CHAPTER TEN - GROUP LONG TERM CARE INSURANCE

 

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.  Readers responded:

 

 

This is, of course, an unscientific survey, but it is particularly interesting that 74% of those responding 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 arena 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. 

Group Long Term Care Insurance has become more “interesting” as an employer-sponsored benefit because of the Health Insurance Portability and Accountability Act of 1996 (HIPAA), 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 with limited success but it is increasing.  The primary provisions of this act involving Group LTCI or Employers furnishing LTC Insurance coverage for employees:

1. Employers who pay LTCI premiums on behalf of an employee will be entitled to deduct that premium as a business expense, as they do for medical insurance.
2. LTC Insurance premiums paid by an employer on behalf of an employee will not be treated as income to that employee.
3. Long Term Care Insurance is not permitted under Section 125 cafeteria plans; nor can a Flexible Spending Account reimburse long-term care expenses.
4. Long Term Care Insurance premium is, however, an acceptable expenditure for the new medical savings accounts that this law makes available to self‑employed and small businesses of fewer than 50 lives.
5. Long Term Care Insurance premiums are tax deductible to the self-employed within the overall self-employed deductible limits.

 

HISTORY OF GROUP LONG TERM CARE INSURANCE

In 1987 insurers began offering the first employer‑sponsored or group Long Term Care Insurance plans.  As has been the case with policies marketed to individuals, insurance companies have both entered and withdrawn from the market since that time.  Ten years ago, of the 121 companies marketing LTCI policies at that time, less than 20% offered employer‑ sponsored plans.  Still, 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.

According to 1997 reports from the Health Insurance Association of America (HIAA), more than 440,000 LTC employer-sponsored group policies have been sold since 1987. The large employer marketplace for LTC products is under penetrated and the 10-employee to 200-employee market has been virtually untapped.

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.  As can be seen from the figures above, 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.

FACTORS AFFECTING GROUP LTCI

It has taken some time for insurance companies to enter the group LTCI market, the delay usually attributed to the high cost of entering this market.  A significant start-up investment, including case management structures to deal with a myriad of variables in long‑term care, is required.  With a little more than a decade of experience in Group LTCI, insurance companies do not yet have a large body of statistical data that they would like in order to finely hone policy provisions and pricing—factors that can either promote profitability or contribute to high losses.  Things are changing, however.

Insurer reluctance is not the only factor responsible for the small number of employer‑sponsored LTCI plans.  Employers who aren’t exactly scouring the marketplace for additional employee benefits to offer have not yet fully embraced the concept.  Perhaps the main stumbling block to a rapid growth is usually attributed to the high cost of other health benefits – medical insurance, by itself, can create a drain on profitability of a company as it still continues to grow.  Therefore, they are really not interested in an additional benefit.  However this is changing also as employers recognize tax breaks for premiums paid on an LTCI policy.

Group LTCI provides several advantages that can be persuasive in helping to change this attitude:

1. LTC Insurance can be especially appealing as an addition to an employee benefits package, although the employer must commit a certain amount of time and money to handle administrative details, including payroll deduction.
2. The HIPAA Act gives tax considerations to employers (discussed below) for the first time, and treats Long Term Care Insurance benefit payments the same as other Health insurance products.
3. There is still another factor that makes employer‑sponsored LTC Insurance attractive.  Employers are beginning to recognize the economic loss that occurs when an employee must deal with the financial stresses of long‑term care for a spouse or for elderly parents.  Group LTC Insurance can help relieve the burden, both financially and by reducing employee work hours lost from providing care for a family member.  LTC Insurance can help maintain or restore employee productivity by removing one of the reasons for loss of productivity.

THE MAIN FEATURES OF THE GROUP PLANS

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.)

