How to Double the Value of Your Clients’ Annuities to Pay for Extended Care, Tax-Free!

The amount of money sitting in annuities today is approaching $2 trillion. While most people purchased their annuities with the intent of letting them accumulate as a source of supplemental retirement income, many in or near retirement are starting to view them as a guaranteed source of “emergency funds” to cover catastrophic illness or extended care expenses during retirement.

The standard approach by most financial advisors is to recommend converting annuities into an income stream or taking allowable withdrawals to cover medical or extended care costs. What if you could show your older clients how they could multiply the value of their standard deferred annuities two, or three, or four times to cover ongoing extended care expenses with zero income tax consequences?


Leveraging Your Clients’ Existing Annuities

That’s the kind of leverage owners of fixed deferred annuities can gain through a Pension Protection Act (PPA)-compliant annuity. Congress enacted the PPA in 2006 (effective Jan 1, 2010) with a provision allowing owners of an existing non-qualified annuity owner to upgrade to a PPA-compliant annuity through a tax-free 1035 exchange. It then allows them to take tax-free withdrawals to cover qualifying extended care expenses in the future. That’s significant because distributions from traditional annuities are taxable on a last-in-first-out basis.

What’s the catch? Anyone with a non-qualified deferred annuity is eligible to convert it to a PPA-compliant annuity. However, to qualify for a cash value increase, your client must meet certain medical and health care requirements. The first requirement is the height and weight guidelines. If your client falls within the very generous guidelines, they are eligible.

The next requirement is being able to answer “no” to five questions typically associated with long-term care insurance underwriting, such as “do you require assistance with the activities of daily living?” If your client answers “no” to all five (plus a short cognitive screen call), they may be an excellent candidate. Their answers to the next five medical questions will determine their eligibility for a 2X, 3X or more benefit increase.


A Powerful Win-Win for Your Clients

After passing that simplified underwriting, your clients will suddenly have tax-free access to two, three, or more times more cash that can be used to pay for long-term care expenses. If your client never needs extended care or they decide to use the funds for other purposes, they still have access to the cash value amount following the regular tax rules applied to traditional deferred annuities.

In the realm of financial planning, that’s a powerful solution to be able to offer your clients who may be thinking about long-term care but have either been declined for coverage or are reluctant to pay on-going premiums for the proper type and amount of coverage.

(Note: If your clients are looking for large accumulation or income streams from their annuity investment these PPA compliant plans are NOT the right tool. They are designed for “leverage and tax efficiency.”)

It’s a rare opportunity to significantly improve a client’s extended care planning position without having to “find the money” and without a material change to their assets. It’s one of the purest win-wins you can offer your clients.

As your partner in all areas of protection and wealth accumulation planning, FAIU has the resources and access to the top annuity providers. All you need to do is have the essential conversation with your clients about how they plan to keep their commitments to their family should they ever require extended care. We’ll do the rest.

By Ed Stone, LTC, DI & Annuity Specialist