Long-term care is costly, and it can quickly empty your funds while lowering your quality of life. Long-term care insurance covers a portion of the cost, so you don’t have to foot the bill yourself. On the other hand, long-term care insurance rates are expensive and can rise over time. Exchanging your annuity contract for a long-term care annuity (also known as the 1035 exchange) is one option available to annuity contract holders. 1035 Exchange Withdrawals from a non-qualified deferred annuity (after-taxed money) are deducted from earnings first, followed by the contract’s initial investment premium using the Last In, First Out (LIFO) tax technique. The annuitant’s earnings part of the withdrawal is considered taxable income. However, if certain conditions are met, IRC Section 1035 allows you to exchange one annuity for another without immediate tax repercussions. Since January 1, 2010, the Pension Protection Act (PPA) has allowed for the tax-free exchange of life insurance and annuities for eligible long-term care insurance policies such as long-term care annuities. How To 1035 Exchange An Annuity For A Long-Term Care Insurance Annuity? Specific criteria must be met for a tax-free exchange of an annuity to a long-term care insurance policy to be classified as such:
- The annuity must first be non-qualified.
- The transaction must take place directly between insurance firms. If you take money out of your annuity and use it to pay for long-term care insurance, you won’t get a tax break. A 1035 Exchange Form will be included with the annuity application.
The Advantages And Disadvantages Of The 1035 Exchange Advantages • Annuity payments are tax-free when used to pay for long-term care insurance. • If you use an annuity to pay for long-term care insurance, you may be able to avoid having to use other assets or income to fund premiums. • To compensate for long-term care needs, a long-term care annuity will either double or treble the value of your annuity. • You can keep the annuity’s cash surrender value if you change your mind. • If you swap your annuity for a long-term care insurance annuity, your beneficiaries will get the annuity’s cash value as an inheritance, which would not have been possible otherwise. Disadvantages You may be asked to pay a surrender charge when an annuity is exchanged, lowering the value of the annuity. There is no surrender charge if the annuity is past the surrender term.
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