Non Qualified Long Term Care Annuity
Jason Stolz CLTC, CRPC
Non-qualified long-term care annuities allow retirees to use existing after-tax savings to pay for future care expenses—without triggering new taxes. Thanks to the Pension Protection Act (PPA), annuity earnings can now be withdrawn tax-free when used to fund qualified long-term care benefits. At Diversified Insurance Brokers, we help clients leverage these tax advantages, reposition old annuities, and create coverage that protects both their income and their legacy.
Unlock Tax-Free Long-Term Care Benefits
See how to convert an existing annuity into tax-free long-term care coverage under the Pension Protection Act.
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Learn more about non-qualified annuities and how they fund care efficiently.
How Non-Qualified LTC Annuities Work
Unlike traditional LTC policies that require new premiums, a non-qualified annuity uses existing after-tax savings you’ve already accumulated. When paired with an LTC rider or used in a 1035 exchange into a new hybrid contract, both your principal and gain can pay for care tax-free. This is one of the most powerful applications of the Pension Protection Act.
Pension Protection Act Tax Treatment
Under the 2006 Pension Protection Act (effective 2010), annuity withdrawals and policy gains are excluded from taxable income when used for qualified long-term care services. That means your annuity’s deferred growth can cover home health, assisted living, or nursing care—without generating new tax liability.
- Tax-free LTC payouts: Withdrawals for qualified care are fully exempt from federal income tax.
- Tax-deferred growth: Your annuity continues to compound without annual taxation.
- No loss of value: If LTC is never needed, beneficiaries still receive the remaining annuity value.
Who Should Consider a Non-Qualified LTC Annuity?
- Individuals with existing non-qualified annuities who no longer need income from them.
- Retirees seeking tax-free access to gains for future care expenses.
- Clients with health changes who may not qualify for traditional LTC insurance.
- Couples wanting shared LTC coverage using joint-life annuity contracts.
Using a 1035 Exchange to Upgrade an Existing Annuity
If you already own a deferred annuity, you can reposition it into a new LTC-qualified contract via a Section 1035 tax-free exchange. This transfer preserves your tax basis, keeps all gains deferred, and enables tax-free treatment for future LTC withdrawals. It’s a compliant, IRS-approved strategy that can turn idle annuities into long-term care protection.
Example: Converting an Idle Annuity
Imagine a retiree with a $200,000 non-qualified annuity that has grown to $280,000. A 1035 exchange into a qualified LTC annuity allows that entire $80,000 gain to fund future care tax-free. If no care is needed, the remaining value passes to beneficiaries. Either way, the funds never face double taxation.
Traditional vs. Non-Qualified Annuities for LTC Planning
| Feature | Traditional LTC Policy | Non-Qualified LTC Annuity |
|---|---|---|
| Premium Payments | Ongoing premiums | One-time repositioned asset |
| Tax Treatment | Premiums may be deductible | Withdrawals & gains tax-free for care |
| Return of Value | Use-it-or-lose-it | Unused balance passes to heirs |
| Underwriting | Medical review required | Generally simplified or none |
Coordinating LTC & Retirement Income
A non-qualified LTC annuity can work alongside your retirement portfolio or other income sources. Some clients pair it with a fixed annuity ladder for predictable growth, while others integrate it into estate or charitable planning strategies to minimize taxes long-term.
Design Your LTC-Qualified Annuity Plan
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FAQs: Non-Qualified Long-Term Care Annuities
Are non-qualified LTC annuities tax-free?
Yes. Under the Pension Protection Act, earnings from a non-qualified annuity are tax-free when used to pay qualified long-term care expenses.
What is the advantage of using a 1035 exchange?
A 1035 exchange lets you move an existing annuity into an LTC-qualified contract without taxes, preserving gains for tax-free care benefits.
Do I need to qualify medically?
Most non-qualified LTC annuities have simplified underwriting or no medical exam—ideal for those who might not qualify for traditional LTC insurance.
Can I still earn interest while my funds are in the annuity?
Yes. Your principal continues to grow tax-deferred, and unused value passes to beneficiaries if long-term care is never needed.
Are payouts guaranteed for life?
LTC annuity payouts continue until the policy’s LTC benefit pool is exhausted. Some hybrid annuities extend benefits for lifetime care.
What happens if I never need long-term care?
Any remaining account value is paid to beneficiaries, often without surrender charges after the vesting period.
Can couples share one annuity for LTC benefits?
Yes. Many non-qualified LTC annuities offer joint coverage for two insureds under a single contract.
Can business owners use this strategy?
Yes. Business owners can use after-tax assets to fund LTC annuities, keeping benefits tax-free while maintaining liquidity and estate flexibility.
