Long-term care insurance covers long-term care in a variety of settings—not just in nursing homes—which has the distinct advantage of allowing a much broader scope of long-term care and has the effect of allowing an insured to have greater freedom to choose the facility that matches their needs. An insured has more choice now than in the past because the rapidly growing senior segment of the population has demanded facilities other than just nursing home and home health care. LTCI provides flexibility so that the insured can afford other types of care; such as assisted living facilities, or continuing care retirement community, etc. LTCI typically pays a daily rate to the care provider, although some policies pay a weekly or monthly benefit. A “good” LTCI policy will cover all levels of care, particularly custodial and personal care, and will provide benefits for adult day care in addition to assisted living facilities and nursing facilities.
LTCI has been a disappointment to some as it has not grown in popularity as well as was expected, but still, within the past ten years LTCI has grown from paying nothing to 5% or more of nursing home receipts and is increasing in percentage each year. The governments—state and federal—have encouraged private LTC Insurance by tax break legislation for the product, plus offering LTCI for federal workers, military and retirees and their families. Congress continues to encourage the purchase of LTCI plans by various bills, including full deduction of premiums and the passing-through of premiums in cafeteria plans
Long-term care insurance is a contract designed to pay for care when necessary due to the loss of one’s ability to function independently in society whether it be due to an injury or sickness or through the natural progression of growing old and becoming frail.”
“’Long-term care insurance’ includes any insurance policy, certificate, or rider advertised, marketed, offered, solicited, or designed to provide coverage for diagnostic, preventive, therapeutic, rehabilitative, maintenance, or personal care services that are provided in a setting other than an acute care unit of a hospital and includes all products containing any of the following benefit types: coverage for institutional care including care in a nursing home, convalescent facility, extended care facility, custodial care facility, skilled nursing facility, or personal care home; home care coverage including home health care, personal care, homemaker services, hospice, or respite care; or community-based coverage including adult day care, hospice, or respite care.”
HIPAA (PL 104-191) increased the deduction for health insurance that self employed taxpayers may claim, in addition to other changes. It had a definite impact on Long Term Care Insurance (LTCI) by creating new types of LTCI policies—Tax Qualified (TQ).
Prior to HIPAA, the taxability of LTCI benefits was simply not addressed, which meant that technically LTCI benefits could be taxable to the individual receiving benefits. It had never been applied, as far as can be determined because, it is generally accepted, the IRS did not want to tax nursing home benefits of an elderly and ill person. This would have obviously created a hue and cry that would start with the senior lobby, and besides, such taxation would not be fair.
To the credit of the elected politicians, HIPAA “legitimized” LTCI benefit payments by defining LTCI as a “health insurance product” and allowing the benefits to be tax-free as with other health insurance plans. However, Congress expanded this tax-advantaged legislation to specify that these tax advantages could be available only if the LTCI plan met their criteria. The Act created two classes of LTCO policies: Tax Qualified (TQ) and Non-Tax Qualified (NTQ)” plans. In some ways the NTQ benefit “triggers” are more liberal and therefore it is easier to qualify for NTQ benefits. But the spectre of being taxed on benefits created a chilling effect on the “old” policies. Many companies still offer both types of policies, but some states have added to the HIPAA qualifications for TQ policies, discouraging the sale of any LTCI policy except for the TQ plans. LTCI policies in force prior to the HIPAA are grandfathered so the tax possibilities are neutered.
The contract must:
Qualified long-term care services:
Chronically Ill Individual
A chronically ill individual is one who has been certified by a licensed health care practitioner within the previous 12 months as one of the following:
Limit on Exclusion
In addition to the amounts on the following chart, an individual can generally exclude from gross income:
Taxpayers can include premiums paid on a qualified long-term care insurance contract for themselves, their spouse, or their dependents when figuring their deduction. But, for each person covered, they can include only the smaller of the following amounts.
The amount paid for that person, or
The amount shown below - 2004 rates. (Use the person’s age at the end of the year.)
Age 40 or younger $260
Age 41 to 50 $490
Age 51 to 60 $980
Age 61 to 70 $2,600
Age 71 or older $3,250
Per Diem Limitation $230
Age group |
1999 |
2000 |
2001 |
2002 |
2003 |
2004 |
Age 40 or less |
$210 |
$220 |
$230 |
$240 |
$250 |
$260’ |
Ages 41 to 50 |
$400 |
$410 |
$430 |
$450 |
$470 |
$490 |
Ages 51 to 60 |
$800 |
$820 |
$860 |
$900 |
$940 |
$980 |
Ages 61 to 70 |
$2,120 |
$2,200 |
$2.290 |
$2,390 |
$2,510 |
$2,600 |
Ages 71 and older |
$2,660 |
$2,750 |
$2,860 |
$2,990 |
$3,130 |
$3,250 |
(Per Diem Limitation) |
$190 |
$190 |
$200 |
$210 |
$220 |
$230 |
Source: IRS Rev. Proc. |
98-61 |
99-42 |
2001-13 |
2001-59 |
2002-70 |
2003-85 |
LTCI can be broken into three basic types of policies: 1) Nursing Facility and Residential Care Facility Only, 2) Home Care Only and 3) Comprehensive Long-Term Care (Not all insurers offer all 3 types).
