Earlier this year, Congress passed the Pension Protection Act of 2006.Included in that legislation are some features that encourage preparation and spending for long-term care. In particular, the act allows the transfer of excess pension benefits to fund estimated retiree medical costs, and it permits annuity and life insurance contracts to expand their coverage to include long-term-care costs, including skilled care from medical professionals and custodial care (such as assistance with bathing, eating, dressing, walking, etc.).

Under the new legislation, deferred annuity contracts and life insurance policies that include a long-term-care rider can pay out amounts for long-term care, and those amounts represent non-taxable income. This new feature is effective beginning in 2010, but applies to annuity and life insurance contracts that were issued after Dec. 31, 1996.

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