A New Tax Law That is Actually Good For You Section 844 of the Pension Protection Act of 2006

Agenda Pension Protection Act 2006 Pension Protection Act 2006 Section 844 Section 844 Ok, this sounds boring. But the new laws are VERY consumer friendly and you will gain valuable information today.

Producer Training Requirements Required for all producers selling any LTC insurance in State – Partnership or Non-Partnership Required for all producers selling any LTC insurance in State – Partnership or Non-Partnership Initial NAIC 8-hour CE course and 4-hours CE every 24 months may be taken online or in person Initial NAIC 8-hour CE course and 4-hours CE every 24 months may be taken online or in person Some states are requiring state-specific Medicaid and Partnership information in addition to the NAIC 8-hour CE course. Some states are requiring state-specific Medicaid and Partnership information in addition to the NAIC 8-hour CE course.

New Tax Law PENSION PROTECTION ACT OF 2006 PENSION PROTECTION ACT OF 2006 Section 844 of Act specific to benefits found in annuity products Section 844 of Act specific to benefits found in annuity products Allows for Tax Free Distributions of Gain in Compliant Deferred Annuities to Fund/Reimburse Long Term Care Expenses Allows for Tax Free Distributions of Gain in Compliant Deferred Annuities to Fund/Reimburse Long Term Care Expenses Includes All Types of Care Includes All Types of Care

PENSION PROTECTION ACT OF 2006 Withdrawals from Non-Qualified annuities can be tax free to pay for long term care expenses only if the current annuity is PPA ’06 compliant. Withdrawals from Non-Qualified annuities can be tax free to pay for long term care expenses only if the current annuity is PPA ’06 compliant. Withdrawals from Non-Qualified annuities can be tax free to pay for long term care insurance premiums even if not PPA ’06 compliant. Withdrawals from Non-Qualified annuities can be tax free to pay for long term care insurance premiums even if not PPA ’06 compliant.

Treatment of annuity and life insurance contracts with a long term care insurance feature The above is the official title of Section 844 Section 844 has the following benefits: 1) It allows LTCI benefits from annuities and life insurance policies to pay income tax free (so long as the benefits are tax qualified). 2) It allows for the 1035 exchange of a life insurance policy or annuity to a LTCI policy. 3) It allows for the 1035 exchange of an annuity that does not have a LTCI rider to one that does have one.

So What Does This Mean? Suppose you have an annuity worth $150,000 and the cost basis is $80,000. If you wanted to take money from the annuity, you pay ordinary income tax on the gain of $70,000. But if you take money out to pay for LTC expenses or insurance, you pay NO TAXES. It saves you the taxes of the $70,000 gain. That is perhaps a $19,000 savings.

What’s the Catch? Most existing annuities do not have LTC provisions in the wording of the contract therefore would not qualify for tax free withdrawals. An annuity must be PPA06 certified for the withdrawals to be tax free. Few carriers have the proper wording in their existing contracts. Most existing annuities do not have LTC provisions in the wording of the contract therefore would not qualify for tax free withdrawals. An annuity must be PPA06 certified for the withdrawals to be tax free. Few carriers have the proper wording in their existing contracts.

Exchanging funds DEFERRED ANNUITY TO LTC 1035 TRANSFER AUTHORIZATION Only individual-owned annuity to individual-owned LTC policy or joint- owned annuity to shared LTC policy exchanges are permitted. The proposed/current LTC insured(s) must be the owner(s) of the annuity. Only individual-owned annuity to individual-owned LTC policy or joint- owned annuity to shared LTC policy exchanges are permitted. The proposed/current LTC insured(s) must be the owner(s) of the annuity. Only annual mode is available with the 1035 partial exchanges program. Only annual mode is available with the 1035 partial exchanges program. I/We understand that the above requested transfer of funds from my/our existing annuity contract will be handled as 1035 exchange(s). I/We hereby authorize carrier to process the required exchange(s) I/We understand that the above requested transfer of funds from my/our existing annuity contract will be handled as 1035 exchange(s). I/We hereby authorize carrier to process the required exchange(s) on a one time or recurring annual basis, withdrawing necessary funds from the above designated annuity contract(s) to fund the premiums of the Long Term Care Insurance Policy referenced above.

