company. If the annuitant withdraws the funds first, they then pay the insurance premiumthe money can be treated as taxable income.


Exchange 1035: Long Term Care Insurance Annuity

Exchange 1035: Long Term Care Insurance Annuity

A 1035 exchange allows an annuitant to use annuity money to pay long term care insurance premiums. If the funds are exchanged directly from the annuity to the insurance company, the exchange is tax-free. Otherwise, it may be taxed as normal income. Using a 1035 exchange to pay for long term care insurance means giving up at least some annuity income, and not all long term care insurance companies will allow this.

Long Term Care Tips

  • A Financial Advisor assistance in assessing the tax and investment implications of a 1035 exchange. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three financial advisors who serve your area, and you can interview your advisors at no cost to decide which one is best for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.

  • While it’s helpful to have a way to pay for long-term care insurance tax-free, it still doesn’t guarantee you’ll be able to get coverage. The American Association for Long Term Care Insurance said in 2019 that almost 20% of 40 to 49 year olds and almost 54% of those over 75 had their applications rejected for health reasons.

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