DEFINITION OF A GROUP

The definition of a “group” for LTCI varies somewhat from the definition of group in other forms of insurance.  In California, Group Long Term Care Insurance means a Long Term Care Insurance policy for any of the following:

1. One or more employers or labor organizations
2. Any professional, trade, or occupational association for its members or former or retired members, or combination of these, if that association meets both of the following:
1. Is composed of individuals all of whom are or were actively engaged in the same profession, trade, or occupation.
2. Has been maintained in good faith for purposes other than obtaining insurance.
3. An association or a trust or the trustees of a fund established, created, or maintained for the benefit of members of one or more associations. Prior to advertising, marketing, or offering that policy or a certificate within this state, the association or associations, or the insurer of the association or associations, must file evidence with the Commissioner that the association or associations have at the outset a minimum of 100 persons and have been organized and maintained in good faith for a primary purpose other than that of obtaining insurance, have been in active existence for at least one year, have a constitution and bylaws which provide all of the following, and provide evidence that the following have been consistently implemented:
4. The association or associations hold regular meetings, not less than annually, to further purposes of the members.
5. Except for credit unions, the association or associations collect dues or solicit contributions from members.
6. The members have voting privileges and representation on the governing board and committees.

Thirty days after that filing the association or associations shall be deemed to satisfy these organizational requirements, unless the Commissioner makes a finding that the association or associations do not satisfy those organizational requirements.

A group other than as previously described in this section shall be subject to all of the following findings by the Commissioner:

1. The issuance of the group policy or certificate is not contrary to the best interest of the public.
2. The issuance of the group policy will result in economies of acquisition or administration.
3. The benefits are reasonable in relation to the premiums charged.
4. The use of the true or fictitious name of the group, group master policyholder, group policy, certificate, or any trust or other entity created or used for the marketing of the group policy or certificates is not deceptive or misleading with regard to the status, character, or proprietary or representative capacity of the insurer, group, trust, or other entity.
5. The group’s main revenue source is not related to the marketing of insurance.
6. The group’s outreach method to obtain new members is not related to the solicitation of insurance.
7. The group provides benefits or services, other than insurance, of significant value to its members. The Commissioner shall investigate the percentage of members using the other services and the monetary value of those services.
8. A life care contract provider that has been authorized to provide services and benefits under the appropriate sections of the Health and Safety Code.²¹⁹

The purpose of this Code Section is to determine that a group that is offering LTCI is actually a legitimate group and not a group that has been formed primarily for the purpose of selling or obtaining group LTCI coverage.  It is the duty of the agent to verify that the group meets these requirements before undertaking a solicitation for group LTCI coverage.

WHO MAY BE COVERED

A feature that sets group LTCI coverage apart from other types of group insurance is 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.  Know the requirements for policies marketed because 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.

BENEFITS & OTHER PROVISIONS RE: INDIVIDUAL PLANS

Employer‑sponsored LTC Insurance may be virtually identical to individual policies marketed.  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.

GROUP LTCI COSTS

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.

It is important to stress that an agent must learn about the specific details of employer‑sponsored plans he/she wants to be installed in the workplace.  The insurers will provide guidelines concerning policies that may be offered to employers and provide assistance to the agent on customization to meet client needs.  However, each insurer probably has certain conditions it will not change, so an agent needs to determine exactly where to be flexible and what provisions are not negotiable prior to making a presentation to a prospect.

ASSOCIATION GROUP LTC INSURANCE

An Association, such as the American Medical Association, the American Association of Retired Persons (AARP), and others at both national and state levels may also offer group LTC Insurance.  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.

While the AARP policy is written by a strong nationally‑known insurer, that is not the case with all association policies, so it is important that both the agent and the customers know with whom they are negotiating.  Buyers are especially warned by consumer advocates to avoid association policies that do not originate with bona fide associations.  Unfortunately, a few insurers “invent” associations as a way to sell LTCI policies that are cheap in both price and benefits.  This is not likely to be a concern for most agents since this type of insurer usually operates by direct mail rather than through agents.

SELF‑EMPLOYED SPECIAL INCENTIVES

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 Form 1040 (Schedules A and the amount should be shown on Box 14 of the W-2)

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).

Normally, if the self-employed individual (or partner or wage earner of S Corp. who is not more than 2% stockholder) qualifies to take this deduction, they must use the Self-Employed Health Insurance Deduction Worksheet in the Form 1040 instructions to calculate the amount that they can deduct.  The Worksheet is not used if there were more than one source of income subject to self-employment tax; if they file Form 2555, Foreign Earned income,  or Form 2555-EZ, Foreign Earned Income Exclusion; or if they use amounts paid for qualified LTCI to figure the deduction.  If they cannot use the worksheet in the Form 1040 Instructions, they can use the worksheet in Publication 535, Business Expenses, to calculate the deduction.

