annuitant as of the annuity starting 
date or the difference in age between 
the annuitant and joint annuitant is 
15 years or less, 
‘‘(III) the life of the annuitant 
with a minimum period of payments 
or with a minimum amount that must 
be paid in any event, or 
‘‘(IV) the lives of the annuitant 
and a joint annuitant with a minimum 
period of payments or with a min-
imum amount that must be paid in 
any event, but only if the annuitant is 
the spouse of the joint annuitant as of 
the annuity starting date or the dif-
ference in age between the annuitant 
and joint annuitant is 15 years or 
less. 
‘‘(iii) EXCEPTIONS.—For purposes of 
clause (ii), annuity payments shall not fail 
to be treated as part of a series of substan-
tially equal periodic payments— 
‘‘(I) because the amount of the 
periodic payments may vary in accord-
ance with investment experience, re-
allocations among investment options, 
actuarial gains or losses, cost of living 
indices, a constant percentage applied 
not less frequently than annually, or 
similar fluctuating criteria, 
‘‘(II) due to the existence of, or 
modification of the duration of, a pro-
vision in the contract permitting a 
lump sum withdrawal after the annu-
ity starting date, or 
‘‘(III) because the period between 
each such payment is lengthened or 
shortened, but only if at all times 
such period is no longer than one cal-
endar year. 
‘‘(B) ANNUITY CONTRACT.—For purposes 
of subparagraph (A) and subsections (b)(5) and 
(x), the term ‘annuity contract’ means a com-
mercial 
annuity 
(as 
defined 
by 
section 
3405(e)(6)), other than an endowment or life 
insurance contract. 
‘‘(C) MINIMUM PERIOD OF PAYMENTS.— 
For purposes of subparagraph (A), the term 
‘minimum period of payments’ means a guaran-
teed term of payments that does not exceed the 
greater of 10 years or— 
‘‘(i) the life expectancy of the annu-
itant as of the annuity starting date, in the 
case of lifetime annuity payments de-
scribed in subparagraph (A)(ii)(III), or 
‘‘(ii) the life expectancy of the annu-
itant and joint annuitant as of the annuity 
starting date, in the case of lifetime annu-
ity payments described in subparagraph 
(A)(ii)(IV). 
For purposes of this subparagraph, life expect-
ancy shall be computed with reference to the ta-
bles prescribed by the Secretary under para-
graph 
(3). 
For 
purposes 
of 
subsection 
(x)(1)(C)(ii), the permissible minimum period of 
payments shall be determined as of the annuity 
starting date and reduced by one for each sub-
sequent year. 
‘‘(D) MINIMUM AMOUNT THAT MUST BE 
PAID IN ANY EVENT.—For purposes of subpara-
graph (A), the term ‘minimum amount that 
must be paid in any event’ means an amount 
payable to the designated beneficiary under an 
annuity contract that is in the nature of a re-
fund and does not exceed the greater of the 
amount applied to produce the lifetime annuity 
payments under the contract or the amount, if 
any, available for withdrawal under the contract 
on the date of death.’’. 
(c) RECAPTURE TAX FOR LIFETIME ANNUITY PAY-
MENTS.—Section 72 of such Code is amended by redesig-
nating subsection (x) as subsection (y) and inserting after 
subsection (w) the following new subsection: 
‘‘(x) RECAPTURE TAX FOR MODIFICATIONS TO OR 
REDUCTIONS IN LIFETIME ANNUITY PAYMENTS.— 
‘‘(1) IN
GENERAL.—If any amount received 
under an annuity contract is excluded from income 
by reason of subsection (b)(5) (relating to lifetime 
annuity payments), and— 
‘‘(A) the series of payments under such 
contract is subsequently modified so any future 
payments are not lifetime annuity payments, 
‘‘(B) after the date of receipt of the first 
lifetime annuity payment under the contract an 
annuitant receives a lump sum and thereafter is 
to receive annuity payments in a reduced 
amount under the contract, or 
‘‘(C) after the date of receipt of the first 
lifetime annuity payment under the contract the
dollar amount of any subsequent annuity pay-
ment is reduced and a lump sum is not paid in 
connection with the reduction, unless such re-
duction is— 
‘‘(i) due to an event described in sub-
section (c)(5)(A)(iii), or 
‘‘(ii) due to the addition of, or in-
crease in, a minimum period of payments 
within the meaning of subsection (c)(5)(C) 
or a minimum amount that must be paid 
in any event (within the meaning of sub-
section (c)(5)(D)), 
then gross income for the first taxable year in 
which such modification or reduction occurs 
shall be increased by the recapture amount. 
