Elder Law Resources:

Exchange an Old Annuity or Life Insurance for Long-Term Care Insurance

A new law makes the purchase of products that combine annuities or insurance policies with long-term care insurance more attractive. As ElderLawAnswers previously reported, these “hybrid” products are gaining in popularity due to a law that went into effect January 1, 2010, making distributions from life insurance and annuities tax-free when used to pay for long-term care. The same law also allows owners of annuities or life insurance policies to exchange their old policies for long-term care insurance or hybrid policies without being taxed.

Section 1035 of the U.S. tax code allows holders of annuity or life insurance contracts to move to another annuity or life insurance contract without being taxed on the move. The new law extends the benefits of section 1035 to individuals who want to exchange an old annuity or life insurance policy for a long-term care insurance policy or a hybrid policy. The law applies only to “non-qualified” annuities, which means annuities that were purchased with after-tax dollars.

If you have an old annuity or life insurance policy and want long-term care insurance, you have several options. You can either partially or fully exchange the old policy and use the proceeds to purchase a stand-alone long-term care insurance policy. Or you can fully exchange the old policy for a new hybrid insurance or annuity contract that also includes a long-term care insurance policy. You will then be able to withdraw money from the annuity or life insurance contract tax-free as long as it is being used to pay for long-term care.

Exchanges may not be beneficial for everyone. Before exchanging any policies, you should make sure your current policy doesn’t have a death benefit or another benefit that you don’t want to give up. Also, there may be surrender charges for exchanging an old annuity. Talk with your elder law attorney to determine if an exchange is the right move for you.