August 17, 2006 President Bush signed into law the Pension Protection Act of 2006 (The Act). The Act has greater value with the possibility Medicaid planning could change significantly making it more difficult for people to qualify. Leveraging savings to be able to self pay for long-term care becomes an important strategy.
It used to be that a person would expect a relatively short life expectancy after retirement. Now many of us can plan on one third of our lives spent in retirement. Today retirees face a tremendous amount of financial uncertainty. The shift has changed from dying too soon to living too long—or what many experts define as a new financial problem: “longevity risk.” The new challenge facing retirees today and tomorrow is how to provide income security for a long and uncertain retirement. To know if one will have enough money to last a lifetime is more important now than ever before.
That is where The Act comes into play. Individuals owning annuity contracts can now have long-term care riders attached to them that provide special tax benefits. The Act allows annuities without the long-term care benefits to be exchanged for an annuity that does. If done correctly, the exchange is tax free.
Let’s look at an example: We will call this person Bob. Bob is age 70 and not married. He lives alone and has health issues. He, along with his children, are concerned if he should need long-term care in the future. Due to serious health issues he is not a candidate of traditional long-term care insurance.
He has an annuity valued at $140,000. In addition he has $300,000 in a Money Market and $37,000 in checking. His home is paid for and valued at $240,000. By taking advantage of the Pension Protection Act he can make a tax free exchange to an annuity that will allow him to continue to earn interest tax deferred but, here is the key, will turn his $140,000 into $420,000 of long-term care tax free benefits. He can use the long-term care money to pay for home health care, assisted living, or nursing home. Most people want to stay home as long as possible and this type of planning allows that.
It is easy to see $420,000 will last a lot longer and provide more security than $140,000. It also provides more options. If you want more security, options, and peace of mind you may want to take advantage of the Pension Protection Act.