Residential care facility in most LTCI policies, means a facility licensed as a residential care facility for the elderly or a residential care facility. Normally eligible providers are facilities that meet applicable licensure standards, if any, and are engaged primarily in providing ongoing care and related services sufficient to support needs resulting from impairment in activities of daily living or impairment in cognitive ability and which also provide care and services on a 24-hour basis, have a trained and ready-to-respond employee on duty in the facility at all times to provide care and services, provide three meals a day and accommodate special dietary needs, have agreements to ensure that residents receive the medical care services of a physician or nurse in case of emergency, and, have appropriate methods and procedures to provide necessary assistance to residents in the management of prescribed medications.
In many policies, the benefit amount payable for care in a residential care facility must be no less than 70 percent (or some similar amount) of the benefit amount payable for institutional confinement.
TQ policies require that all covered expenses incurred by the insured while confined in a residential care facility, are for long-term care services that are necessary diagnostic, preventative, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal care services, needed to assist the insured with the disabling conditions that cause the insured to be a chronically ill individual. Often, there will be no restriction on who may provide the service or the requirement that services be provided by the residential care facility, as long as the expenses are incurred while the insured is confined in a residential care facility, the reimbursement does not exceed the maximum daily residential care facility benefit of the policy or certificate, and the services do not conflict with federal law or regulation for purposes of qualifying for favorable tax consideration provided by Public Law 104-191.
Residential Care Facilities (RCF) and Board and Care homes (RCFE) often do not have the staff to perform all of the needed care for a resident. The law specifies that if this care must be obtained from an independent source that the policy will still pay for the care as long as it was included in the plan of care and the coverage limit is high enough.
In TQ policies or certificates (group LTCI) the threshold establishing eligibility for care in a residential care facility must be no more restrictive than that for home care benefits, and the definitions of impairment in activities of daily living and impairment of cognitive ability are the same as for home care benefits.
Policies that are limited to the provision of home care services, including community-based services, are called a 'home care only' policy or certificate. Definitions of home care services are:
“Home health care” is skilled nursing or other professional services in the residence, including, but not limited to, part-time and intermittent skilled nursing services, home health aid services, physical therapy, occupational therapy, or speech therapy and audiology services, and medical social services by a social worker.
“Adult day care” is medical or nonmedical care on a less than 24-hour basis, provided in a licensed facility outside the residence, for persons in need of personal services, supervision, protection, or assistance in sustaining daily needs, including eating, bathing, dressing, ambulating, transferring, toileting, and taking medications (“Activities of Daily Living”, discussed in detail later).
“Personal care” is assistance with the activities of daily living, including the instrumental activities of daily living, provided by a skilled or unskilled person under a plan of care developed by a physician or a multidisciplinary team under medical direction. Instrumental activities of daily living' include using the telephone, managing medications, moving about outside, shopping for essentials, preparing meals, laundry, and light housekeeping.
“Homemaker services” is assistance with activities necessary to or consistent with the insured’s ability to remain in his or her residence that is provided by a skilled or unskilled person under a plan of care developed by a physician or a multidisciplinary team under medical direction.
“Hospice services” are outpatient services not paid by Medicare, that are designed to provide palliative care, alleviate the physical, emotional, social, and spiritual discomforts of an individual who is experiencing the last phases of life due to the existence of a terminal disease, and to provide supportive care to the primary care giver and the family. A skilled or unskilled person may provide care under a plan of care developed by a physician or a multidisciplinary team under medical direction.58
“Respite care” is short-term care provided in an institution, in the home, or in a community-based program, that is designed to relieve a primary care giver in the home. This is a separate benefit with its own conditions for eligibility and maximum benefit levels.
TQ Long-term care policies that offer home care coverage must base the insured’s eligibility to receive benefits on either impairment in two activities of daily living or impairment of cognitive ability.
This is a TQ provision that tightened up the benefit availability—HIPAA states that requiring “medical necessity” or similar standard as a criteria for benefits is not allowed.
TQ policies, and some state regulations, require that every comprehensive long-term care policy or certificate that provides for both institutional care and home care and that sets a daily, weekly, or monthly benefit payment maximum, shall pay a maximum benefit payment for home care that is at least 50 percent of the maximum benefit payment for institutional care, plus usually there is a minimum payment (such as $50 per day). Insurance products approved for residents in continuing care retirement communities are exempt from this provision. Every such comprehensive long-term care policy or certificate that sets a durational maximum for institutional care, limiting the length of time that benefits may be received during the life of the policy or certificate, will allow a similar durational maximum for home care that is at least one-half of the length of time allowed for institutional care.
