Think shelling out for your own home-health services, an assisted-living facility or nursing-home care might be in your future? Good news: Come New Year's Day, these services can be yours tax-free.
Thanks to the Pension Protection Act of 2006, starting Jan. 1, 2010, you'll no longer have to pay federal income tax on an annuity's proceeds as long as you use those proceeds to pay for long-term-care coverage. That means the chronically ill or disabled will no longer have to rely solely on a regular long-term-care insurance policy or Medicaid to fund their medical and nonmedical care.
Considering that long-term-care costs are expected to reach $300,000 a year by 2030, up from $75,000 currently, and considering that Medicaid covers only up to 75% of long-term-care costs, this is a welcome change, says Carl Friedrich, an actuary and principal at Milliman, a consultancy in Lake Forest, Ill.
"The very fact that Congress enacted this legislation indicates a growing awareness by regulators that there is a fundamental need for long-term-care insurance," Friedrich says. "Through this provision, they're trying to create better tax incentives to enable the industry."
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But before you snatch up either, have a look at the following positive and negative aspects of long-term-care annuities:
The positives
You can get your money back. "Beyond their newly favorable tax status, long-term-care annuities offer the flex appeal of having long-term-care coverage. But if you don't need it, you can get your money back," says Jesse Slome, the executive director of the American Association for Long-Term Care Insurance in Westlake Village, Calif.In regular long-term-care insurance policies, payments are forfeited to insurance companies even if services aren't used. But with an annuity, unspent funds belong solely to the account holder and can be withdrawn eventually. Those funds can also pass to beneficiaries in the event of death.
Unused gains are tax-deferred. Long-term-care annuities also can generate tax-deferred gains. This is a benefit particularly for people in high tax brackets who plan to be in lower brackets when they begin drawing down their accounts. And although gains used to pay for long-term care will be tax-free starting Jan. 1, gains that don't fund such services are still subject to tax upon withdrawal.
It's easier to qualify. If you're too ill to qualify for regular long-term-care insurance, you might have an easier time getting coverage through a long-term-care annuity because there are fewer hoops to jump through. For instance, to qualify for a long-term-care annuity from Genworth Financial, an insurer in Richmond, Va., you have to fill out age and health status applications. But they ask you fewer insurability questions, and there are no medical underwriting requirements, says Warren Jaffe, a long-term-care product development leader at Genworth.
The negatives
Your coverage might run out too soon. The main drawback on long-term-care annuities is the length of coverage. If you don't deposit enough upfront, your coverage might not last during an extended long-term-care situation.Here's how it works: Let's say you deposit $50,000 into an annuity and opt for a 200% benefit limit, or $100,000 of long-term-care coverage, for two years. That would give you about $4,000 a month for 24 months. And although your long-term-care insurance would kick in after your $50,000 deposit was depleted, it would cut off at $100,000. So if you needed further coverage, you'd be out of luck with these types of accounts, Slome says.
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"If you have a long claim -- outside of three years -- you're going to wish you had a traditional long-term-care policy, because the typical annuity will not be anywhere close to sufficient," he says.
Jaffe, from Genworth, says extension plans are available. However, they cost extra. The range is based on your age and the selections chosen in designing your long-term-care coverage benefits, he says.
There are early-withdrawal fees. People who can't afford to tie their money up for too long should look for shorter-term bets. That's because surrender fees -- the penalty for tapping your cash too early -- kick in on withdrawals within the first five to 10 years you own an annuity, Friedrich says.
You need a lump sum upfront. You'll also need to have between $75,000 and $150,000 just lying around to get coverage in the first place, Friedrich says. Unlike a regular long-term-care insurance policy, in which you pay for coverage in monthly payments, an annuity with a long-term-care rider requires you to pay a lump sum upfront."If your deposit amounts to less than $50,000, it's not going to provide a very meaningful long-term-care benefit," Friedrich says.
This article was reported by Diana Ransom for SmartMoney.com.
Published Nov. 9, 2009
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