Maximizing Your Annuity Concept

Last week , I set the table for this part of the conversation about maximizing your annuity. Please, take a minute to refresh your memory of the opportunity.

This is not a MYGA or rate chasing strategy, but a strategy where we are able to transform taxable gain into tax free income if it is utilized for long term care purposes.  There are only a few deferred annuities that provide this benefit.

This leverage is made possible due to Section 844 of the Pension Protection Act (PPA) which allows for cash value life insurance and deferred annuity proceeds to be exchanged tax free into “annuity and life insurance policies with a long term care feature.” 

For more details about how the PPA works, you can start with our Pension Protection Act FAQ.  You can also contact my internal Justin Fox at (844) 658-3725 or justinfox.isp@oneamerica.com.

or me.

By repositioning that annuity into a Pension Protection Act (PPA) annuity, we can produce tax free distributions when they are made for qualifying long term care services. This isn’t a new concept, but it is one that is often overlooked. And, don’t forget what the demographics for this strategy are.

Let’s talk about a few of questions that need to be included in the conversation. 

• Let’s start by reviewing why you bought this annuity.
• How long have you had this annuity?
• What would cause you to spend the money in this annuity?
• Do you own a new type of annuity or an old one?

The key here is to identify and explain the problem with the existing annuity.

Of course, this sets us on the path to providing the solution with one of our PPA annuity products from OneAmerica – Annuity Care I or Indexed Annuity Care.

Here is a case that we had about a month ago. 

During the course of a routine plan review, the advisor asked the clients share her view of how her annuities fit into her overall financial plan.  She reiterated that it was her “emergency money” that she would use it if she needed for “the nursing home”.  Here is where the advisor asked, “can I show you an idea that might make your plan even better?” 

She had about $380,000 in nonqualified deferred annuities that were not being used for income and were the “emergency money” with a basis of $180,000.  After explaining how the distributions would be taxed from the annuities, Indexed Annuity Care was presented.

In this particular case since the client was 79 , the initial approach was a “base only” strategy where we simply “wash away” the taxable gain at distribution time when the monies are needed for long term care expenses.

Rather than moving all of the annuities, only $230,000 were exchanged into Indexed Annuity Care (the basis for this exchange was $100,000). The remaining $150,000 remained in other annuity contracts continuing to grow tax deferred. Using the Indexed Annuity Care policy as a long term care funding resource for her, the strategy called for a conservative approach where the fixed account crediting strategy was elected.

On day 1 of the policy, $9,679 of tax free LTC benefits would be paid from the policy for up to 24 months. Year over year, the LTC benefits are guaranteed to increase and in year 8 of the policy, the guaranteed tax free monthly LTC benefit would be $12,684.

Remember this, when the policy is utilized for long term care benefits, the distributions are tax free. Meaning that over $116,148 of annuity monies were used. Had this been a “non PPA” deferred annuity, those monies would be taxed as ordinary income until it reaches the basis which would be tax free. Consider the impact that a taxable distribution would have on her taxes, means tested benefits programs, and the Medicare IRMAA surcharge. Then, compare the impact of the tax free LTC benefits provided by the Indexed Annuity Care plan.

For a sample of the illustration, follow this link.

The process to apply for this is pretty simple if we are submitting a “base only” application.  There is no phone exam, no paramed, and no APS requirements.  If the client can answer no to these 5 questions (we do need height & weight and will gather a RX script / MIB to verify their answers), we can help them.  Our base contract can be offered to age 87.  Here are the 5 knock-out questions – section B of the application. 

5 Knock-out questions  

Here is what I would like from you … identify 2 or 3 clients who fit the profile, introduce the concept of improving the position using a “new style” annuity THEN contact either Justin or me to discuss the case.

Remember, this is an annuity product, so make sure that proper training in place with OneAmerica to make things move smoothly.  If you need some guidance on this, start with my internal Justin Fox – (844) 658-3725 or justinfox.isp@oneamerica.com.

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