Home care benefits are not to be limited or excluded by any of the following:
Only those policies or certificates providing benefits for both institutional care and home care may be called “comprehensive long-term care” insurance. A majority of those who purchase LTCI policies, purchase comprehensive policies—normally because the Comprehensive Plan covers care both home-care and care in a facility. While a comprehensive policy is more expensive, most people want to have coverage for care, and do not want to “gamble” on whether the needed care is furnished at home or in a nursing care of other facility. The comprehensive policy represents choices and control to the insured when they need care and provides a financial incentive for the insured to stay out of a nursing home as the benefits are available to pay for care in the least restrictive setting, plus flexibility.
A reimbursement policy pays for the actual services that the insured receives—reimbursement benefits payments by the insurance company to the insured for the actual expenses incurred by the insured, such as medical expenses. For example, if a nursing home charges a patient $250 a day and the LTCI policy limit is $200 a day, then the policy will only pay the $200 per day. If the nursing home charges $150 a day, then that is what the policy will pay – “up-to” is what these policy benefits are sometimes called.
Technically, indemnity is compensation for a loss. The most popular types of Comprehensive LTCI policy uses a “pool” of money concept which determines the insured’s total benefit by determined by multiplying the daily benefit chosen by the benefit period. Simply put, if the policy has a $200 daily benefit and has a 3-year benefit period (1095 days), the amount of the “pool” is $219,000. Therefore, under an indemnity policy, if the insured had $200 a day benefit for every day he was disabled and if he required at least one visit each day from a home care provider who only charged $100 per day, after 3 years the benefits cease. Under a reimbursement plan, he would have been reimbursed the actual cost, therefore his pool of money would last more than 3 years. This would be important if the insured was still alive and disabled after 3 years (1095 days).
Coverage is written on the basis of a daily benefit amount, with a wide span between the minimum and maximum amounts available. The daily benefit amount generally applies to nursing home care and may or may not vary for care in other types of facilities. Nursing home benefits will be discussed first, and then the text will address various ways policies handle benefit payments for care under other circumstances.
An important point about the daily benefit is that this is usually the maximum amount the policy will pay for a day of care. Most policies stipulate that the insurer will pay 100% of actual costs incurred up to the daily benefit amount. Policies offer daily nursing home benefits ranging from as little as $20 per day to as much as $500 per day with most having a maximum of $300. Some policies place a minimum on the total maximum benefits, such as $900,000, and there may be a daily benefit maximum, such as $10,000 or $12,000 per month, and others may have no maximum published.
The amount of the daily benefit is one of the critical pricing factors—the higher the daily benefit, the higher the premium, everything being equal.
Daily policy benefits cover room and board and skilled or custodial care which are usually included in the package price from an institution. Anything payable by Medicare is not covered by the policy but Medicaid can pay in addition to insurance. All levels of licensed facilities are covered to include Alzheimer’s facilities, skilled care, intermediate care and custodial care facilities but it is entirely possible to be in a facility, especially an Assisted Living Facility, and not qualify for LTCI benefits.
Determining the exact figure for a specific nursing facility is sufficient only if the policy includes an option to have the daily benefit amount indexed for inflation as discussed later
The benefit period, or length of time for which an LTC Insurance policy pays benefits, is another significant factor in the cost of a policy—the longer the period, the greater the premium, assuming everything else is the same. As a general rule, the periods are 1, 2, 3, 4, 5 years, and Lifetime. Those policies using the “Pool” concept express their benefit periods as the total amount that can be accumulated in the “Pool.” However, they usually also offer an expensive “lifetime” policy, in which case there is no actual Benefit Period – the policy pays the costs of the long-term care up to the Daily Benefit chosen.
A lifetime benefit period might be referred to as “unlimited” or “unlimited lifetime” coverage. Care must be exercised when using “lifetime” terminology as with some policies this means that the dollar amount of coverage that can be used over the insured’s lifetime—a lifetime limit expressed in dollars. Other definitions may show that “lifetime benefit” to mean an unlimited dollar amount of benefits that will last for the lifetime of the insured.
There are differences among policies as to limitation of the home and community care benefits. Most companies are moving away from daily limits as monthly or weekly limits provide the greatest flexibility for the insured in that they would not be limited to a specific amount per day but could use the entire weekly or monthly benefit as needed. As an example, if an insured had a daily home care benefit of $50 per day and he was receiving therapy at home three days a week at $150 per therapy session, he would, under the daily limitation only receive $150 a week. With some policies, home care is limited to a percentage—usually 50% or 75%—of the daily benefit amount paid to facilities even though home care may actually cost more than facility care.
Home care benefits typically cover the services of licensed nurses, aides and therapists. Policies cover certain activities of non-licensed providers and some even pay a limited benefit to the insured’s own children as providers as well. The options of what is covered and under what circumstances vary from policy to policy. It is important for agents to review and compare policies.
