IRS Issues Interim Guidance on the Federal Income Tax Treatment of Annuity and Life Insurance Contracts with a Long-Term Care Insurance Feature


On August 11, 2011, the Internal Revenue Service (the IRS) released interim guidance – Notice 2011-68 (the Notice) – addressing the application of certain changes to the federal income tax rules governing qualified long-term care (QLTC) insurance, annuity, and life insurance contracts. Specifically, the Notice provides interim guidance on the federal income tax treatment of annuity and life insurance contracts with a long-term care insurance feature, i.e., combination products. Guidance on this topic has been pending on the annual priority guidance plan prepared by the Treasury Department and the IRS since 2009. The Notice also requests comments on several important issues to be addressed in future guidance concerning combination products.


The Pension Protection Act of 2006 (the PPA) amended sections 72, 1035, and 7702B of the Internal Revenue Code of 1986 in regards to the federal income tax treatment of combination products and added certain new reporting requirements for charges and payments for QLTC insurance under combination products. In general, these amendments affect QLTC insurance, annuity, and life insurance contracts issued after December 31, 1996, but only with respect to taxable years beginning after December 31, 2009, and tax-free exchanges occurring after December 31, 2009. The information reporting amendment applies to charges made after December 31, 2009.

Amendments to Section 72. QLTC insurance coverage can be provided in conjunction with an annuity contract (or a life insurance contract) either as a separate insurance coverage paid for with direct premium payments or by drawing amounts from the cash value of the annuity contract (or, alternatively, the cash surrender value of the life insurance contract). The PPA added section 72(e)(11), which provides that a charge is not includable in income if it is made against the cash value of an annuity contract or the cash surrender value of a life insurance contract and constitutes payment for coverage under a QLTC insurance contract that is a part of, or is a rider to, the annuity or life insurance contract. The investment in the contract is reduced (but not below zero) by the charge. The PPA did not otherwise amend the definition provided in section 72(c)(1) and section 72(e)(6) for the term “investment in the contract.”

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