‘‘(2) RECAPTURE AMOUNT.— 
‘‘(A) IN GENERAL.—For purposes of this 
subsection, the recapture amount shall be the 
amount, determined under rules prescribed by 
the Secretary, equal to the amount that (but for 
subsection (b)(5)) would have been includible in 
the taxpayer’s gross income if the modification 
or reduction described in paragraph (1) had 
been in effect at all times, plus interest for the
deferral period at the underpayment rate estab-
lished by section 6621. 
‘‘(B) DEFERRAL
PERIOD.—For purposes 
of this subsection, the term ‘deferral period’ 
means the period beginning with the taxable 
year in which (without regard to subsection 
(b)(5)) the payment would have been includible 
in gross income and ending with the taxable 
year in which the modification described in 
paragraph (1) occurs. 
‘‘(3) EXCEPTIONS TO RECAPTURE TAX.—Para-
graph (1) shall not apply in the case of any modi-
fication or reduction that occurs because an annu-
itant— 
‘‘(A) dies or becomes disabled (within the 
meaning of subsection (m)(7)), 
‘‘(B) becomes a chronically ill individual 
within the meaning of section 7702B(c)(2), or 
‘‘(C) encounters hardship.’’. 
(d) LIFETIME DISTRIBUTIONS OF LIFE INSURANCE 
DEATH BENEFITS.— 
(1) IN
GENERAL.—Subsection (d) of section 
101 of such Code (relating to life insurance pro-
ceeds) is amended by adding at the end thereof the 
following new paragraph:
‘‘(4) EXCLUSION FOR LIFETIME ANNUITY PAY-
MENTS.— 
‘‘(A) 
IN
GENERAL.—In 
the 
case 
of 
amounts to which this subsection applies, gross 
income shall not include the lesser of— 
‘‘(i) 50 percent of the portion of life-
time annuity payments otherwise includible 
in gross income under this section (deter-
mined without regard to this paragraph), 
or 
‘‘(ii) the amount in effect under sec-
tion 72(b)(5). 
‘‘(B) RULES
OF
SECTION
72(B)(5)
TO 
APPLY.—For purposes of this paragraph, rules 
similar to the rules of section 72(b)(5) and sec-
tion 72(x) shall apply, substituting the term 
‘beneficiary of the life insurance contract’ for 
the term ‘annuitant’ wherever it appears, and 
substituting the term ‘life insurance contract’ 
for the term ‘annuity contract’ wherever it ap-
pears.’’. 
(2) CONFORMING AMENDMENT.—Paragraph (1) 
of subsection (d) of section 101 of such Code is 
amended by adding ‘‘or paragraph (4)’’ after ‘‘to the 
extent not excluded by the preceding sentence’’.
(e) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendments made by 
this section shall apply to amounts received in cal-
endar years beginning after the date of the enact-
ment of this Act. 
