An Old Idea – Split Annuity

We have been on the tax-deferred to tax-free for LTC train for the past few weeks.  It all started with our March episode of Coffee Break. 

If you have not seen that episode yet, please take a moment.  I am sure that you’ll get a nugget or two of information from it.  Remember, a new episode airs the second Tuesday of each month and you can access it (or any past episode) on-demand at LTCcoffeebreak.com

So far, in Fridays with Fisher, I’ve told you what makes Annuity Care work (the PPA and HIPAA), the basics of the rules, and shared a warning about a common misperception with deferred annuities. 

Let me share with you an idea. 

It’s one of the first concepts that I learned over 30 years ago when I came into the industry as a career agent in rural New Hampshire.  It is the concept of the split annuity. 

Here is how I view the split annuity for 2023.

Rather than splitting an annuity into an income component and a growth component, I like you to consider splitting it into a long term care defensive component and a growth component.  Heck, you could actually go 3 ways (LTC, income, growth) if the annuity is big enough.

Let’s keep it simple.

Let’s say we have $500,000 in a nonqualified deferred annuity that is out of surrender for a female client who is 75 years old.  She does not need the money for income but does realize the impact of an extended healthcare event.  More importantly, she does not have children and her only family is her sister’s children located several states away.  So care and paying for care is a concern.

For this discussion, we will split the annuity in half.  $250,000 will be moved via 1035 exchange into a nonqualified deferred annuity to grow.  It can be put into a fixed annuity, fixed indexed annuity, variable annuity – whatever is suitable and meets her needs. 

The other $250,000 will be 1035 exchanged into Annuity Care – this will provide long term care benefits if needed.  Remember, with Annuity Care, if the policy is not required for long term care, the annuity proceeds are paid to the named beneficiary at the death of the insured.

For this example, lets assume that out client elects for a limited duration Annuity Care II with a 60 month LTC benefit period elected.  The monthly benefit generated from Annuity Care II would be $10,466 (that is $125,592 annually).  That represents a pool of tax-free LTC benefits of $627,960.  Remember, there is no vesting schedule and benefits are counted on a monthly (not daily) basis.

Meanwhile on the growth side of the equation, let’s assume the $250,000 is put in a fixed deferred annuity crediting 4.75% annually.  In 10 years, that annuity would have grown to $509,318.

So, at the 10 years, you have a deferred annuity with a value in excess of $500,000 along with a pool of long term care benefits of $600,000 providing a tax-free extended healthcare protection barrier.

This is just one such strategy that could be employed using an Annuity Care product.  The next time that long term care funding is being considered, remember to consider every option – especially those nonqualified deferred annuities with gain that are out of surrender.

For more information, contact either my internal Justin Fox or me.

Justin Fox               justinfox.isp@oneamerica.com                    (844) 658-3725

Kevin Fisher               kevin.fisher@oneamerica.com                  (678) 512-9627

And – as always – thanks for taking a few minutes for me.

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