Paying for long-term care insurance (LTCI) doesn’t always mean writing a new check. Thanks to federal tax laws like the Pension Protection Act (PPA) and Section 1035 of the Internal Revenue Code, you may be able to use money from existing financial products, such as life insurance or annuities, to fund your LTCI premiums in a more tax-efficient way.

What Is the Pension Protection Act?

The Pension Protection Act of 2006 introduced new tax advantages for those using certain insurance products to pay for long-term care. Specifically, it allows funds from qualifying life insurance policies or annuities to be used for LTCI expenses without being taxed as income, as long as the product meets specific IRS criteria. This makes it possible to reposition assets you may no longer need for their original purpose and put them toward long-term care coverage instead.

What Is a 1035 Exchange?

A 1035 exchange allows you to move money from one type of insurance product to another tax-free as long as the exchange meets IRS requirements. Many people use this strategy to fund asset-based or hybrid LTCI policies by exchanging a life insurance policy with cash value or a non-qualified annuity into a traditional LTCI policy or a hybrid policy with LTC benefits. This allows you to shift money you’ve already saved into a product that better fits your future needs without triggering a taxable event.

Benefits of Using PPA and 1035 Strategies

• Tax-free transfers: Avoid paying income tax on gains when moving funds between qualified products.
• Better use of existing assets: Reallocate funds from old policies that may no longer align with your goals.
• Simplified LTC funding: Pay LTCI premiums using cash value from other policies, potentially avoiding out-of-pocket payments.
• Legacy preservation: Protect your estate by ensuring you’re financially prepared for long-term care needs.

Are these funding strategies right for you?

If you have a life insurance policy or annuity you no longer need or one that’s underperforming, these options may help you optimize your existing wealth for long-term care planning.

One of our licensed LTC Advocates can help you explore your eligibility and walk you through the process, step by step.