Posted on August 12th, 2025

The Pension Protection Act gives owners of nonqualified deferred annuities a powerful planning option. It allows them to convert these annuities into combined annuity and long-term care (LTC) products, making it possible to access gains—normally taxable—on a non-taxable basis when the funds are used for LTC expenses. This approach can be especially valuable for individuals who may not qualify for traditional LTC insurance or who prefer not to commit to ongoing premium payments.

Case Study One

An 81-year-old client owns an existing $125,000 nonqualified annuity or cash fund. While there is a potential need for care, qualifying for traditional long-term care insurance may be difficult, and the client wishes to avoid ongoing premium costs. In this situation, an annuity/LTC product can offer a solution.

The base product provides an initial 36-month LTC benefit equal to the value of the annuity, entirely tax-free. It also allows for cash value growth and requires no underwriting. For those who want extended coverage, an optional rider is available. This rider can add another 36 months of benefits or even a lifetime LTC benefit, though it does require underwriting through a tele-interview. It also offers flexibility in payment plans, including single payment, 10-year, 20-year, or continuous payments, and can include inflation protection.

In this case, the $125,000 existing annuity is reallocated so that $102,500 funds the base annuity, while $22,500 is directed to the rider for lifetime LTC coverage. With this arrangement, the annuity owner can access up to $36,000 per year, tax-free, for LTC expenses for life. The tradeoff is that the new annuity may have a lower interest rate and a lower cash-surrender value than the original contract.

Case Study Two

A married couple, both age 60, are retired and have a sizeable IRA along with a high pension income. They want a plan with guaranteed premiums, prefer to use only qualified plan assets, and know that once required minimum distributions (RMDs) begin, they will have more income than they need.

Their solution is to transfer $200,000 from their IRA to purchase a single-premium $240,000 annuity, which includes a 20% bonus. The annuity is then used to purchase a 10-pay whole-life policy, with annual premiums of $24,000. This policy provides a death benefit/LTC benefit of $239,497, along with a lifetime rider for LTC insurance. The rider ensures that each spouse has an $86,220 lifetime LTC benefit.

One key requirement for this strategy is that both clients must be at least 59½ years old to avoid penalties when using qualified plan funds. As their advisor notes:

“They have transferred a portion of their qualified money to pay for this plan that will cover both of them for life. I think it’s a great approach. If designed properly, it can cover both income and healthcare needs.” — The Financial GPS