One other item, if advance payments of the health coverage tax credit were made on behalf of the individual to their insurance company, they should not include any advance payments made for them when calculating the amount to be deducted for insurance premiums.  And if they are claiming the health coverage tax credit, they should subtract the amount shown on line 4 of Form 8885 –– reduced by any advance payments shown on line 6 of that form — from the total insurance premiums that they paid.

In addition to all the requirements of federally qualified policies already discussed, the requirements unique to group long-term coverage are that they may not be offered as part of a “cafeteria plan,” i.e., long-term care expenses cannot be reimbursed under a Section 125 flexible-spending plan.

QUALIFIED LONG TERM CARE TAX INFORMATION

F NOTE: The tax information provided is an interpretation of federal guidelines. Clients should always consult with their financial advisor or a tax consultant regarding tax advantages.

 

TAX TREATMENT BY THE CORPORATION

(Example:) Regular, C Corporate employer pays premium on insured employee). (LTCI coverage provided by a 501(c) organization to its Employees will receive similar tax treatment to that provided by a C Corporation).

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.  The corporation in the example would be able to deduct the full $2,000 premium paid for the employee.  If the corporation paid $2,400 for the 61‑year-old employee, it would be able to deduct the full premium, even if the premium exceeds the age‑based limit for the individual deduction.

NOTE:  The LTCI plan must be tax qualified.

TAXATION OF BENEFITS TO EMPLOYEES

With respect to the benefits received under employer provided qualified long-term care coverage, payments received by the insured are tax-free as well, under Code Section 105(b).

The employee in the example would have no income from the employer‑provided coverage; and any benefits received under the policy would not be taxable.

(Example:) Morgan’s LTD., a partnership, purchased a tax-qualified LTCI policy with an annual premium of $2,000 for a 62‑year‑old individual with un-reimbursed medical expenses of $5,000 (including the long term care premium).  Adjusted Gross income = $50,000.

(Partnership employer pays premium for (a) non-partner Employees, and (b) partners who perform services; and such coverage is provided in connection with the performance of such services.)

Since the partners are self-employed, the exclusion for employer‑provided coverage does not apply to them, and the premiums paid by the partnership are includible in their individual income.  The partner is treated as paying the premiums and is eligible for the self‑employed deduction on 100% of the premium. 

A partnership, like any other employer, may deduct any premiums paid for tax-qualified LTC Insurance (as well as other accident and health coverage) for its Employees and their spouses and dependents in accordance with the rules outlined above for corporations.  Therefore, if a partnership paid a $2,000 premium for a 62‑year‑old employee (non‑partner), the partnership would deduct the entire amount.  If the premium were more than $2,510 (in excess of the 2004 age-based limit on deductions for individual purchasers), the partnership would still deduct the full premium.

If a partnership pays long term care or other accident of health coverage premiums for its partners (and their spouses and dependents) for services rendered by the partners which payments are not based on the income of the partnership, the partnership deducts the premium from its taxable income as a business expense in the same manner it would for premiums paid on behalf of its Employees.  The amount of the premiums attributable to each partner is included in the partner’s income (including premiums paid for spouse and dependents) and reported by the partnership on each partner.  The partnership would deduct the full $2,000 paid on behalf of a partner, and $2,000 would be included in such partner’s income from self-employment.

(Example:) A Limited Liability Corporation purchased a tax-qualified LTCI policy with an annual premium of $2,000 for a 62‑year‑old individual with un-reimbursed medical expenses of $5,000 (including the long term care premium). Adjusted Gross Income = $50,000.

(LLC pays premium on Employees and LLC member‑owner of the entity).

A limited liability corporation is treated as a partnership for purposes of these rules. The LLC can deduct Long Term Care Insurance premiums paid on behalf of both its owners (members) and its Employees.  The deductions are not limited by the age‑based limits on premiums for individual deductions or the per diem limit on periodic payments.