(2) 
SPECIAL
RULE
FOR
EXISTING
CON-
TRACTS.—In the case of a contract in force on the 
date of the enactment of this Act that does not sat-
isfy the requirements of section 72(c)(5)(A) of the 
Internal Revenue Code of 1986 (as added by this 
section), or requirements similar to such section 
72(c)(5)(A) in the case of a life insurance contract), 
any modification to such contract (including a 
change in ownership) or to the payments thereunder 
that is made to satisfy the requirements of such sec-
tion (or similar requirements) shall not result in the 
recognition of any gain or loss, any amount being in-
cluded in gross income, or any addition to tax that 
otherwise might result from such modification, but 
only if the modification is completed prior to the 
date that is 2 years after the date of the enactment 
of this Act.
SEC. 3. ANNUITY AND LIFE INSURANCE CONTRACTS WITH 
LONG-TERM CARE INSURANCE RIDERS. 
(a) EXCLUSION FROM GROSS INCOME.—Subsection 
(e) of section 72 of the Internal Revenue Code of 1986 
(relating to amounts not received as annuities) is amended 
by redesignating paragraph (11) as paragraph (12) and 
by inserting after paragraph (10) the following new para-
graph: 
‘‘(11) SPECIAL RULES FOR CERTAIN COMBINA-
TION CONTRACTS PROVIDING LONG-TERM CARE IN-
SURANCE.—Notwithstanding paragraphs (2), (5)(C), 
and (10), in the case of any amount applied against 
the cash value of an annuity contract or the cash 
surrender value of a life insurance contract as pay-
ment for coverage under a qualified long-term care 
insurance contract which is part of or a rider on 
such annuity or life insurance contract— 
‘‘(A) the investment in the contract shall 
be reduced (but not below zero) by such 
amount, and 
‘‘(B) such amount shall not be includible 
in gross income.’’. 
(b) TREATMENT OF COVERAGE PROVIDED AS PART 
OF A LIFE INSURANCE OR ANNUITY CONTRACT.—Sub-
section (e) of section 7702B of such Code (relating to
treatment of qualified long-term care insurance) is amend-
ed to read as follows: 
‘‘(e) TREATMENT OF COVERAGE PROVIDED AS PART 
OF A LIFE INSURANCE OR ANNUITY CONTRACT.— 
‘‘(1) COVERAGE TREATED AS CONTRACT.—Ex-
cept as otherwise provided in regulations prescribed 
by the Secretary, in the case of any long-term care 
insurance coverage (whether or not qualified) pro-
vided by a rider on or as part of a life insurance 
contract or an annuity contract, this title shall apply 
as if the portion of the contract providing such cov-
erage is a separate contract. 
‘‘(2) APPLICATION OF SECTION 7702.—Section 
7702(c)(2) (relating to the guideline premium limi-
tation) shall be applied by increasing the guideline 
premium limitation with respect to the life insurance 
contract, as of any date— 
‘‘(A) by the sum of any amount (other 
than premium payments) applied against the 
life insurance contract’s cash surrender value 
(within the meaning of section 7702(f)(2)(A)) 
for coverage made to that date under the life 
insurance contract, less 
‘‘(B) any such amounts the application of 
which reduces the premiums paid for the life in-
surance contract (within the meaning of section 
7702(f)(1)). 
‘‘(3) PORTION DEFINED.— 
‘‘(A) IN GENERAL.—For purposes of this 
subsection, the term ‘portion’ means only the 
terms and benefits under a life insurance con-
tract or annuity contract that are in addition to 
the terms and benefits under the contract with-
out regard to long-term care insurance cov-
erage. 
‘‘(B) TREATMENT OF DISTRIBUTION FOR 
PURPOSES
OF
TITLE.—For purposes of this 
title, any distribution made pursuant to the 
terms of the long-term care portion of the con-
tract shall be treated as made solely under such 
portion, irrespective of the effect of the dis-
tribution on the cash value of the annuity con-
tract portion or the cash surrender value of the 
life insurance contract portion. 
‘‘(4) ANNUITY
CONTRACTS
TO
WHICH
PARA-
GRAPH (1) DOES NOT APPLY.—For purposes of this 
subsection, none of the following shall be treated as 
an annuity contract: 
‘‘(A) A trust described in section 401(a) 
which is exempt from tax under section 501(a).
