A Unique LTC Strategy

         A little while ago, we worked with a client who was tired of paying the increasing annual premiums for their Long-Term Care (LTC) policy. As many of you know, traditional LTC policies are issued with a set level of benefits. This means the insurance company promises to pay a specified amount towards your care if you meet certain requirements. Typically, these include being unable to perform two out of six activities of daily living, with some policies requiring validation of your need by a physician. In return, you receive coverage up to the specified amount for your LTC needs. In most cases, these benefits are paid to you tax-free.

        The drawback of these types of policies is the ongoing payment of premiums, which can become increasingly frustrating as insurers raise rates over the years. These increases often occur as insurers adjust to the risk of an aging population making more claims on their policies. When premiums rise, the insurer generally offers you a few options:

1. Convert to a paid-up reduced benefit policy: You would no longer pay premiums, but your benefits would be significantly reduced.

2. Reduce your coverage amount and maintain the same premium: Your benefits would be reduced, but less drastically than with the paid-up option, and you would still need to pay premiums annually.

3. Maintain your current coverage and pay the increased premiums.

        None of these options are particularly appealing. However, LTC costs continue to rise and can severely impact a financial plan if coverage is needed, and no policy is in place to protect you and your family.

        So, what’s the unique solution? Here’s how it works: if you have an old non-qualified (non-IRA) annuity that you don’t expect to need, you can use it to fund your LTC policy. But wait—it gets better.

        As you may know, earned interest that is not distributed from your annuity remains in the contract until you withdraw it. At that point, the retained interest becomes taxable as ordinary income to the annuity owner. Instead of distributing that earned interest, paying income tax on the earnings, and then using post-tax dollars to pay the premium, you can use a tax-free exchange called a 1035 exchange. This allows you to transfer funds directly from your non-qualified annuity to your LTC policy to pay your annual premiums.

       By doing so, you not only reduce or completely eliminate those troublesome premiums for several years, but you also avoid paying taxes on the retained interest in the annuity.

       It’s important to note that this is not a one-size-fits-all solution. You should consult both your financial professional and your tax professional to determine if this strategy is appropriate for your situation.

Call Medallion Financial Group at 301-990-9704 to determine if this strategy is appropriate for you.