Applying this example, the LLC would be able to take the full $2,000 deduction, regardless of whether the recipient of the long-term care coverage was an employee or an owner.  The only difference is that if the insured is an owner, the $2,000 will be included in the owner’s income from self‑employment.

Members and/or owners of the LLC are treated as partners (and are self-employed).  Thus, the premiums paid by the LLC for the qualified long-term care coverage for themselves, and their spouses and dependents are included in their income.  Such premiums are eligible for both the self‑employed deduction and the deduction for all medical expenses in excess of 7.5% of AGI.

(Example:) An “S” Corporation purchases a tax-qualified LTCI policy with an annual premium of $2,000 is purchased for a 62‑year‑old individual with un-reimbursed medical expenses of $5,000 (including the long term care premium). Adjusted Gross Income = $50,000.  An S-Corporation can pay premium on Employees and Shareholders.

A Sub‑S corporation is treated as a partnership for purposes of these rules.  The Sub‑S Corporation can deduct LTCI premiums paid on behalf of both its owners (shareholders who own 2% of the stock) and its Employees.  The deductions are not limited by the age‑based limits on premiums for individual deductions or the per diem limit on periodic payments.

Applying this example of a Sub‑S corporation, it would be able to take the full $2,000 deduction, regardless of whether the recipient of the long-term care coverage was an employee or an owner. The only difference is that if the insured is an owner, the $2,000 will be included in the owner’s income from self‑employment.

In respect of the owner/employee, 2% shareholders are treated as partners (and are self‑employed). Thus, the premiums paid the Sub‑S Corporation for long term care coverage for 2% shareholders and their spouses and dependents are included in their income. Such premiums are eligible for both the self‑employed deduction and the deduction for all un-reimbursed medical expenses in excess of 7.5 % of AGI.  Under the example, an employee would have no taxable income. 

(Example:Employer pays part of the premium; employee pays the rest).

Again, a tax-qualified LTCI policy with an annual premium of $2,000 is purchased for a 62‑year‑old individual with un-reimbursed medical expenses of $5,000 (including the long term care premium).  His Adjusted Gross Income = $50,000.

Employer  (Owner/Employee)

The employer receives the same treatment on the portion of long term care premium it pays that it does on the entire premium in the employer‑pay‑all situation.   

Thus, all employers corporate, partnerships, Sub‑S corporations and LLC’s) get a full deduction for the premium paid on behalf of its Employees without regard to the age‑based premium limits applicable to individual deductions.  In addition, partnerships, LLC’s and Sub‑S corporations may deduct the premiums it pays for its owners (2% shareholders for Sub‑S corps) for their services, but the portion of the premium paid by the entity for such self‑employed persons is includible in their income.

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 for tax purposes than indemnity policies.  The payment of premium by individuals and the tax treatment of the employer‑provided coverage is subject to the same rules outlined with respect to indemnity policies.  The tax‑free receipt of benefits under a per diem policy is limited so that policyholders will be taxed on the amount of benefits which exceeds the greater of:  $2510 at age 62 (See previous discussion of deductible amounts), or the amount of long-term care expenses incurred by the insured.

Only benefits paid under a policy specifically to reimburse actual expenses are not subject to the cap.  Thus, payments made on a daily, monthly, annual, or even a lump‑sum basis will be periodic payments subject to the cap, unless limited by the policy to the actual expenses incurred by the insured.

Periodic payments are excluded from the insured’s income up to the maximum (See Chapter on taxation of premiums and benefits).  If the periodic payments exceed the cap, the amount of benefits over the cap may be excluded from the income only to the extent the individual has incurred actual expense for long term care services.  The excess payments will be included in income without regard to the individual’s basis in the contract from the premium paid for coverage.

There are also potential disadvantages to group LTI coverage. Strict requirements apply to individual policies in California that do not apply to all forms of group coverage. The same range of benefits (both required and optional) may not be available under group coverage. Most significantly, group coverage may be less secure than individual coverage in terms of cost or continued coverage, because renewal is not guaranteed. A group sponsor has the right to change insurance companies, replace the group policy with another policy, or to terminate the group plan..