Pay for caregivers are paid by LTCI policies in most cases as described later.
Nearly all comprehensive policies are written as “integrated policies” or policies with “pooled benefits” which provides a total dollar amount that may be used for different types of long-term care services, subject only to daily, weekly, or monthly dollar limits for covered long-term care expenses. These policies specify that benefits would be “pooled” and then used for whatever form long-term care was needed. To arrive at the “pool” amount, one simply multiplies the daily benefit by the benefit period (in days). With these policies, the insured can use any amount of the total for any of the covered services as long as there is money in the “pool.”
The industry is moving towards every long-term care policy or certificate providing an integrated pool of dollars (a single dollar amount that may be used interchangeably for any home, and community based services, or facility care covered by the policy or certificate). There is no limit on any specific covered benefit except for daily, weekly, or monthly limit set for home, and community based care and for the limits for facility care. Insurers may impose limitations for reimbursement of actual expenses and incurred expenses up to daily, weekly, and monthly limits.
With many policies, and in most states, overall lifetime maximum benefit amount can be used interchangeably between the various covered Home and Community Care, Nursing Facility and/or Residential Care Facility benefits as outlined in this policy. The policyholder could use all of the coverage for facility care, all for home care, all for RCF care or any combination of the three. Except when paying for institutional care, the policy will usually pay a certain amount per day as stipulated in the policy, and conversely, when paying for home and community care, the policy pays a certain amount per day, week or month.
There is no limit on the use of any specific covered benefit, except for daily, weekly or monthly benefit limits that may be set for Home and Community Care benefits and daily benefit limits that may be set for Nursing Facility and Residential Care Facility benefits.
A long‑term care policy’s elimination period, sometimes called a deductible period, is a period of time during which no benefits are paid immediately after the insured is qualified to receive long‑term care. Insurers typically offer elimination periods ranging from zero days (no elimination period) up to 365 days, with different insurers offering different options. Under policies that pay benefits for different kinds of care, a single elimination period usually qualifies the insured for all types of care. When the same elimination period applies to all types of care, this is sometimes called an “integrated” elimination period.
Insureds may be able to choose different elimination periods for different types of care, such as 30 days for nursing home care and ten days for home health care. Some insurers specifies that a 90‑day elimination period applies for nursing home care and a 30‑day period for home and community‑based care, other policies offer elimination periods in a range of zero to 365 days for nursing home care and seven, 20 or 60 days for home health care. Most of the newer policies generally offer the same care-related elimination periods.
A shared-benefit rider allows the duration of the benefit to be lengthened if both spouses have coverage, in effect combining their benefits so if one spouse’s benefits are exhausted, they may “draw” from the benefits of the other spouse. This Rider may be part of some policies if both spouses have the coverage. The ability for the spouses to share a “pool” consisting of the combined benefits of the two policies is less expensive than two separate policies.
For many elderly persons, it is traumatic if they have to leave the Nursing Home temporarily and then return to another bed, even if it is the same nursing home. This benefit allows a person to return to his “own bed” after a specified period of time. If the insured is hospitalized during a Nursing Home or Assisted Facility stay, and there is a charge for the insured to reserve their bed for a later return, the policy will pay these charges, usually up to a maximum usually of 21 days of hospitalization during a policy year.
Benefits may be restored under most policies, but the insured must be off-claim before benefits are restored for periods ranging from 180 days to 6 months as a rule, with most policies using the 180 days and usually limited to restoration only twice.
It must be noted that the period before benefits are restored must be as indicated (180 days or 6 months usually) in the policy and the insured must have been treatment-free before the claim or the new claim is for a different cause completely.
Most modern policies pay for any home modification medically necessary, therapeutic device, and the purchase or rental of equipment which assists the insured so that they can stay at home. These provisions vary by policy and by company.
Another recent benefit available but not offered by all plans, is the Caregiving Training feature. Typically, the policy will pay for training of a person to become a Caregiver when the caregiver is going to take care of the insured in his home. Many policies allow for training for family members. The payment for training is typically “five times” the Maximum Daily Benefit.
Many policies include an Informal Caregiver Training Benefit which pays for training an informal caregiver, such as a friend or family member, to care for the covered person at home.
A few policies allow for a paid-up feature, such as single premium plans or those paid up in some specified period of time (3, 5, 10, 20 years typically) or paid up at age 65.
Typically, the insurance company will waive the premiums on the policy and any attached Riders, if the insured is confined to a Nursing Home or Assisted Care facility for a period of more than 90 days. This waiver applies to premiums falling due thereafter, on the policy and any Riders. This waiver will continue as long as consecutive days of nursing care benefits are being paid to the insured.
The most common non-forfeiture benefit is the “return-of-premium” benefit. Most companies offer this as a benefit, but still it can add from 20% to as high as 100% of the premium—sometimes doubles the cost of the policy.
