Wednesday, February 12, 2014

How Refreshing!

As regular readers know, agents that want to sell Partnership-compliant Long Term Care insurance (LTCi) plans must re-qualify every two years via a 4 hour "refresher" course. This helps to ensure that we're as up-to-date as possible on the latest LTCi news and policies.

Since my last one was in February of '12, I was due, and so spent this morning under the expert tutelage of Ray Copenheaver, CLTC, LTCP. As always, there was quite a bit to absorb, including news on deductibility of premiums (it just got harder) and on "gifting" to avoid Medicaid eligibility issues (you need to plan sooner).

But we also learned some other more positive tidbits, one of which I'll share here:

Two of the biggest objections folks have to even considering buying a plan is the premium and the (justifiable) fear of rate increases. A lot of the former is dependent on one's age and health, and what level of benefits one chooses. But there is precious little that one can do about the latter: if a carrier is going to increase rates, it's going to increase rates.

But there are a number of plan designs that allow one to bullet-proof one's plan against rate increases, and one of them is made possible by the PPA (no, not the PPACA): the Pension Protection Act that took effect 2 months prior (in January of 2010). One of the key provisions of the PPA is that it made it possible for carriers to offer a special kind of annuity: one that, in addition to tax deferred growth, offers tax-free long term care benefits.

Very cool.

Here's an example:

John and Mary own a non-qualified annuity (that is, it's not tied up in an IRA or other similar vehicle). Their original $50,000 deposit has now grown to a hefty $100,000 (hey. it could happen!). In ordinary circumstances, the $50,000 gain would be taxable. So if one of them needed long term care, they really have only $85,000 available (the original $50,000 plus whatever's left of the gain after taxes). Ouch.

But under PPA rules, they could trade in this annuity for one with an enhanced long term care benefit, and effectively double their long term care funds. In our scenario, the $100,000 "enhanced" annuity includes a $201,000 long term care "pool" from which either could draw to fund long term care, and these are paid out tax-free. Nice.

The downside, such as it is, is that if neither of them ever need long term care, the initial $100,000 (plus interest) is passed along to their beneficiary as a taxable instrument. Still, that's what would have happened had they kept the original plan, so no harm, no foul.

Since the plan is paid in a lump sum, there's no danger of any rate increase. and presuming that this was money that John and Mary weren't living on, it's not a direct out-of-pocket expense like a pay-as-you-go plan would be.

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