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New Tax Perks for Non-qualified Annuity Owners

Your Line to Retirement • January 19, 2015
You can thank the Pension Protection Act.

On January 1, 2010, owners of certain non qualified annuities were allowed some new tax benefits. On that date, the Pension Protection Act (PPA) of 2006 was fully implemented and brought about dramatic and interesting changes for those who had started annuities with after-tax dollars. 

New interest in hybrid annuities. Some variable annuities give you the option of buying a long term care insurance rider for additional cost. These are often called “hybrid annuities” or “annuity/LTCI plans”. Typically, the people most interested in them are annuity holders outside of their surrender period who have a need for long term care planning.

If it turns out that the hybrid annuity owner doesn’t need long term care, then he or she usually can choose from three options: arranging an ongoing income stream from the annuity contract, cashing out the annuity and paying income tax on the proceeds, or continuing to earn tax-deferred interest on the annuity.1

There are some trade-offs for the LTC coverage in these annuities. The cost of the LTC rider decreases the potential tax-deferred income stream resulting from the annuity contract. Benefits usually aren’t activated until two years after the annuity is purchased. Additionally, the LTC coverage only lasts for a certain number of years (though in some of these plans, the annuity owner may pay extra to extend it).1

A new perk: tax-free withdrawals to pay for long term care. With all this in mind, owners of hybrid annuities can thank the PPA for a new option. At the start of 2010
  • These non-qualified deferred annuities with added long term care insurance riders were now characterized as tax-qualified LTC insurance plans.2
  • As a result, all withdrawals from these hybrid annuities are income tax free so long as they are used for qualified long term care. So you can use the cash value of the annuity to cover the cost of LTC insurance premiums without triggering a taxable event.2
  • Annuity owners are now allowed to make tax-free 1035 exchanges into appropriate hybrid annuities with long term care riders.3
  • Additionally, an annuity owner can do a 1035 exchange for the cash value from any annuity into a single-premium qualified LTC insurance policy without incurring any gains.3

Now these annuities are even more attractive. Hybrid annuities with LTC insurance riders already offer their owners tax-deferred growth – and sometimes, a return-of-premium option that gives back the investment to an owner’s estate if no LTC claim is made. The new allowance of what could be sizable tax-free withdrawals makes them look even better.

In addition, the new freedom to make a tax-free exchange means that an annuity owner can now leave a current contract for a hybrid annuity that may provide a much greater pool of money someday to cover LTC costs. The possible downside: if you make that move before age 59½, you may incur fees, charges and/or penalties as a result. (Keep in mind also that annuity contracts are not “guaranteed” by any federal agency; the “guarantee” is a pledge from the insurer.)

Are they for you? These hybrid annuities are certainly worth a look. If you can’t qualify medically for LTC insurance but still need to be protected, a hybrid annuity may be an excellent option. Many people fund these annuities by redirecting cash from a bank CD or an annuity they already own. You might want to talk to your insurance or financial consultant about the possibility.
Guarantees provided by life insurance and annuities are subject to the financial strength of the issuing insurance company; not guaranteed by any bank or the FDIC. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. Please consult with a professional specializing in these areas regarding the applicability of this information to your situation. 11739 – 2011/6/1

These are the views of the author and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.

Citations.

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting Representative or the Representative’s Broker/Dealer. This information should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information. www.petermontoya.com, www.montoyaregistry.com, www.marketinglibrary.net

A Look at Mortgage Term Life Insurance

By Your Line to Retirement • January 19, 2015
What are the pros and cons of paying premiums for mortgage protection? A potential “helping hand” for a homeowner’s heirs. No one wants to saddle their heirs with the hard choice of paying off an unsettled mortgage or selling or losing a home. A mortgage term life insurance policy can provide relief in such a dilemma. Simply put, this is a term life policy designed for homeowners. If you die owing a huge sum to a mortgage lender, the proceeds from the policy will pay off the note. Why, and why not? The pros and cons of mortgage term life are simply stated. On the plus side, you are paying (relatively) little for a lot of potential mortgage protection, which could be useful if your heirs are in no financial shape to make mortgage payments. On the negative side, term insurance is term insurance. If you live past the term of your mortgage term life policy, no benefit will be forthcoming for all those premiums. You don’t find many fans of mortgage term life insurance in the mortgage industry. Their argument is that a regular life insurance policy might do the job just as well, and give your heirs more flexibility besides. Still, quite a few homeowners want mortgage term life insurance and appreciate its designated purpose. Basic types. The cheapest type of mortgage term life is the level premium/level benefit policy. You can commonly purchase them with 20-, 25- or 30-year terms. As the name implies, the premiums are guaranteed to stay level for the entire policy term, and the benefit amount does not decline with time. You can still find the original kind of mortgage term life policy, in which your premiums stay level but your coverage shrinks as your mortgage balance diminishes. While some banks and insurers still offer these “old school” policies, they are getting scarce. An interesting alternative. Some homeowners decide to get a return-of-premium term life policy instead of a mortgage term life policy. With an ROP term policy, the insurance company will give you all of your premiums back if you outlive the term (provided, of course, that you’ve kept your policy in force). Someone with 20 years left on a home loan could get a 20-year ROP term policy for an amount comparable to their mortgage balance and get all the money paid into the policy back without a tax consequence if they are alive two decades later. 1 That money could be used for any need or objective. So how is this different than private mortgage insurance? Well, PMI isn’t about protecting you at all – it’s about protecting the lender in case you default on your home loan. It diversifies that risk to a third party. Should you look into these options? You might be in a situation in which you really don’t want to risk burdening your heirs with an existing mortgage – especially if they are trying to pay off one themselves. Or, maybe you want a more flexible insurance option that could be used to pay off a mortgage or meet other needs. Talk to your financial or insurance advisor today to explore this a little further.

Don't Make This Mistake with Your 401(k)

By Your Line to Retirement • January 19, 2015
If you have kids, you’re either dreading the cost of college or already dealing with the pressure. Today, the average cost of an education at a public university is $22,286 per year. Private schools cost even more, averaging $44,750 annually. For most people, providing their children with a solid education is a high priority, so it’s no wonder so many parents feel driven to make desperate decisions. Unfortunately, desperation can drive us to make poor decisions with our money. Before you drain your retirement account to pay that tuition bill, stop and consider the ultimate cost to you. You may feel that you can afford to lose a few thousand from your retirement account, but that’s not all you’ll lose. You would also lose the compounding interest that money would have accumulated over the rest of your life, and you may also incur significant fees for withdrawing the money. You could end up struggling once you retire, or being forced to work longer than you had planned. Raiding your 401(k) fund to pay for college can be one of the worst financial mistakes you’ll ever make. Luckily, it’s also a mistake you can easily avoid. You have many other options available to you, such as grants, scholarships, loans, work study programs, and so on. Families who don’t believe they’ll qualify for financial assistance are often surprised – especially if they have more than one family member in college at the same time. Talk to a financial aid counselor at the school of your choice, and you may find that you have more options than you previously imagined. If you start planning early enough, you can prevent an educational funding crisis from ever hitting your family. A 529 savings plan allows you to set aside money for college with taxes deferred. Talk to your financial advisor about the benefits and risks of a 529 savings plan, and protect your retirement fund while giving your children their best start in life.
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