Are you paying for a cash value life insurance policy you don’t really need anymore? Or perhaps you have a variable annuity, but aren’t sure what to do with it? Well, good news on both fronts! You can use a friendly little IRS rule, called a 1035 exchange, that allows you to trade a current cash value life insurance or annuity policy for a different insurance product and not pay any tax on the trade.
My favorite strategy is to exchange them for an asset-based long-term care policy. This is not your typical traditional LTC policy, with all of its inherent drawbacks. This is a policy you fund once, with the 1035 exchange, and there are no further premium payments. It provides you with an enhanced pool of tax-free LTC dollars that you can use for home health care, assisted living, or full skilled care. And, if you don’t ever need it for LTC costs, it has a death benefit that passes to your heirs. It solves the “use it or lose it” drawback of traditional LTC insurance, and since you pay once-and-done, there’s no fear of increasing annual premiums.
This tax-free 1035 exchange process has lots of tax advantages. Normally, the cash value of a life insurance policy and the accumulation value of an annuity has interest that is taxable if you take it out. But when you exchange it for an asset-based LTC policy, the LTC benefits are tax-free and the death benefit is tax-free. Voila! The taxable interest has disappeared! Note that this strategy does not apply to term insurance, which has no cash value. And if you don’t have an existing insurance policy to exchange, you can still purchase this type of LTC policy with non-retirement money, or even pay for it over a period of time.
Beyond the tax benefits, an asset-based LTC policy truly solves retirees’ most vexing dilemma: how do you protect yourself from the lurking financial drain of LTC costs, while still being able to confidently enjoy your retirement? A 2023 Genworth study found, in Loudon County, the average monthly cost of home health care is $5,434, assisted living is $4,825, and full skilled care is $8,851. Hoping for good health is not an LTC strategy – why risk your hard-earned assets, or put your adult children in a financial bind, when easy solutions are out there waiting for you?
Call or email me at ymarsh@marshwealth.com to learn more. Peace of mind is priceless.
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