1035x to a LTC policy Existing annuity does NOT have to be PPA’06 compliant. Existing annuity does NOT have to be PPA’06 compliant. LTC policy should be on annual mode. LTC policy should be on annual mode. 1035x is for the annual LTC premium amount. 1035x is for the annual LTC premium amount. Done each year. Done each year. Annuity carrier should provide a 1099 but coded LTC so tax free. Annuity carrier should provide a 1099 but coded LTC so tax free. Check with annuity carrier if compliant Check with annuity carrier if compliant

Annuities ANNUITY LANDSCAPE ANNUITY LANDSCAPE 150 Billion Annual Sales 150 Billion Annual Sales 1.8 Trillion in In-Force Annuities (that’s $1,800,000,000,000) 1.8 Trillion in In-Force Annuities (that’s $1,800,000,000,000) Deferred Annuity purchasers are attracted by Deferred Annuity purchasers are attracted by Safety Safety Favorable tax treatment Favorable tax treatment Guaranteed income Guaranteed income Avoiding probate Avoiding probate

Do you have an annuity? According to an industry study: According to an industry study: 83% of non-qualified annuity holders never touch the funds. 83% of non-qualified annuity holders never touch the funds. When asked why they hold an annuity the two most common answers are When asked why they hold an annuity the two most common answers are 1) For emergencies 2) To pass to my spouse or family

Annuities ANNUITY LANDSCAPE – WHAT’S REALLY HAPPENING NOW? ANNUITY LANDSCAPE – WHAT’S REALLY HAPPENING NOW? How many are annuitized? How many are annuitized? How do annuity owners plan to fund medical emergencies? How do annuity owners plan to fund medical emergencies? How do we sell annuities in a low interest rate environment How do we sell annuities in a low interest rate environment

Long Term Care Insurance LONG TERM CARE LANDSCAPE LONG TERM CARE LANDSCAPE Long Term Care Insurance is a “good idea” 95% of people age 65 or older are not buying it Recent economy – do clients want to pay premiums? More and more boomers every year Whether consciously or sub-consciously: clients are self-insuring

LTCI Most Common Objections 1) Too expensive 2) What if I never use the benefits? 3) Insurance companies can raise rates on me 4) I’ve got enough money to pay on my own

Linked Benefits WHAT ARE LINKED BENEFITS? WHAT ARE LINKED BENEFITS? Single Premium Products Single Premium Products Some Annual Premium Paying Products Available Some Annual Premium Paying Products Available Annuities, Universal Life and Whole Life Annuities, Universal Life and Whole Life Better Leveraging Assets for These Benefits Better Leveraging Assets for These Benefits Non-Qualified or Qualified funds Non-Qualified or Qualified funds NOT LTC Partnership Approved NOT LTC Partnership Approved

Linked Benefits HOW DO LINKED BENEFIT PRODUCTS WORK? Creating tax advantaged withdrawals from annuities and life insurance to reimburse or fund long term care events Creating tax advantaged withdrawals from annuities and life insurance to reimburse or fund long term care events Doubling, tripling or creating a lifetime of unlimited benefits Doubling, tripling or creating a lifetime of unlimited benefits Withdrawing from accumulation value first, then extending benefits Withdrawing from accumulation value first, then extending benefits

Going on Claim Similar triggers to traditional LTCI policies Similar triggers to traditional LTCI policies Can’t perform 2 of 6 ADLs Can’t perform 2 of 6 ADLs Cognitively Impaired Cognitively Impaired Doctor recommendation Doctor recommendation Most are reimbursement some indemnity Most are reimbursement some indemnity Daily or Monthly Benefit Payments Daily or Monthly Benefit Payments TAX FREE BENEFITS TAX FREE BENEFITS

Going on Claim Tapping into death benefit or annuity accumulation value first, then rider kicks in and provides additional pool of money. Tapping into death benefit or annuity accumulation value first, then rider kicks in and provides additional pool of money. Premium paying policies usually tapping into death benefit only and no additional pool of money. Premium paying policies usually tapping into death benefit only and no additional pool of money. TAX FREE BENEFITS TAX FREE BENEFITS

Linked Benefits Life insurance with LTC benefits Life insurance with LTC benefits Whole life or Universal life base Single life or second-to-die Single premium or on going premiums Fixed annuities with LTC benefits Fixed annuities with LTC benefits

Accelerated Benefit Riders Commonly called Chronical Illness rider. Commonly called Chronical Illness rider. Similar triggers for a LTC claim. Similar triggers for a LTC claim. Usually no additional pool of money…just death benefit. Usually no additional pool of money…just death benefit. No health license or additional CE required. No health license or additional CE required. UL or Whole Life product UL or Whole Life product Premium Flexibility- Lifetime payment or single pay Premium Flexibility- Lifetime payment or single pay

Product Samples Without mentioning specific carriers, here are a few samples of how linked benefit products work.