OUT OF STATE GROUPS

The Insurance Commission must approve a group long-term care policy of an insurer that is not domiciled in the state of California.  At least 30 days prior to advertising, marketing or offering the group LTCI policy in the state, the insurer must file examples of it’s master policy and certificate, Outline Of Coverage and advertising material that will be used in California.  The insurer must file evidence with the Commissioner, prior to advertising the policy, that the group to be insured has at least 100 persons, was organized and maintained for a purpose other than to obtain insurance, has been in actively in existence for at least one year, has a constitution and by-laws, and actively performs as a self-governing body.

The materials that are required to be filed with the Commissioner by this Section, shall be filed with the Commissioner for informational purposes only, and not for approval purposes.²²⁰

Required Disclosures in Certificates

Under California law, a certificate of insurance must be issued to each insured group member, and the certificate must include all of the following:

1. A description of the principal LTC benefits and coverage provided by the group policy.
2. A statement of the principal exclusions, reductions and limitations contained in the policy.
3. A statement of the terms under which the policy may be continued or discontinued, including any reservation of a right to change premiums.
4. A statement that the group master policy, and not the certificate, determines the governing contractual provisions of the coverage.
5. An explanation of the insured’s rights regarding continuation, conversion and replacement.²²¹

Insured’s Options at Termination of a Group Policy

Every group LTC Insurance certificate issued or delivered in California must provide for continuation or conversion of coverage for individual insureds if the group coverage terminates for any reason except if (1) the termination is due to failure to make a premium payment or contribution, or (2) the termination is due to replacement of the group policy within 31 days by another policy providing identical benefits, substantially equivalent benefits, or better benefits, and the premium for the replacement coverage is calculated on the insured’s age at the time the original certificate was issued.

Any insured individual whose eligibility for group coverage is based on his or her relationship to another person will be entitled to continuation coverage under the group policy if the qualifying relationship terminates due to death or divorce.

“Continuation coverage” means the maintenance of coverage under an existing group policy when that coverage would be or has been terminated and which is subject only to continued timely payment of the premium.²²²

“Conversion coverage” means an individual policy of long-term care insurance, issued by the in­surer of the terminating group coverage, without considering insurability, containing benefits which are identical, or which have been determined by the Commissioner to be at least substantially equivalent, to the group coverage which would be or has been terminated for any reason. In determining whether benefits are substantially equivalent, the Commissioner shall consider, if applicable, the relative advan­tages of managed care plans that use restricted provider networks, considering items such as service availability, benefit levels, and administrative complexity.²²³

The premium for the converted policy must be calculated on the insured’s age at the time the group certificate was issued. If the terminating group coverage replaced previous group coverage, the pre­mium for the converted policy shall be calculated on the insured’s age at the time the previous group certificate was issued.²²⁴

Before issuing conversion coverage, the insurer may require, if adequate notice is provided to certifi­cate holders in the certificate, that:

1.      The individual must have been continuously insured under the group policy, or any group policy that it replaced, for at least six months immediately prior to termination in order to be entitled to conversion coverage.
2. The insured must submit written application for a conversion policy within a reasonable period after termination of the group coverage, and the premium paid as directed by the insurer, in order that the conversion policy is issued effective on the day following termina­tion of group coverage.
3. The conversion policy contains a provision for a reduction of benefits if the insured has existing long-term care insurance, payable on an expense incurred basis, which, together with the conversion policy, would result in payment of more than 100% of incurred expenses. This provision shall not be included in the conversion policy unless the reduction in benefits is reflected in a premium decrease or refund.
4.       The conversion policy contains a provision limiting the payment for a single claim, spell of illness, or benefit period occurring at the time of conversion, to the amount that would have been payable had the group coverage remained in effect.²²⁵

Updating Group Policies

Every policy shall contain a provision that, in the event the insurer develops new benefits or benefit eligibility or new policies with new benefits or benefit eligibility not included in the previously issued policy, the insurer will grant current holders of its policies who are not in benefit or within the elimination period the following rights: (1) The policyholder will be notified of the availability of the new benefits or benefit eligibility or new policy within 12 months. The insurer’s notice shall be filed with the Department at the same time as the new policy or rider. (2) The insurer shall offer the policyholder new benefits or benefit eligibility in one of the following ways:

(A) By adding a rider to the existing policy and paying a separate premium for the new benefits or benefit eligibility based on the insured’s attained age. The premium for the existing policy will remain unchanged based on the insured’s age at issu­ance. ²²⁶

(B) By replacing the existing policy or certificate in accordance with Section 10234.87.

