27 - 1Copyright 2008, The National Underwriter Company Taxation of Long-Term Care Insurance Definition of “Qualified” Long Term Care Insurance Contract

27 - 1Copyright 2008, The National Underwriter Company

Taxation of Long-Term Care Insurance

Definition of “Qualified” Long Term Care Insurance Contract IRC Section 7702B –HIPAA act of 1996 Requirements

Only coverage provided is long term care services Contract does not reimburse for services reimbursed under Title

XVIII of the Social Security Act Contract is guaranteed renewable Contract does not provide for a cash surrender value or other

money that can be paid, assigned, or pledged as collateral for a loan or borrowed

Chapter 27Risk Management For Financial Planners


Definition of “Qualified” Long Term Care Insurance Contract (cont’d) Requirements (cont’d)

All premium refund and dividends are to be applied as a reduction in future premiums or to increase future benefits

Contracts satisfies certain consumer protection provisions concerning

Model regulation and model act provisions Disclosure Nonforfeitability




Definition of “Qualified” Long Term Care Insurance Contract (cont’d) Requirements (cont’d)

Meet provisions of the NAIC Long term care Model Regulation Guaranteed renewal or noncancellability Prohibitions on limitation and exclusions Extension of coverage Replacement of policies Unintentional lapses Requirement to offer inflation protection Disclosure Prohibition against preexisting conditions and probationary periods

in replacement policies




Definition of “Qualified” Long Term Care Insurance Contract (cont’d) Disclosure requirements

Nonforfeiture provisions Properly captioned Benefit provided in the event of default of payment

Benefit adjusted only as necessary to reflect changes in claims, persistency and interest

Provides for at least one of the following options Reduced paid-up insurance Extended term insurance Shortened benefit period




Definition of “Qualified” Long Term Care Insurance Contract (cont’d) Policy must be delivered within 30 days of approval Claim denials must be responded to a policyholders

written request for explanation within 60 days of receipt




Definition of “Qualified” Long Term Care Services Definition of “Chronically Ill Individual”

Activity of Daily Living (ADL’s) Benefit Person is classified as chronically ill

Unable to perform, without substantial assistance, at least two of the ADL’s for at least 90 days

Eating, toileting, transferring, bathing, dressing, and continence

Qualified policy must take into account at least five of these ADL’s in determining whether a person is chronically ill.




Definition of “Qualified” Long Term Care Services Cognitive Impairment

Individual requires substantial supervision to protect himself from threats to is health and safety due to severe cognitive impairment

Must be certifies by a health care practitioner

Business uses Group long term care policies offered by employers

generally participating employees pay the full cost of this coverage




Tax implications Nonqualified policy

Taxation for premiums paid for and benefits received from such a policy is uncertain

It is believed the tax benefits applicable to qualified long term care policies are not applicable to nonqualified long term care policies

Qualified policy Premiums deductible as a medical expenses

To the extent they and all other eligible medical expenses exceed 7.5% of adjusted gross income

Subject to additional dollar limitation Based on age brackets Example – for ages 51 through 60 limitation is $1,150 in 2008




Tax implications (cont’d) LTC owned by self employed individuals

Premiums are eligible for deduction Subject to the same dollar amount limitations Exception

Deduction not available if self employed individual id eligible to participate in any subsidized health plan maintained by any employer of the self employed individual or his spouse

If the employer plan provides for qualified long term care coverage

Gift tax consequences Neither the purchase nor receipt of benefits will trigger federal

gift tax consequences Gift tax liability may occur if the fund to purchase the policy are

given by one individual to another.




Tax implications (cont’d) Estate tax consequences

Generally no significant estate tax implications One indirect effect

Assets that would have been used, absent a policy, now stay in the estate and if large enough could subject the estate to federal estate tax

Generation skipping transfer tax consequences No consequences




Tax implications (cont’d) Design features

Qualified Benefit triggers based are specified by the internal revenue code

Activities of daily living

Chronically ill - Cognitive impairment trigger

ADL benefit trigger safe harbor definitions Substantial assistance means hand-on assistance or standby

assistance Hands-on assistance means physical assistance of another person

without which an individual would not be able to complete the ADL Standby assistance means presence of another individual that is

needed to prevent an individual from injury while performing an ADL




Tax implications (cont’d) Design features (cont’d)

Cognitive impairment safe harbor definitions Severe cognitive impairment means loss or deterioration in

intellectual capacity that is similar to Alzheimer's disease and the like forms of irreversible dementia . . .

Substantial supervision means continual supervision by another person that is needed to protect the severely cognitively impaired person from threats to his health or safety



Documents

27 - 1Copyright 2008, The National Underwriter Company Taxation of Long-Term Care Insurance Definition of “Qualified” Long Term Care Insurance Contract