With a “return of premium” benefit, the policyholder receives cash, usually a percent of the total premiums paid to date after lapse or death. Another approach is a “shortened benefit period,” where the long-term care coverage continues but the benefit period or duration amount is reduced as specified in the policy.
Relatively new is the “contingent nonforfeiture benefits upon lapse,” a feature that gives policyholders additional options in the face of a significant increase in policy premiums. If the insured does not purchase the optional nonforfeiture benefit, then a contingent nonforfeiture benefit is triggered if policy premiums rise by a specified percentage.
Actually another form of a nonforfeiture provision, the shortened benefit period, provides a mechanism whereby all of the money put into a policy cannot be lost if the policyowner stops paying premiums at some future date. Since federal laws require that a nonforfeiture provision must be offered to every prospective policyowner, this may be more attractive that the return-of-premium.
As indicated earlier, HIPAA requires certain other benefits.
Federal and state laws require that the applicant has the right to inspect the policy and, if not satisfied for any reason whatsoever, to return the policy directly to the insurer within 30 days for a refund of all money paid. Agents are forbidden to harass or otherwise try to pressure their clients into keeping the policy in force.
The possibility exists that an insured may become mentally impaired and forgets to make premium payments. This could result in the unintentional lapse of a long-term care insurance policy just at the time when its benefits are needed most. To prevent a mentally impaired insured from forgetting to make premiums payments, a policy typically offers a policy provision to protect against unintentional lapse. Premiums paid by bank draft help to alleviate these problems. The policyowner also designates at least one person other than himself to receive notice if the policy is in danger of lapsing. If the policy still lapses, there is usually a provision that will reinstate the policy if the lapse was due to cognitive impairment or loss of functional capacity and within a specified time of lapse.
All individual long-term care insurance policies must contain a renewability provision which discloses the term of coverage for which the policy is initially issued, the terms and conditions under which the policy may be renewed, and whether or not the issuer has the right to change the premium.
The Treasury Department has released guidelines (Notice 97‑31) which provide temporary IRS interpretations of what changes can be made to "Grandfathered/Qualified” status. Per the IRS, if a Grandfathered policy is materially changed after December 31, 1996, it loses its Grandfathered/Qualified status.
A material change, per the guidelines, could include any change in the terms of the contract altering the amount of coverage or timing of any item payable by the policyholder, the insured, or the insurance company. (A material change could eventually be determined by the IRS to be any client‑requested increase in benefits.)
Exclusions are typically the common ones—preexisting conditions, war, alcoholism, drug addiction, participating in a felony, etc.
HIPAA changes the preexisting condition provision of LTCI to basically: “No long-term care insurance policy or certificate, other than a group policy or certificate, shall use a definition of preexisting condition which is more restrictive than a condition for which medical advice or treatment was recommended by, or received from a provider of health care services, within six months preceding the effective date of coverage of an insured person and every long-term care insurance policy or certificate shall cover preexisting conditions that are disclosed on the application no later than six months following the effective date of the coverage of an insured, regardless of the date the loss or confinement begins…”
Typically, federal and state laws will state that termination of Long Term Care Insurance shall be without prejudice to any benefits payable for institutionalization if that institutionalization began while the long-term care insurance was in force and continues without interruption after termination. This extension of benefits beyond the period the long-term care insurance was in force may be limited to the duration of the benefit period, if any, or to payment of the maximum benefits and may be subject to any policy waiting period, and all other applicable provisions of the policy.
Federal and state laws generally require that policies may not precondition the availability of benefits on prior hospitalization, conditions eligibility for benefits provided in an institutional care setting on the receipt of a higher level of institutional care, preconditions the availability of benefits for community-based care, home health care, or home care on prior institutionalization or conditions eligibility for non-institutional benefits on a prior institutional stay of more than 30 days.
Policies may not contain a provision that would cancel, non-renew or otherwise terminate the coverage based on the insured’s age or the deterioration of the insured’s mental or physical health.
Policies may not contain a provision that bases payment of benefits on any standard described as “usual and customary,” “reasonable and customary” or other similar words.
There are several other requirements by federal and/or state laws, including:
Automatic Inflation Protection increases the daily benefit annually on the policy’s anniversary automatically. The amount of increase is usually based on a predetermined rate—typically 5 percent per annum.
With the automatic protection, the cost of the automatic increase riders is part of the policy’s original premium, so, as in most insurance plans, the insureds are prepaying for future benefits. The annual premium that includes an automatic benefit increase rider is be more expensive at the inception, than the other methods wherein the protection is afforded through a Rider or Amendment, but it is considered as the least expensive overall.