(C) By replac­ing the existing policy or certificate with a new policy or certificate in which case consideration for past insured status shall be recognized by setting the premium for the replacement policy or certificate at the issue age of the policy or certificate being replaced. The insured may be required to undergo new underwriting, but the underwriting can be no more restrictive than if the policyholder or certificate holder were applying for a new policy or certificate.

The insurer of a group policy as defined under subdivisions (a) to (c), inclusive, of Section 10231.6 must offer the group policyholder the opportunity to have the new benefits and provisions extended to existing certificate holders, but the insurer is relieved of the obligations imposed by this section if the holder of the group policy declines the issuer’s offer.²²⁷ This section shall become operative on June 30, 2003.²²⁸

Group Policies Issued Before 1-1-97

"Group policies issued prior to January 1, 1997, shall be allowed to remain in force and not be required to meet the requirements of this chapter, as amended during the 1997 portion of the 1997—98 Regular Session, unless those policies cease to be treated as federally qualified long-term insurance contracts. If such a policy or certificate issued on such a group policy ceases to be a federally qualified long-term care insurance contract under the grandfather rules issued by the United States Department of the Treasury pursuant to Section 7702B(f)(2) of the Internal Revenue Code, the insurer shall offer the policy and certificate holders the option to convert, on a guaranteed-issue basis, to a policy or certificate that is federally tax qualified if the insurer sells tax-qualified policies."²²⁹

Replacement of Group Coverage

Slightly different requirements apply for replacement transactions involving group LTCI coverage. When individual insurance is replaced, the law requires disclosure of information and a warning notice to the individual who will make the purchase decision.  When group coverage is replaced, it is the group master policyholder who makes the decision for the entire group, so the law protects the individual insureds by requiring the replacing insurance company to provide substantially the same benefits without any gaps in coverage.

When a group LTCI policy is replaced by another group policy issued to the same master policyholder, the replacing insurer is required to do all of the following:

1. Provide benefits identical or substantially equivalent to the terminating coverage,
2. Calculate premiums for the new coverage based on each insured’s age at the time the group coverage being replaced was originally issued,
3. Offer coverage to all persons who are covered under the replaced policy on its date of termination,
4. Not exclude coverage for any preexisting conditions that would have been covered under the terminating coverage,
5. Not require new waiting periods, elimination periods, probationary periods, or similar precon­ditions, and
6. Not vary the benefits or premiums based on an insured’s health, disability status, claims experience, or use of long-term care services.²³⁰

Generally, premiums for replacement of group coverage must be based on each insured’s age when the group coverage was originally issued, even if multiple replacements have been involved. If any group coverage being replaced has replaced previous group coverage, the current premium must be based on the ages of insureds under the original group policy. However, if replacement coverage offers new or increased benefits, any premium for those benefits may be calculated according to each insured’s age at the time of replacement.²³¹ 

Group policies issued prior to January 1, 1997, shall be allowed to remain in force and not be required to meet the requirements of the code, as amended during the 1997 portion of the 1997-98 regular session, unless those polices cease to be treated as federally qualified long-term care insurance contracts. If such a policy or certificate issued on such a group policy ceases to be a federally qualified long-term care insurance contract under the grandfather rules issued by the united states Department of the treasury in accordance with the internal revenue code, the insurer shall offer the policy and certificate holders the option to convert, on a guaranteed-issue basis, to a policy or certificate that is federally tax qualified if the insurer sells tax-qualified policies.²⁴⁴

Group vs. Individual LTC Insurance

As with many group programs, group LTCI may not go far enough to provide coverage needed. The choice of what type of coverage, length of coverage, amount of coverage, elimination period and most importantly, whether or not inflation protection is included is up to the employer estab­lishing the plan.  Individual employees may have some choices, but those choices are not usually as broad as those in a program individually designed for that client’s needs.

