Clients who have accumulated retirement savings may be concerned about higher income tax rates in the future when they begin taking distributions from their taxable retirement accounts. At the same time, planning for funding unpredictable long-term care expenses can appear daunting with the average annual cost of nursing home care now reaching $75,000. What to plan for can be confusing when there are so many unknown and unpredictable factors.
Future of Tax Rates
To deal with the uncertainty of future tax rates, new IRA conversion rules should be considered. According to the new rules provided for under the Tax Increase Prevention and Reconciliation Act (TIPRA 2005), a taxable IRA can be converted to a non-taxable ROTH IRA beginning in 2010.
The price? The IRA owner needs to include the entire IRA proceeds in taxable income in the year of conversion. However, for conversions done in 2010, the IRS will allow an IRA owner to spread the payment of taxes due over 2011 and 2012–but only if the conversion is done in 2010.
Long Term Care Needs
Long-term care costs, like taxes, can deplete retirement savings. A single insurance solution that covers both life insurance and long term care may thus help to mitigate the negative financial effects of long term care on personal savings–an issue that statistically will affect 70% of people over the age of 65.
Planning Priorities
Many folks may recognize the importance of life insurance to protect assets for the benefit of family members after death. But what may be overlooked is the need to protect one's independence and retirement savings during one's lifetime, in sickness and in health, and during the lifetime of the healthy spouse. If there is no savings to tax, then fretting over uncertain income tax rates may be moot.
What To Do?
The single insurance solution is a combination whole life insurance policy that provides a guaranteed death benefit and LTC benefits funded thru a single premium. This is, of course, a more agreeable topic to discuss with clients than the opportunity to advance a lump sum tax payment to the IRS though a ROTH conversion. So, you may want to start a planning discussion with this topic at the top of the list.
Certainly, the combination policy can go a long way to hedge against LTC expenses depleting savings that could benefit the non-ill spouse as well. If the LTC benefit is not used, the life insurance remaining will pay out in full to heirs. To boot, guaranteed cash values are strong on some policies, underpinned by a guaranteed return of a single contribution to the policy within the first few years; and the long-term possibility of cash values being substantially higher than the investment in the contract.