Inflation protection may be offered as an option in some plans, whereby the insured may buy additional daily benefit coverage at predetermined and periodic intervals without having to reapply and without evidence of insurability. Typically, the plans offer a 15% increase every 3 years. The premium for accepting the option is calculated at the attained age rate, and added to the premium, therefore when the option is elected, the premium increases. While this system may be attractive in the early years because the entry premium is lower than with the automatic protection, in most cases it really is not the best way to obtain inflation protection.
Perhaps the most drastic and contentious requirement for a Tax Qualified policy relates to qualifying for benefits. HIPAA requires several provisions before the policyholder can be certain that any benefits will not be taxed to the insured—tax qualified.
An individual is chronically ill if they have been certified by a licensed health care practitioner within the previous 12 months as one of the following:
1) They are unable for at least 90 days, to perform at least two activities of daily living without substantial assistance from another individual due to loss of functional capacity. Activities of daily living are eating, toileting, transferring, bathing, dressing and continence, or
(2) They require substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.
Non-qualified policies use similar benefit triggers, but usually add a third trigger: “If deemed medically necessary.” These policies also leave out the restrictive language “for at least 90 days.” On the other hand this is offset by the fact that the insurance company often determines eligibility with non-qualified policies; whereas, a third party, impartial, licensed health care practitioner certifies eligibility under qualified policies. Cognitive impairment covers Alzheimer’s, stroke, dementia and other organic nervous disorders under both policy forms.
Tax-qualified policies include a definition, required by the IRS, which lessens the perceived advantage of the non-qualified contracts. TQ contracts define “substantial assistances” as “stand-by” assistance, meaning that this is not “hands-on” care and just verbal encouragement can be considered as substantial assistance. This definition could easily make it simpler to qualify for benefits with a qualified contract than with a non-qualified contract.
Agents should understand and be able to explain the definitions used in the contract under discussion. The difference in “transferring” or “transferring, including ambulating activities,” when used as definition for ADLs in a LTCI policy, may make a difference in qualifying for benefits and the kind of benefits received.
Definitions may change but for the present, IRS notice 97-31 provides definitions that are appropriate, including the following:
The definitions of “activities of daily living” to be used in policies and certificates that are intended to be federally qualified long-term care insurance, shall consist of the following until such time that these definitions may be superseded by federal law or regulations:
(a) ability to move into or out of bed, a chair or wheelchair, or
(b) the ability to move into and out of a bed, a chair, or wheelchair, or ability to walk or move around inside or outside the home, regardless of the use of a cane, crutches, or braces.
A tax qualified LTCI policy is not required to recognize any ADL in order to determine whether an individual is chronically ill under the cognitive impairment requirement. It is quite possible for a person who is cognitively impaired—indeed, severely cognitively impaired—to perform activities of daily living without assistance, but still they would require considerable supervision.
“Impairment of cognitive ability” means that the insured needs “substantial supervision” due to “severe cognitive impairment.”
“Severe cognitive impairment” means a loss or deterioration in intellectual capacity that is comparable to (and includes) Alzheimer’s disease and similar forms of irreversible dementia; and measured by clinical evidence and standardized tests that reliably measure impairment in the individual’s short-term or long-term memory, orientation as to people, places, or time, and deductive or abstract reasoning.
“Substantial supervision” means continual supervision (which may include cueing by verbal prompting, gestures or other demonstrations) by another person that is necessary to protect the severely cognitively impaired individual from threats to his or her health or safety (such as may result from wandering around).
Individual states may have different requirements for NTQ policies, but generally the insured will qualify for benefits if he can demonstrate
“Impairment in activities of daily living” means that the insured needs “human assistance,” or “continual substantial supervision.”
“Activities of daily living” in almost all of the NTQ policies refers to the insured needed assistance in include eating, bathing, dressing, ambulating, transferring, toileting, and continence;
The definitions of the ADLs, as a general rule, are basically the same as those defined in the TQ policies, except that in the definition of “Eating”, below—eating under the TQ ADL definition— if the person could “eat” by using a feeding tube, or by using his fingers, they would not be considered as impaired, but under an NTQ plan, if they could not use a fork or spoon, they would be considered as impaired.
NTQ policies generally follow the following definitions:
“Ambulating” is the additional ADL for NTQ policies, however there are semblances of ambulation in the TQ definition of Transferring.
“Impairment of cognitive ability” means deterioration or loss of intellectual capacity due to organic mental disease, including Alzheimer’s disease or related illnesses that requires “continual supervision” to protect the insured or others.
The National Underwriter conducted an informal poll in December 2004 stating the assumption that the largest growth in LTCI over the next few years will probably be as a group product sold at worksites and asked readers for comments. 74% of those who responded either agreed somewhat or strongly agreed that the heaviest future growth of LTCI is in the group area. Whether this stands the test of time will depend somewhat on what legislation in the tax area will be passed by Congress in the near future. In any event, this should not be a surprise as Americans generally look to their employers for health benefits, so this, in the eyes of most Americans, is just another health product.