‘‘(B) A contract— 
‘‘(i) purchased by a trust described in 
subparagraph (A), 
‘‘(ii) purchased as part of a plan de-
scribed in section 403(a), 
‘‘(iii) described in section 403(b), 
‘‘(iv) provided for employees of a life 
insurance company under a plan described 
in section 818(a)(3), or 
‘‘(v) from an individual retirement ac-
count or an individual retirement annuity. 
Any dividend described in section 404(k) which is 
received by a participant or beneficiary shall, for 
purposes of this paragraph, be treated as paid under 
a separate contract to which subparagraph (B)(i) 
applies.’’. 
(c) TAX-FREE EXCHANGES AMONG CERTAIN INSUR-
ANCE POLICIES.— 
(1) EXCHANGE OF LIFE INSURANCE, ENDOW-
MENT, AND ANNUITY CONTRACTS FOR LONG-TERM 
CARE CONTRACTS.—Subsection (a) of section 1035 
of such Code (relating to general rules) is amended 
by striking the period at the end of paragraph (3) 
and inserting ‘‘; or’’ and by adding after paragraph 
(3) the following new paragraph:
‘‘(4) a contract of life insurance, contract of en-
dowment insurance, or annuity contract for a quali-
fied long-term care insurance contract.’’. 
(2) ANNUITY CONTRACTS CAN INCLUDE QUALI-
FIED LONG-TERM CARE INSURANCE.—Paragraph (2) 
of section 1035(b) of such Code is amended by add-
ing at the end the following new sentence: ‘‘For pur-
poses of the preceding sentence, a contract shall not 
fail to be treated as an annuity contract solely be-
cause a qualified long-term care insurance contract 
is a part of or a rider on such contract.’’. 
(3) LIFE INSURANCE CONTRACTS CAN INCLUDE 
QUALIFIED
LONG-TERM
CARE
INSURANCE.—Para-
graph (3) of section 1035(b) of such Code is amend-
ed by adding at the end the following new sentence: 
‘‘For purposes of the preceding sentence, a contract 
shall not fail to be treated as a life insurance con-
tract solely because a qualified long-term care insur-
ance contract is a part of or a rider on such con-
tract.’’. 
(4) TAX-FREE
EXCHANGES
OF
QUALIFIED 
LONG-TERM
CARE
INSURANCE
CONTRACT.—Sub-
section (a) of section 1035 of such Code (relating to 
certain exchanges of insurance policies), as amended 
by paragraph (1), is amended by striking ‘‘or’’ at
the end of paragraph (3), by striking the period at 
the end of paragraph (4) and inserting ‘‘; or’’, and 
by inserting after paragraph (4) the following new 
paragraph: 
‘‘(5) a qualified long-term care insurance con-
tract for a qualified long-term care insurance con-
tract which only covers the same insured.’’. 
(d) 
QUALIFIED
LONG-TERM
CARE
COVERAGE 
TREATED AS QUALIFIED ADDITIONAL BENEFITS UNDER 
LIFE INSURANCE CONTRACT.—Subparagraph (A) of sec-
tion 7702(f)(5) of such Code (defining qualified additional 
benefits) is amended by striking ‘‘or’’ at the end of clause 
(iv), by redesignating clause (v) as clause (vi) and insert-
ing after clause (iv) the following new clause: 
‘‘(v) coverage under a qualified long- 
term care insurance (as defined under sec-
tion 7702(B)(e)).’’. 
(e) EFFECTIVE DATES.— 
(1) IN GENERAL.—Except as provided by para-
graph (2), the amendments made by this section 
shall apply to contracts issued after the date of the 
enactment of this Act. 
(2) SUBSECTION (c).—The amendments made 
by subsection (c) shall apply with respect to ex-
changes occurring after the date of the enactment of 
this Act. 
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