I’ve said it before, and I’ll say it again: One of the easiest ways to secure your clients’ retirement success is by addressing long-term care.
The cost of extended care continues to escalate. And it will continue to climb as Americans live longer and the demand for care increases. If you’re not protecting against this risk, you’re doing you and your clients a huge disservice.
Today, there are more than $471 billion of annuities on the books of insurers.1 Rarely do our clients annuitize these older annuities, and the utilization rate for income riders remains low. Both of these facts make me think that many people purchased these fixed and indexed annuities for a future need or emergency. If that is the case, why not apply the annuity for the specific purpose of covering emergencies?
Under current tax law, annuity owners are allowed a tax-free exchange between annuities under certain circumstances. The contract being exchange and purchased must have the same owner and annuitant and considered like-for-like. If the exchange meets that criteria, the embedded gains (deferred interest) may continue to be deferred in the new contract being purchased.
With the Pension Protection Act, there is a new level of tax-free status with nonqualified annuities. When the client has a qualifying long-term care event, proceeds from the annuity are received tax-free. That includes the carrier’s funds as part of the long-term care insurance, the original principal (cost basis), and all the deferred gains in the contract. Older contracts like variable annuities, fixed annuities, and fixed indexed annuities qualify for this exchange treatment and potential for tax-free distributions due to long-term care.
Your clients’ needs change over time. You routinely adjust their asset allocation with market conditions and changes in risk tolerance as they age. You can also change the purpose of their existing annuities to match their current purpose.
Take a look at your existing book of business. Or, ask about a prospective client’s annuity holdings. It’s likely to make a lot of sense to your clients to re-purpose some of their assets in order to create leverage and tax efficiency.
Turn old assets with tax-deferred gains into tax-free distributions for long-term care event. The transaction is easy to complete and benefits many who are holding older annuities for an emergency.
Across the country, advisors are telling us they’d love to find a steady stream of clients. Well, more than $3 trillion in pension assets are ready to move to either insurance carriers or employees in the next two decades. So, with the right approach, pension risk transfer can provide sustainable growth for any financial services firm.
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About the Author
Mike McGlothlin is a team leader, retirement industry activist and disciple of Indiana Hoosier basketball. In addition to being EVP of retirement at Ash Brokerage, he is a sought-after writer and speaker. His web series, “Winning Strategies,” provides insight and motivation for financial advisors in many forms – blogs, books, videos, podcasts and more. His latest book, “Free Throw for Financial Professionals,” is available now – learn more at www.freethrowsforpros.com.
1Insured Retirement Institute Fact Book 2018, 17th edition: https://www.myirionline.org/research/research-detail-view/iri-fact-book-2018-17th-edition-(single-license-download)
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