It should be stressed that the cost is not always less expensive, and underwriting is not always more liberal than an individual program.  Employees should be urged to investigate whether or not the group plan best suits their needs by comparing it with what is available to them as individuals.

 

STUDY QUESTIONS

 

1.  Employers who pay LTCI premiums on behalf of an employee

      A.  will not be able to deduct that expense as a business expense.

      B.  will only be able to deduct that expense if the LTCI is part of a Section 125 plan.

      C.  will be entitled to deduct the premium as business expense, like health insurance.

      D.  will be able to deduct only 50% of the premium as a business expense.

 

2.  The principal reason that insurance companies have not entered the group LTCI market earlier is

      A.  probably due to the high cost of entering the market.

      B.  that the large mutuals have the market well penetrated.

      C.  there is no group LTCI business left.

      D.  the agent’s commissions are too high in that business.

3.  In California, a Group Long Term Care Insurance plan has several requirements as to the definition of “group,” including

      A.  an association formed for the purpose of friendship and obtaining insurance.

      B.  such organization having been maintained in good faith for purposes other than obtaining insurance & are composed of individuals who are all actively engaged in the same profession or trade.

      C.  groups of persons who are afflicted with the same disease or impairment.

      D.  any organization that does not collect dues.

 

4.  The main difference between group LTCI and other types or group insurance is

      A.  the cost.

      B.  who may be covered.

      C.  tax consequences.

      D.  commission.

 

5.  Another way that group LTCI differs from other group insurance plans is

      A.  that the rates differ by age of the individual.

      B.  benefits cease when the master policy is terminated.

      C.  a master policy is issued in the name of the organization or employer.

      D.  group LTCI underwriting is identical to individual underwriting.

 

6.  Self-employed as a general partner has special tax incentives for payment of premiums on behalf of the individual, spouse and dependants, up to 100% of the amount paid, however

      A.  if the self-employed is a partnership it does not qualify.

      B.  it will not qualify if the self-employed employ family members in the business.

      C.  the deduction cannot be greater than the taxpayer’s net earnings from his trade or business.

      D.  it can only be claimed one time, on the date of the policy.

 

7.  If a corporation pays the premiums on LTCI coverage on an employee

      A.  even if the premium is in excess of the age-based limits for the deduction of the individual.

      B.  there is no deduction allowed for the corporation.

      C.  the employee may deduct the entire premium amount paid on their behalf.

      D.  the business deduction is only allowed if the coverage is provided under a group policy.

 

8.  If the employer-provided LTCI coverage is a qualified LTCI contract which provides benefits on a per diem basis, or other flat amounts for a fixed period of time,

      A.  it is still treated entirely as any group LTCI plan for tax purposes.

      B.  the tax-free receipt of benefits under that policy is limited so that the policyholder will be taxed on the amount of benefits exceeding a stated cap, or the long-term care expenses incurred by the insured.

      C.  there are no tax benefits of any kind for either the individual or the employer.

      D.  the employee must consider periodic payments as part of his income.

 

9.  In California, a certificate of insurance must be issued to each insured group member, and the certificates must include several items, including

      A.  a statement of the principal exclusions reductions and limitations contained in the policy,

      B.  details as how the member may become a Medi-Cal beneficiary.

      C.  a statement that the certificate and not the master policy determined the contractual provisions of the policy.

      D.  a financial report from the issuing insurer.

 

10.  When a group LTCI policy is replaced by another group policy issued to the same master policyholder, the replacing insurer is required to do several things, including

      A.  provide benefits approximately the same as was provided when the existing policy was first issued.

      B.  explain by memorandum why some persons are not covered that were covered under the replaced policy.

      C.  excluding coverage for any pre-existing condition.

      D.  provide benefits identical or substantially equivalent to the terminating coverage.

 

ANSWERS TO STUDY QUESTIONS

1C     2A     3B     4B     5A     6C     7A     8B     9A     10D