Gain valuable tax benefits by replacing an unneeded annuity with a new one that offers long-term care coverage.

Purchasing traditional long-term care (LTC) insurance to help cover the costs associated with an extended care need—which are costs not covered by Medicare—can be an expensive undertaking. But thanks to an often-overlooked provision of the Pension Protection Act (PPA), which took effect in 2010, you may be able to exchange your existing non-qualified annuity policy (e.g., purchased with after-tax as opposed to pre-tax dollars) for another annuity contract that offers long-term care benefits.

A Shift From Tax-Deferred to Tax-Free

Under the current guidelines of the PPA, individuals who purchase LTC coverage through a non-qualified annuity contract are eligible for favorable tax treatment. The reason is that when a fixed annuity has an LTC rider, any accumulated tax-deferred interest and gains used to pay for qualified long-term care expenses will, in most cases, be free from federal income taxes. Here’s a simple example:

  • Perhaps you purchased a $150,000 annuity several years ago. Over time, that annuity has grown in value to $200,000. If you opt to hold onto it, the $50,000 of deferred gains that have accumulated would be considered taxable when withdrawn. Depending on your income tax bracket, up to $16,000 of those gains could be eroded by taxes. Alternatively, you could opt to exchange the $200,000 annuity for a fixed annuity.

Additional Benefits

Aside from the obvious tax advantages, exchanging one annuity contract with a new annuity with LTC benefits can help enhance your long-term planning by offering:

  • New Features/Better Rates: Depending on your current annuity, an exchange could potentially give you access to new annuity features and benefits (or better interest crediting provisions) that weren’t available when you purchased your current contract.

70% of adults turning age 65 will require long-term care during their lifetime1
$5,148 - Average monthly cost for in-home care2
$4,500 - Average monthly cost for an assisted-living facility2

  • Tax-Deferred Growth: While allocating a portion of your retirement savings to protect against LTC expenses, it’s not a ‘use it or lose it’ proposition like some traditional long-term care policies. If the need for care arises, funds are available for that purpose. But if you never need the LTC benefit, your annuity will continue to grow and accumulate tax-deferred earnings.

  • Legacy Planning: If your long-term care needs turn out to be either non-existent or minimal, whatever funds remain in your annuity could help provide a valuable legacy to your children or other beneficiaries.

Making this type of annuity exchange may also give you a greater degree of investment flexibility—freeing up other assets you earmarked for long-term care expenses and allowing you to reallocate them toward different growth and income goals.

Rules for Enacting an Annuity Exchange

To reap the tax benefits of an exchange:

  • The proceeds from your existing annuity contract must be directly transferred to the new policy (insurer-to-insurer). You cannot have the proceeds distributed to you and then in turn purchase a new annuity with long-term care benefits. As soon as you take receipt of the assets, they are considered irrevocably distributed and normal taxation rules then apply.
  • To be PPA compliant, the new annuity must include a LTC rider that allows you to access a portion of the death benefit to pay for long-term care expenses tax-free.

One other important consideration is the length of time you’ve owned the annuity you plan to exchange. Early surrender charges can run as high as 15%, so unless you’ve owned it long enough to eliminate any surrender charges, this strategy likely won’t be appropriate for your needs. Additionally, the new annuity could extend your surrender period—temporarily limiting your access to the funds.

Since there are specific qualifications you must meet, and considerations to be weighed before making an exchange, it’s a good idea to sit down with your Financial Advisor before engaging in any transaction.

Working With Janney

Depending on your financial needs and personal preferences, you may opt to engage in a brokerage relationship, an advisory relationship or a combination of both. Each time you open an account, we will make recommendations on which type of relationship is in your best interest based on the information you provide when you complete or update your client profile.

When you engage in an advisory relationship, you will pay an asset-based fee which encompasses, among other things, a defined investment strategy, ongoing monitoring, and performance reporting. Your Financial Advisor will serve in a fiduciary capacity for your advisory accounts.

For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.

By establishing a relationship with us, we can build a tailored financial plan and make recommendations about solutions that are aligned with your best interest and unique needs, goals, and preferences.

Contact us today to discuss how we can put a plan in place designed to help you reach your financial goals.

1. Morningstar, “100 Must-Know Statistics About Long-Term Care,” March 2023

2. Genworth Cost of Care Survey, January 2022

 

Janney Montgomery Scott LLC, its affiliates, and its employees are not in the business of providing tax, regulatory, accounting, or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

About the author

Peter A. Longo

Vice President, Director of Insured Solutions Consulting

Read more from Peter A. Longo

For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.

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