Q. My wife and I are 84 and considering a retirement home. I read about a provision in the Pension Protection Act that would allow long-term care costs to be paid tax-free through an annuity. We have an annuity with a surrender value of more than $300,000. What part of this could help us pay our monthly bill?– R.M.
A. First, you need to evaluate whether you would owe taxes on annuity withdrawals, said Montgomery Taylor, an accountant and financial planner in Santa Rosa, Calif.
If the value of your contract is down to basically what you put into it (all too common these days), you could owe no tax, and thus have no need for a tax break, Taylor said.
That said, the Pension Protection Act of 2006 did create a tax break for annuity owners that began this year. While you don’t get a break on direct long-term care costs, you can qualify for tax-free annuity withdrawals that are used to pay for long-term care insurance premiums. If you end up needing the insurance, your coverage could equal two to three times the value of the annuity policy, experts said.
Some hybrid annuity/long-term care products have been available in recent years, though several insurers are developing new products to take advantage of the provision, said Carl Friedrich, a principal with Milliman, an insurance industry consulting firm.