Saturday, May 8, 2010

New Tax Regulation Makes Long-Term Care Insurance More Affordable

Boomers are often reluctant to buy long-term care insurance (LTCI) because it’s not exactly cheap … annual premiums for a decent plan can easily run $2,000. Plus they might not like the thought that if they don’t use the insurance, they’ve wasted their money. However, without some kind of coverage, a change in your health could wipe you out! But thanks to a new tax regulation, you might be able get a policy while still accumulating bucks for the future. It starts with a fixed, deferred annuity (FDA). Money you put into one of these annuities accumulates tax-free until you withdraw it. When you make a withdrawal, part it is considered a return of your original investment, thus comes out tax-free. The rest is considered earnings and taxed at your ordinary income tax rate. As you can see, then, FDAs can be a valuable way to put away money for retirement, much like an IRA. Now, back to LTCI … The Pension Protection Act of 2006 includes two provisions regarding FDAs and LTCI that took effect January 1, 2010: 1. Money you withdraw to pay LTCI premiums is distributed free of taxes, therefore your after-tax cost for the policy could be less. 2. Money you transfer directly from an annuity to pay for long-term care insurance is not taxable. Insurance companies were quick to jump on the second provision by introducing FDAs with a LTCI rider. Very simply here’s how they work: Suppose, for example, you put $50,000 into a FDA. And let’s assume it’s designed to pay you up to 300% in benefits. That means you’d have $150,000 in coverage from day one without paying LTCI premiums. And if you never have to use the benefit, your $50,000 continues to grow tax-deferred. Of course, this perk comes at a cost, which is a reduction in the interest rate you’ll receive on the amount you pay in. So be sure to ask your agent for the details. But at least now you have a basic idea of two more ways to protect your nest egg and leave something for your love ones. Best wishes, George P.S. For more information on all your long-term care options, be sure to read A Boomer’s Guide to Long-term Care.

2 comments:

  1. George,
    I have a question about an ESOP within my company. I was told that if a employee was in a Union, (i.e I.B.E.W. Electricians Union), he could not be part of an ESOP program in the office. Is this true altogether or are there certain ESOP's that allow this and its written more custom to the company profile?

    John Wicks

    johnw@beckerelectrical.com

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  2. John,

    I've never heard of that. To the best of my knowledge, everyone participates. But I could be wrong.

    Here's an article just to give you an overview of how an ESOP works: http://www.nceo.org/main/article.php/id/8/

    If I were you, I'd check with your company's HR department and/or union rep to get the full story on this.

    Please let me know what you find out. And I'll keep researching.

    Good luck!

    George

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