Changes to the tax code enacted by the Pension Protection Act (Pub.
L. No. 109-280) will provide incentives to purchase long-term care
insurance by providing purchasers with attractive tax benefits,
American Council of Life Insurers Senior Vice President (taxes and
retirement security) Ann Cammack told BNA Dec. 4.
First, the law amended tax code Section 72, so that distributions
from the cash surrender value of life insurance or annuity contracts
used to pay premiums for long-term care riders to the contracts are
excluded from taxable income.
The legislation also amends Section 7702B to treat as qualified
long-term care a long-term care rider to an annuity or life insurance
contract, which generally will exclude premium fees from taxable
income.
The changes essentially mean that any charge against the cash value
of an annuity contract or cash surrender value of a life insurance
contact made as payment for a qualified long-term care contract rider,
or supplement, is excludable from taxable income.
“The hope from a policy standpoint is that this will
encourage people to acquire protection from catastrophic
illnesses,” Cammack said.
The pension law sections generally are effective for contracts
issued after Dec. 31, 1996, but only with respect to taxable years
beginning after Dec. 31, 2009, the law
said.
Thomas Advocates Change.
The changes were championed by outgoing House Ways and Means
Chairman William Thomas (R-Calif.), who viewed the language as a way
to provide taxpayers with multiple benefits from a single pool of
assets, Cammack said.
“The idea is that perhaps it makes it more appealing for the
individual to consider [purchasing] long-term care when they acquire
an annuity or life insurance contract by providing that the
distribution of the assets of the contact is a tax free
distribution,” she said.
The law also amends Section 1035(b) to expand the types of
insurance policies that may be exchanged in a tax-free transaction as
well as amending information reporting requirements contained in
Section 61. Both of those changes are effective for transactions
occurring after Dec. 31, 2009.
Industry Response.
The change to Section 72 mean that monies taken out of a contract's
cash value used to pay long-term care rider fee premiums will not be
treated as a taxable event, but such transactions will reduce the
investment in the contract, but not below zero.
Section 7702 will deny a Section 213 medical expense deduction for
any payments made for coverage under a qualified long-term care
insurance contract if the payment is made as a charge against the cash
surrender value of a life insurance contract or the cash value of an
annuity contract.
Cammack said combination insurance products that link life
insurance and annuities with long-term care insurance currently are
available on the insurance market but that consumer appetite for the
riders likely will increase due to the pension act provisions.
“This is a market [insurance companies] see opening up for
them,” she said.
“This is strictly a question of how the product is treated
for tax purposes. There are companies that sell combination annuity
and long-term care contacts today; they just don't get the same tax
preference as they will in the future,” she added
By Stephen Joyce