Usually built around a fixed immediate annuity chassis, annuity/LTC products gain appeal from their tax-favored status (distributions from combination annuities
used to cover LTC costs are tax-free if handled properly), plus their ability to provide a measure of long-term care coverage to people who either don't want to purchase or can't affordably purchase a stand-alone long-term care insurance policy.
For one, it's a way for suppliers to capitalize on--, including a provision that gives tax-free status to distributions from combination annuities
used to cover LTC costs.
Effective January 1, 2010, this applies to new combination annuity contracts as well as older contracts that are exchanged into new combination annuities
with long term care.
In addition, the Pension Protection Act of 2006 also goes into effect this year for combination annuities
, which allow annuity distributions to fund long term care tax-free.
With it comes a change to federal tax law that allows extremely favorable treatment of so-called combination annuities
. These annuities combine a LTC rider (that is tax-qualified under prescribed standards of federal law) with an annuity.
Given this new tax advantage, and the compelling need for LTC insurance that is not being sufficiently met by stand-alone LTC products, development of combination annuities
to be introduced on or after Jan.
As early as last year, prominent industry authorities and organizations suggested, rightly in my view, that combination annuities will overtake stand-alone LTC insurance within 10 years.
Recall that the PPA only sanctions favorable tax treatment of non-qualified combination annuities. Of the $2 trillion in variable and fixed annuity assets at the end of 2007, $874 billion in assets are nonqualified, according to the NAVA 2008 Fact Book.
But, in combination annuities
, the LTC provisions (or separate rider) are treated as a separate contract, and so charges taken from the annuity to pay for the LTC are considered distributions.