Life/LTC Linked Benefits Female age 60 non-tobacco widowed $750,000 in assets such as CDs, stocks, annuities, IRAs, proceeds from husband’s life insurance… Concerned about LTC needs. $100,000 repositioned to a life/LTC linked benefit.

Comparing Products Life/LTC Female age 60 standard NT $100, th Pres. Life Guard Money Big Sig Life Life Caring Good Things to Life TLC Life Insurance $193,296$202,962$209,520 LTC monthly benefit $8,054$8,457$8,730 LTC duration 6 years Total LTC benefit $579,888$608,886$628,560 Return of premium 100%100%100%

Annuity/LTC Wild Kingdom Life 50 States Life Elimination Period 60 months 7 days Benefit Period 72 months 60 months Annuity Value Yr 1 $102,040$101,023 LTC Value Yr 1 $0$254,414 LTC Daily Benefit Yr 1 $0$142 Annuity Value Yr 10 $123,175$110,324 LTC Value Yr 10 $369,525$296,752 LTC Daily Benefit Yr 10 $168.73$ Annuity Value Yr 20 $151,830$120,704 LTC Value Yr 20 $455,491$349,328 LTC Daily Benefit Yr 20 $207.99$194.06

What about qualified money? One carrier has a second-to-die contract. Transfer IRA to an IRA annuity 1/20 th is withdrawn each year – taxable Withdrawal is used to pay life premiums Life contract has a LTC rider Can include spouse TAX FREE withdrawals for LTC needs

So What Do I Do? Go through your existing book of business Identify clients who have NQ annuities, CDs, have interest in LTC insurance, are between 50-80, high cash values in life insurance, have larger gain in their existing annuities… Then what do you do?

So What Do I Do? CALL THEM!

Sample approach “Dorothy, there has been a tax law change that I think may have a positive affect for you. I’d like to schedule a time to go over this with you.” “Dorothy, there has been a tax law change that I think may have a positive affect for you. I’d like to schedule a time to go over this with you.” “Frank, I know you have that old annuity with XYZ Company. Thanks to a tax law change, I may be able to enhance the benefits of your annuity.” “Frank, I know you have that old annuity with XYZ Company. Thanks to a tax law change, I may be able to enhance the benefits of your annuity.”

Sample Approach “Chuck, I know you are not a fan of long term care insurance but thanks to a tax law change, I would like to share with you a couple ideas or options that may be in your best interest.” “Chuck, I know you are not a fan of long term care insurance but thanks to a tax law change, I would like to share with you a couple ideas or options that may be in your best interest.”

So What Do I Do? 1) Review current non-qualified annuity. Is it PPA’06 compliant? 2) Consider repositioning to an annuity that allows tax free withdrawals to reimburse LTC expenses. Could save $thousands in taxes.

So What Do I Do? 1) Do you have a long term care insurance policy? How are you paying premiums? 2) Consider a 1035 exchange from your existing annuity to have tax free dollars pay the premiums. 3) Call your current annuity company to see if they will allow for 1035x.

How to approach a prospect Benefits-consumer Benefits-consumer This is a powerpoint with audio that you can to prospects or clients introducing them to linked benefits.

UNDERWRITING Linked Benefit products usually no paramed Linked Benefit products usually no paramed Phone interview testing for cognitive ability Phone interview testing for cognitive ability TAKE IT SERIOUSLY word recall Often NO medical records needed Often NO medical records needed Contracts issued within days Contracts issued within days Accelerated Riders usually full underwriting Accelerated Riders usually full underwriting

LINKED BENEFITS SOMETHING NEW TO TALK TO CLIENTS ABOUT SOMETHING NEW TO TALK TO CLIENTS ABOUT TAX FREE BENFITS FOR LTC NEEDS TAX FREE BENFITS FOR LTC NEEDS AVOID GAIN IN NQ ANNUITIES AVOID GAIN IN NQ ANNUITIES LEVERAGE DOLLARS AND CREATE MORE LEVERAGE DOLLARS AND CREATE MORE KEEP MORE $ UNDER MANAGEMENT KEEP MORE $ UNDER MANAGEMENT

Questions? Have questions? Contact me via Could present at your state or local.