There is little doubt that HIPAA gave new life to Group Long Term Care Insurance as for the first time, the rules in respect to the taxation of employers who provide Long Term Care Insurance for their employees have been published. Several insurers have entered the Group Long Term Care Insurance business as a result of the Act, which specifies:
The number of employers offering group LTCI has begun to rise dramatically, with the most noticeable increase being in small businesses with less than 500 employees.
Many of the employer‑sponsored LTCI plans in place are located in very large employee environments such as IBM, Ford Motor Company, Proctor & Gamble, and state government employee groups. In addition, most of these plans are not "off the shelf" policies. Instead, they have been designed specifically for a given group through consultation between the employer and the insurance company. Some insurance companies have begun to target small companies as lucrative markets for their plans, though the numbers show that only a very small percentage of all U.S. employer groups have been affected to date.
With Group LTC Insurance, some of the conventional features of group plans remain intact while other features are more similar to individual insurance policies. First of all, the policies might actually be individual LTCI policies. If so, the policies are fully "portable" if the employee leaves the plan and need not be converted in the traditional way. Optionally, the employer‑sponsored LTCI plan may be set up like other group coverages, requiring employees who want to continue the insurance to convert to individual policies within a certain period after termination. (This is called a conversion privilege and not all group insurance plans offer it.)
A feature that sets group LTCI coverage apart from other types of LTCI insurance is in respect as to who may be covered. Most plans are offered not only to employees and their spouses, but also to the parents of both parties and, sometimes, to children and to retired workers. In most cases, employees are exempt from medical underwriting ‑ they won't have to have a medical exam ‑ but it is likely that other family members must have some type of medical screening. Some insurers require medical underwriting for all parties, including employees, while other group plans might not require medical information about any of the parties. In some cases, even if medical underwriting is required, it is less stringent than for individual policies, especially for older parents. The NAIC's shopper's guide encourages older people to investigate their children's Group LTCI coverage if available, indicating that, while medical screening is likely, group coverage might be more advantageous than individual policies.
The age at which individuals may purchase employer‑sponsored LTCI coverage is often earlier than the age minimums for individual policies. Typical existing plans specify ages 30, 35 and 40 as the minimums and at least one plan designed by a large corporation is offered to 20‑year‑olds. While there are individual policies insuring at these earlier ages, they are fairly rare. Upper age limits vary considerably but generally are similar to individual policies, ages 79 to 85 being typical maximums for purchasing coverage.
Employer‑sponsored LTC Insurance may be virtually identical to individual policies marketed and most offer a range of daily benefit amounts, benefit periods and elimination periods. One should always be aware that in many of the existing plans, the employer has worked with the insurance company to decide on the range of features from which employees can choose.
While the employee makes the final choice, the options available may be pre‑selected and, therefore, more limited than with an individual policy.
As for the availability of other benefits and provisions that are found in individual policies, group LTCI plans vary considerably but there is a trend toward including more benefits. Some existing employer‑sponsored plans include or make available inflation protection, Nonforfeiture or return of premium features, death benefits, reinstatement, restoration of benefits, home care benefits, and others. Group plans usually pay for care at several levels, have no prior institutionalization requirements, and cover care for Alzheimer's and other organic brain disease. Exclusions and pre‑existing conditions limits are similar to those in individual policies.
Another way group LTC Insurance differs from other group coverages is that the rates typically vary by the age of the individual. Although there might be some premium savings over individual policies, this is not always the case, unlike group medical insurance, for example, which may be less expensive than individual medical policies. Depending on the insurer offering the plan, the age of the buyer, and the actual provisions included, group savings might be as little as 2% up to as much as 30%. One major advantage of some employer‑sponsored plans, however, is that the premium might be guaranteed for as long as the employee remains in the group, no matter how old he or she is ‑ a real bonus for an employee who can lock in a low premium at perhaps 30 years of age. Not all group plans guarantee rates for life, but in most cases the premiums will increase only if they increase for everyone in the group.
Group LTC Insurance may also be offered by an association such as the American Medical Association, the American Association of Retired Persons (AARP), and others at both national and state levels. Association plans, which are available only to members of the particular group, vary as widely as other group plans and LTCI coverage in general. Some associations offer more than one type of LTC Insurance policy to members, as is the case with the AARP.
Because of HIPAA, if an individual is self employed and had a net profit for the years, was a general partner (or a limited partnership [LTD] receiving guaranteed payments); or received wages from an S Corporation in which the individual was a more than 2% stockholder (and who is treated as a partner); the individual may be able to deduct as an adjustment to income, up to 100% of the amount paid for qualified Long-Term Care Insurance on behalf of the individual, spouse and dependents.
Additionally, if a person is a wage-earner from an S Corporation in which the person is more than a 2% shareholder, they can enter the premium amount on their 1040.
The LTCI plan must be established under the trade or business and the individual cannot take the deduction to the extent that the amount of the deduction is more than the earned income of the individual from that particular trade or business.
