Tax-free exchanges to pay for long-term care insurance
At least 70 percent of people over the age of 65 will require some level of long-term care, according to insurance company
For example, per month on average, it costs
Long-term care insurance can be an effective way to protect your nest egg against these expenses and preserve it for the next generation, but premiums for these policies can be expensive. Here's where your life insurance policy could enter in. A tax-free exchange using your life insurance policy can be a cost-efficient strategy for funding long-term care premiums.
Partial or hill exchanges allowed
Historically, the
The rule later was expanded to allow partial tax-free exchanges and, more recently, long-term care contracts were added to the permissible list. So, it's now possible to make a total or partial tax-free exchange of a life insurance policy or annuity contract for a long-term care policy, as well as one long-term care policy for another. But there are some restrictions.
For example, to avoid negative tax consequences after making a partial exchange of an annuity contract for a long-term care policy, you must wait at least 180 days before taking any distributions from the annuity.
Tax benefits are significant
A tax-free exchange provides a source of funds for long-term care coverage and offers significant tax benefits. Ordinarily, if the value of a life insurance policy or annuity contract exceeds your basis, lifetime distributions include a combination of taxable gain and nontaxable return of basis. A tax-free exchange allows you to defer taxable gain and, to the extent the gain is absorbed by long-term care insurance premiums, eliminate it permanently.
Consider this example: Joan, age 72, is concerned about possible LTC expenses and plans to buy an LTC insurance policy with a premium of
To avoid a taxable gain, Joan uses partial tax-free exchanges to fund the
Partial tax-free exchanges can work well for standalone long-term care policies, which generally require annual premium payments and prohibit prepayment. Another option is a policy that combines the benefits of long-term care coverage with the benefits of a life insurance policy or an annuity.
Typically, with these "combo policies," the death or annuity benefits are reduced to the extent the policy pays for long-term" care expenses.
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