Discussing converting IRA to life insurance and Roth rollovers

Dear Michael: I read your column a while back and you were talking about taking qualified money – such as an IRA – and using this to buy life insurance. This policy would also pay for long-term care costs. You noted that up to $363 per day is non-taxable. If this is the case, wouldn't I just be able to use my IRA as is and deduct the $363 day? I won't qualify for life insurance so maybe this program isn't for me? – Sitting Good With IRAs.

Dear Sitting Good: Actually, you are talking about two entirely different programs.

The life insurance option is only good for people who are insurable.

For those people who are considering a Roth rollover, this is another alternative with possibly better returns than a traditional Roth rollover. The IRA is converted to a ten-pay paid-up life which can purchase a life insurance policy two to three times the value of the current IRA. This policy has cash values which can be accessed tax-free by the owner, and when they die, their children receive a tax-free death benefit – less any withdrawals made by the owner.

Against market competition in a regular Roth, they are averaging around five percent or so with one compelling advantage. If the market drops, the owner doesn't lose any of their money – they merely lose interest for one year.

Roth rollovers have become so prevalent amongst the wealthy that Congress is looking at laws to restrict people from moving their money from a 401k to a Roth if they make more than $400,000 per year or if they have more than $10 million in their 401k program.

This tells me there are a lot of wealthy, wealthy people doing this right now because if Congress feels there needs to be a restriction, the wealthy know the future on taxes does not look very good. If that's the case, the rest of us better sit up and pay attention.

The other contract states that if you have an IRA, the company will either double the amount you have in your IRA or, if you're healthy enough, triple the amount. This IRA receives no interest at all as the interest goes towards this tripling of your IRA amount rider.

This is also an indemnity contract vs. a traditional reimbursement long-term care policy. Traditional policies will "reimburse" your long-term care expenses – if they were agreed upon by their "care team" in advance. This is much the same as your traditional medical insurance.

An "indemnity" policy pays you a percentage of your money directly to you – once you qualify on two activities of daily living out of five. Those being feeding yourself, toileting, dressing, continence, and transference (getting in and out of chairs, cars, etc. without assistance.) Or two auto-qualifiers – a doctor diagnosis of Alzheimer's or Dementia.

For those who want to go a nursing home for care, the reimbursement policy is for you. For those of you who want to stay at home, the indemnity policy pays the money directly to you and you can pay to get your home care ready. If you need to add on a main floor bedroom or bathroom so you can stay at home, you can do whatever you like.

A "reimbursement" and a "indemnity" policy together could be considered a very complimentary method of planning for care. The indemnity policy will keep you home longer but if your needs progress your reimbursement policy can kick in and pay for institutional care.

If you have an indemnity policy, you do not have to pay taxes up to $363 per day for receiving this benefit for long-term care. This is not a deduction.

Therefore, if you paid for care out of your own pocket, you would have to pay taxes on the IRA withdrawals and then use the standard deductions over seven percent of your income. Again, this deduction phases out with high income.

So, no, you can't just withdraw this amount from your IRA and have it be deductible to you. Only if you receive an indemnity rider benefit is this amount non-taxable.

Again, virtually anyone can qualify for this program.