As with any wage-earner, the individual cannot take this deduction for any month in which they were eligible to participate in any subsidized health plan or LTCI plan maintained by the employer of the employer of the spouse. This helps to eliminate the possibility of “double-dipping.”
This rule is applied separately to plans that provide Long-Term Care Insurance and plans that do not provide Long-term Care Insurance (plans that provide other health insurance only).
In a situation where a “regular” C Corporate or 501(c) employer pays premium on insured employee, income exclusion (Code section 106) applies to the entire premium/coverage provided by the employer. Thus, even if the cost exceeds the age‑based limit on deductibility for individuals and/or the level of coverage exceeds the periodic limit, the employee will not recognize income from the receipt of employer‑provided qualified long term care coverage.
Generally, a corporate employer can deduct all premiums paid for accident and health coverage for its Employees as a general business expense. This deduction also applies to the cost of coverage paid for the spouse and dependents of the employee.
The deduction is available for LTCI paid by the corporation since long term care is now considered accident and health coverage. The corporation's deduction applies to the entire LTCI premium paid even the premium in excess of the age‑based limits for the deduction of individuals (and self‑employed persons). There is no requirement that the long term care coverage be provided by the employer on a non‑discriminatory basis.
The premiums are deductible by the corporate employer whether the coverage is provided under a group policy or under individual policies.
Taxation of premiums to any employer now mirrors the premiums paid for employee benefits for other health insurance benefits. In order for an employer to take advantage of the tax treatments, the plan must be Tax Qualified.
The treatment of taxes for employers should be reviewed with the tax accountant or tax counsel of the business. For instance, Tax Qualified Long Term Care Insurance contracts, which provide benefits on a per diem basis, or other flat amount per fixed period, are treated somewhat differently than indemnity policies. The technicalities are beyond the scope of this text, but it again points out the importance of having professional tax assistance when making presentations to employees for Group Long Term Care Insurance.
With respect to the benefits received under employer provided tax qualified long term care coverage, payments received by the insured are tax free as well, under Code Section 105(b). The employee would have no income from the employer‑provided coverage; and any benefits received under the policy would not be taxable.
F NOTE: Tax Laws change frequently, so the client’s tax attorney should always review information of this type furnished to a client.
STUDY QUESTIONS
1. The main effect that HIPAA had on the Long Term Care Insurance (LTCI) industry was
A. by creating Tax Qualified and Non-Tax Qualified policies.
B. to create a government program whereby seniors suffering from Alzheimer’s would have
their nursing home bills paid by Medicaid.
C. to remove LTCI policies from being fully commissionable.
D. to take regulation of LTCI policies from the states.
2. HIPAA requires that an LTCI policy be
A. noncancellable.
B. guaranteed issue.
C. guaranteed renewable.
D. approved by Medicare.
3. Under HIPAA, one of two requirements to qualify for LTCI benefits, the chronically ill individual who has been certified by a licensed health care practitioner within the previous 12 months as
A. at least for 60 days, is unable to perform at least 3 activities of daily living.
B. having been confined to a hospital for at least 60 days previously.
C. totally insane.
D. at least for 90 days, is unable to perform at least two activities of daily living.
4. Long Term Care Insurance
A. may be treated as a business expense for self-employed individuals.
B. may be included in a flexible-benefit plan.
C. may not be included in a Section 125 Cafeteria plan.
D. benefits will always be taxed as ordinary income.
5. There are three basic types of LTCI policies, which include
A. Retirement Home coverage.
B. In-Hospital Indemnification.
C. Return-of Premium policies.
D. Comprehensive Long Term Care.
6. “Respite Care” is
A. short-term care designed to relieve a primary care giver in the home.
B. designed to provide palliative care and other discomforts of those in the last days
of their life.
C. skilled nursing care performed on a short term basis.
D. covered entirely by Medicare.
7. A LTCI policy that pays for the actual services that the insured receives, such as medical expenses, is
A. an indemnity plan.
B. a group certificate.
C. a reimbursement policy.
D. a comprehensive medical plan.
8. Determining the exact figure for a specific nursing facility is sufficient only
A. if it meets the NAIC Model Bill test.
B. if the policy is a Non-Tax Qualified policy.
C. if the policy contains a daily benefit indexed for inflation.
D. if the policy benefits are approved by the insured’s accountant &/or attorney.
9. Nearly all comprehensive policies are written as
A. integrated policies, or policies with “pooled” benefits.
B. Non-Tax Qualified policies.
C. indemnity policies.
D. zero-deductible policies.
10. HIPAA Tax Qualified LTCI policies require certain provisions, including
A. daily benefits of at least $250 per day.
B. contingent nonforfeiture benefits upon lapse.
C. a 30-day free look.
D. restoration of benefit provision.
ANSWERS TO STUDY QUESTIONS
1A 2C 3D 4C 5D 6A 7C 8C 9A 10C