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Should I pay premiums for LTC from my annuity, and if so, under what approach?

I am 55 years old and want to obtain Long Term Care insurance. I understand you can use an annuity to pay LTC premiums tax free through a tax law called 1035 Exchange, and I have an annuity that I can use. Is this an optimum route to pay for LTC? If so, what should I ask myself to determine whether I should 1) Make a large withdraw from the annuity (paying tax on the gains) to buy an LTC policy with a one-time large payment up front, or 2) arrange for periodic funds transfer to a LTC insurance company to pay ongoing annual premiums for LTC? (Note: I did some calculations assuming my annuity (without any more contribution) would pay 5% per year in gain, and that LTC premiums would go up 10% per year, and the annuity would fund the next 20 years of the LTC premiums under those assumptions.)

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  Answers  |  1

November 12, 2014

Good question! You are close, the 1035 tax free exchange will allow you to exchange an existing annuity or permanent life insurance contract to a new one that has a Long Term Care rider as a benefit. The 1035 does not by itself allow you to use the funds in a annuity for long term care expenses.
This is likely your best route to provide for long term care expenses because the benefits from the rider are tax free. The 1035 to a new annuity with the rider is not guaranteed, there are a few underwriting questions that could preclude you from qualifying for the new contract.
If this strategy does not work, then distributions from your existing annuity will likely be taxable if you are referring to the GWIB rider providing the 5% income stream.
Another alternative is to annuitize your contract, this would create a smaller income tax but leave your heirs without benefits in most cases.

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