Making the Case for Annuity-Based Asset-Based LTC Products

We all know how important it is to keep things simple for clients. Covering the essential components of a planning strategy as efficiently as possible increases understanding and improves the quality of their decisions.

In the Asset-based Long-Term Care (ABLTC) segment, however, there is a detail that must be considered that is often overlooked: Source of funds. Specifically, clients need to understand the pros and cons of using non-qualified funds versus qualified funds, annuities versus brokerage accounts and the like when funding their care planning strategy.

This becomes even more important when we consider the tax ramifications specific to each funding source, particularly when considering non-qualified annuities. Why call out non-qualified annuities specifically? Simple: There's an opportunity to avoid a taxable event altogether by selling an annuity-based ABLTC product. The availability of a tax-free 1035 exchange into an annuity-based ABLTC product unlocks the power of the Pension Protection Act and changes the true cost of the care planning strategy.

These cases can play out in a couple different ways. The most common is a "Money Purchase" approach that starts with the existing annuity's cash value. That amount is used as the single premium to purchase an ABLTC solution. The tax issue is often overlooked and has a material impact on the decision-making process. More specifically, the single premium used to fund a life-based ABLTC product should be discounted by the taxes due on the liquidation of the annuity. That net amount is then used as the single premium on a life-based solution, while the full amount can be used to fund an annuity-based product.