(352) 461-0645

New tax perks for nonqualified annuity owners

You can thank the Pension Protection Act.

On January 1, 2010, owners of certain nonqualified annuities were allowed some new tax benefits. On that date, the Pension Protection Act (PPA) of 2006 was fully implemented and brought about dramatic and interesting changes for those who had started annuities with after-tax dollars. 

New interest in hybrid annuities. Some variable annuities give you the option of buying a long term care insurance rider for additional cost. These are often called “hybrid annuities” or “annuity/LTCI plans”. Typically, the people most interested in them are annuity holders outside of their surrender period who have a need for long term care planning.

If it turns out that the hybrid annuity owner doesn’t need long term care, then he or she usually can choose from three options: arranging an ongoing income stream from the annuity contract, cashing out the annuity and paying income tax on the proceeds, or continuing to earn tax-deferred interest on the annuity.1

There are some trade-offs for the LTC coverage in these annuities. The cost of the LTC rider decreases the potential tax-deferred income stream resulting from the annuity contract. Benefits usually aren’t activated until two years after the annuity is purchased. Additionally, the LTC coverage only lasts for a certain number of years (though in some of these plans, the annuity owner may pay extra to extend it).1

A new perk: tax-free withdrawals to pay for long term care. With all this in mind, owners of hybrid annuities can thank the PPA for a new option. At the start of 2010:

  • These nonqualified deferred annuities with added long term care insurance riders were now characterized as tax-qualified LTC insurance plans.2
  • As a result, all withdrawals from these hybrid annuities are income tax free so long as they are used for qualified long term care. So you can use the cash value of the annuity to cover the cost of LTC insurance premiums without triggering a taxable event.2
  • Annuity owners are now allowed to make tax-free 1035 exchanges into appropriate hybrid annuities with long term care riders.3
  • Additionally, an annuity owner can do a 1035 exchange for the cash value from any annuity into a single-premium qualified LTC insurance policy without incurring any gains.3

Now these annuities are even more attractive. Hybrid annuities with LTC insurance riders already offer their owners tax-deferred growth – and sometimes, a return-of-premium option that gives back the investment to an owner’s estate if no LTC claim is made. The new allowance of what could be sizable tax-free withdrawals makes them look even better.

In addition, the new freedom to make a tax-free exchange means that an annuity owner can now leave a current contract for a hybrid annuity that may provide a much greater pool of money someday to cover LTC costs. The possible downside: if you make that move before age 59½, you may incur fees, charges and/or penalties as a result. (Keep in mind also that annuity contracts are not “guaranteed” by any federal agency; the “guarantee” is a pledge from the insurer.)

Are they for you? These hybrid annuities are certainly worth a look. If you can’t qualify medically for LTC insurance but still need to be protected, a hybrid annuity may be an excellent option. Many people fund these annuities by redirecting cash from a bank CD or an annuity they already own. You might want to talk to your insurance or financial consultant about the possibility.

Guarantees provided by life insurance and annuities are subject to the financial strength of the issuing insurance company; not guaranteed by any bank or the FDIC. This material has been prepared for informational and educational purposes only.  It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.  Please consult with a professional specializing in these areas regarding the applicability of this information to your situation. 11739 – 2011/6/1

These are the views of the author and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.


1Registered Rep[9/15/09]
 The Complete Lawyer [4/20/09]
Financial-planning.com: [11/1/09]

This material was prepared by Peter Montoya Inc., and does not necessarily represent the views of the presenting Representative or the Representative’s Broker/Dealer. This information should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information. www.petermontoya.com, www.montoyaregistry.com, www.marketinglibrary.net

Make the REST of your life
the BEST of your life.

For more than 14 years our mission at West Financial Group has been to guide our valued clients to financial security. We strive to address all of your concerns, ensure you understand the products we recommend and take pride in knowing you’re comfortable with the direction and strategy we provide you.

Our goal is to provide a “WOW” experience at every client interaction! We want every meeting, phone call and event to be an interaction worth talking about. We want our clients to be able to say, “WOW, what an experience! I can't wait to tell my friends about our financial professional.”

Whether it’s financial, retirement, legacy planning or optimizing your future wealth, our approach includes understanding your unique situation, exploring your goals and discovering the best way to make the REST of your life, the BEST of your life. By getting to know you and your family, we serve as financial guides who keep your best interests in mind throughout the entire process.

Skip West | Financial Planner | West Financial Group

Latest blog posts.

What to expect during peak hurricane season in The Villages community.

Monday, August 19, 2019

By: Laurel Nendza

Florida is known for beautiful white sand beaches, Disney World, and a laid back lifestyle.  But unfortunately, Florida has a scary side that shows itself every couple of years. Hurricanes in Florida can create costly damage and threaten lives up and down the Sunshine State.

Learn more...

The SECURE ACT Encourages Annuities.

Monday, July 15, 2019

The political world seems to be turned on its head every other day, but thankfully there is plenty good that comes from our House of Representatives.  One of those good things is an act that benefits retirees and protects them after they've done their part in the working world. The SECURE Act, otherwise known as the Setting Every Community Up for Retirement Enhancement Act, has just recently passed with a massive wave of support. In general, this bill gives retirees more access to workplace pensions and makes it, so they don't have to jump through hoops to get annuities they're deserved.

Back when 401(k) plans were introduced during the Revenue Act in 1978, it let employees invest and save for their future from their paychecks. Great, right? Well, yes but most retirees don't know exactly how much to save for the rest of their days. Will they live comfortably? Or will the money run out because of unexpected medical expenses or other things? The SECURE Act rights that wrong and even promotes the use of annuities by companies! This is fantastic news since it's not an easy or cheap thing to get an annuity.

Learn more...

Latest tips.

Interested in staying the loop with the latest financial tips and information about upcoming dinner discussions? Then sign up for our FREE email newsletter.

* indicates required

Connect with us.