Advisors Blog

Case Study: Annuity to LTC Planning Opportunities

Published on October 15, 2020



Case Study: Annuity to LTC Planning Opportunities

In this actual case, our advisor was able to show clients how to gain leverage of up to six times the value of an old variable annuity when used for tax-free LTC benefits. This technique using the Pension Protection Act of 2006 (PPA) allows the client to wash away all the taxable gains to the extent LTC benefits are actually paid out.

The Client

Married couple, both healthy, age 58. They are joint owners and annuitants on an older variable annuity contract no longer needed for income purposes. Annuity’s current account value: $212,000, with a cost basis of $120,000 (out of surrender period).

The Problem

The couple faces a $90,000 taxable gain in the annuity, so they are reluctant to surrender it, probably not realizing the adverse tax consequences of merely letting it pass to their heirs. They have done no long term care planning, and think they can self-insure the risk, possibly using cash value in the annuity to pay for care, though any funds withdrawn from the annuity would be taxable.

The Solution

We provided three possible solutions to leverage the funds and provide a large pool of LTC benefits which would be completely shielded from income taxes:

1) 1035 the annuity to OneAmerica Annuity-Care II

2:1 Leverage

  • Leverages their $212,000 into a shared pool of LTC benefits of $466,785 (with no inflation). 
  • This is a joint policy, providing $7,072 monthly LTC benefits each for at least 66 months.

2) 1035 the annuity to OneAmerica Annuity-Care II

3:1 Leverage with Inflation

  • Leverages their $212,000 into initial (shared) pool of LTC benefits of $292,814 (with 5% inflation on the COB Rider portion). 
  • Total pool of LTC benefits grows to $650,064 in 25 years. 
  • A joint policy, providing initial LTC benefit of $4,436/month each for at least 66 months. 
  • LTC benefit grows via inflation to $14,286/month in 25 years. 
  • Lack of inflation on the base policy needs to be pointed out, but should be acceptable, given they were already self-insuring the entire risk. With the purchase of Annuity-Care II, they are now only bearing the cost of inflation for the duration of time that the base policy lasts (30 months at most, less if both are on claim at the same time).

3) 1035 to Joint traditional LTC policy with National Guardian Life EssentialLTC

Over 6:1 Leverage with Inflation and ROP at Death

  • Policy is guaranteed paid-up with single-premium (no risk of rate increases).  
  • Joint Policy with Shared Benefit Rider providing an initial LTC benefit of $190/day (each) or approximately $5,700/month. 
  • Each insured has an initial pool of LTC benefits of $208,050, plus a separate shared benefit pool of $208,050 when their initial pool is exhausted. 
  • With 3% compound inflation, the LTC benefit grows to $410/day at age 85 ($12,300/month), and the total LTC pool (both insured’s base pools + Shared Benefit Pool) grows to over $1.3 Million. 
  • With the addition of the optional Limited Return of Premium rider, the beneficiary would receive an amount equal to the premium paid, less LTC claims paid, as a death benefit (thereby functioning much like a hybrid or asset-based LTC plan).

The Pension Protection Act allows the LTC benefits to be received free from income tax, whereas simply withdrawing annuity funds to pay for LTC (or any use) would have been taxable as ordinary income. If an LTC annuity is not used for qualifying LTC claims, its tax treatment is like that of a normal annuity upon withdrawals or upon death of the annuitant. Click below for more details.

For more information on this, please contact your GBS brokerage manager.




We at GBS Insurance thank you again for your business. For more information or insurance quote requests, please contact your brokerage manager or give us a call at (800) 473-5966

For agent use only - not for use with the general public.

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Phone: (800) 473-5966

GBS Insurance and Financial Services, Inc. do not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

© 2020 Arthur J. Gallagher & Co. 





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GBS News: WA State LTC Update | DI Sales Opportunities | Fixed Index Annuity | and more

The soon-to-be-enacted "Long Term Services and Trust Act" will impose a .58% annual tax on Washington state's workforce to fund one year of future LTC benefits (non-portable and only available if still living in WA). The only way to "opt-out" and avoid paying this tax is to show proof of existing coverage.

While the Trust Act could be beneficial for low-to-middle income earners, it negatively impacts those highly compensated individuals who will pay a much larger, disproportionate amount for the same, minimal benefit.


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