BHC's Producer Insights
"Tax-Deferred to Tax-Free Without Taxes"

For Immediate Release
Houston, Texas

People with non-qualified annuities can 1035 transfer tax-free to a “linked benefit” annuity and then withdraw money tax-free from the new annuity. What’s more, the new annuity addresses a major worry for most retirees. This is made possible by laws that were passed in 1997 and 2006 and became effective in 2010. Let me explain this great “add on” sales opportunity to existing clients.

In 1997 the Health Insurance Portability and Accountability Act (“HIPPA”) established that benefit payments from qualified long-term care (“LTC”) policies are not subject to federal income taxation. In 2006 the Pension Protection Act (“PPA”), Section 844, allowed tax-free withdrawals from annuities to pay premiums for qualified LTC insurance riders on a “linked benefit” annuity. This means the HIPPA qualified LTC rider can be paid with tax-free withdrawals from a non-qualified annuity and subsequent LTC benefits are tax free. Let’s see what it means in simple terms.

If a current owner of a non-qualified annuity does a tax-free 1035 Exchange for a “PPA Complaint” annuity, two important benefits are realized:

✓ LTC rider premiums are withdrawn tax-free from the new annuity;
✓ All LTC rider benefits later received are tax-free.

Withdrawals taken from the old annuity to pay LTC rider premiums would have been treated as taxable income on a last-in, first-out basis. Plus, if the annuitant were less than 59½, the 10% penalty tax would also apply. PPA Compliant annuity withdrawals to pay LTC rider premiums are tax-free as are all subsequent LTC benefits. Let’s look at an example.

Annabelle opened an annuity several years ago for $50,000 that now has a surrender value of $100,000. Annabelle recently read an AARP article that said, “the lifetime probability of needing LTC for people 65 and older is 68%”. She is very concerned that long-term convalescent care could ruin her financially. To cover her LTC risk, she plans to tax-free 1035 Exchange her current annuity for one that has a PPA Compliant LTC rider because it addresses her needs. The new annuity works the same as the old one except: (a) the premiums for the LTC rider will be taken tax-free and automatically from the account value of the new annuity, and (b) if she ever needs LTC, the benefits will be tax-free. This means the $50,000 tax-deferred earnings in her old annuity will be tax-free if received as LTC benefits. What’s more, for slightly increased premiums an enhanced benefits rider can multiply her tax-free LTC benefits. Her new annuity is growing just like the old one but now Annabelle can receive LTC benefits tax-free without giving up the advantages of an annuity or paying taxes on the withdrawals for LTC premiums.

BHC’s Client Profile Review (“CPR”) program will identify for you likely prospects for this new PPA Compliant annuity. The CPR program is free to BHC’s active producers and will allow you to close “add on” and “cross product” sales from current clients. Since the PPA Compliant annuity offers qualified LTC benefits that older annuities do not, carriers’ suitability standards for 1035 Exchanges are easier to meet. It is an excellent way to protect your clients from the expenses of long-term convalescent care without having to overcome the “use it or lose it” objection. The added features include simplified underwriting, tax-free withdrawals for premiums, tax-free LTC benefits if needed and permanently avoiding taxes on the tax-deferred earnings if LTC rider benefits are received. Call BHC today and ask about the CPR program and getting appointed to offer the new PPA Complaint annuity.