Taxation of Long-Term Care
Chapter 27
Risk Management For Financial Planners
Insurance
 Definition of “Qualified” Long Term Care Insurance
Contract
 IRC Section 7702B –HIPAA act of 1996
 Requirements
 Only coverage provided is long term care services
 Contract does not reimburse for services reimbursed under Title
XVIII of the Social Security Act
 Contract is guaranteed renewable
 Contract does not provide for a cash surrender value or other
money that can be paid, assigned, or pledged as collateral for a
loan or borrowed
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Taxation of Long-Term Care
Chapter 27
Risk Management For Financial Planners
Insurance
 Definition of “Qualified” Long Term Care Insurance
Contract (cont’d)
 Requirements (cont’d)
 All premium refund and dividends are to be applied as a
reduction in future premiums or to increase future benefits
 Contracts satisfies certain consumer protection provisions
concerning
 Model regulation and model act provisions
 Disclosure
 Nonforfeitability
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Taxation of Long-Term Care
Chapter 27
Risk Management For Financial Planners
Insurance
 Definition of “Qualified” Long Term Care Insurance
Contract (cont’d)
 Requirements (cont’d)
 Meet provisions of the NAIC Long term care Model Regulation
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Guaranteed renewal or noncancellability
Prohibitions on limitation and exclusions
Extension of coverage
Replacement of policies
Unintentional lapses
Requirement to offer inflation protection
Disclosure
Prohibition against preexisting conditions and probationary periods
in replacement policies
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Taxation of Long-Term Care
Chapter 27
Risk Management For Financial Planners
Insurance
 Definition of “Qualified” Long Term Care Insurance
Contract (cont’d)
 Disclosure requirements
 Nonforfeiture provisions
 Properly captioned
 Benefit provided in the event of default of payment
 Benefit adjusted only as necessary to reflect changes in claims,
persistency and interest
 Provides for at least one of the following options
 Reduced paid-up insurance
 Extended term insurance
 Shortened benefit period
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Taxation of Long-Term Care
Chapter 27
Risk Management For Financial Planners
Insurance
 Definition of “Qualified” Long Term Care Insurance
Contract (cont’d)
 Policy must be delivered within 30 days of approval
 Claim denials must be responded to a policyholders
written request for explanation within 60 days of receipt
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Taxation of Long-Term Care
Chapter 27
Risk Management For Financial Planners
Insurance
 Definition of “Qualified” Long Term Care Services
 Definition of “Chronically Ill Individual”
 Activity of Daily Living (ADL’s) Benefit
 Person is classified as chronically ill
 Unable to perform, without substantial assistance, at
least two of the ADL’s for at least 90 days
 Eating, toileting, transferring, bathing, dressing, and
continence
 Qualified policy must take into account at least five of these
ADL’s in determining whether a person is chronically ill.
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Taxation of Long-Term Care
Chapter 27
Risk Management For Financial Planners
Insurance
 Definition of “Qualified” Long Term Care Services
 Cognitive Impairment
 Individual requires substantial supervision to protect himself
from threats to is health and safety due to severe cognitive
impairment
 Must be certifies by a health care practitioner
 Business uses
 Group long term care policies offered by employers
 generally participating employees pay the full cost of this
coverage
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Taxation of Long-Term Care
Chapter 27
Risk Management For Financial Planners
Insurance
 Tax implications
 Nonqualified policy
 Taxation for premiums paid for and benefits received from such
a policy is uncertain
 It is believed the tax benefits applicable to qualified long term
care policies are not applicable to nonqualified long term care
policies
 Qualified policy
 Premiums deductible as a medical expenses
 To the extent they and all other eligible medical expenses exceed
7.5% of adjusted gross income
 Subject to additional dollar limitation
 Based on age brackets
 Example – for ages 51 through 60 limitation is $1,150 in 2008
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Taxation of Long-Term Care
Chapter 27
Risk Management For Financial Planners
Insurance
 Tax implications (cont’d)
 LTC owned by self employed individuals
 Premiums are eligible for deduction
 Subject to the same dollar amount limitations
 Exception
 Deduction not available if self employed individual id eligible to
participate in any subsidized health plan maintained by any
employer of the self employed individual or his spouse
 If the employer plan provides for qualified long term care coverage
 Gift tax consequences
 Neither the purchase nor receipt of benefits will trigger federal
gift tax consequences
 Gift tax liability may occur if the fund to purchase the policy are
given by one individual to another.
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Taxation of Long-Term Care
Chapter 27
Risk Management For Financial Planners
Insurance
 Tax implications (cont’d)
 Estate tax consequences
 Generally no significant estate tax implications
 One indirect effect
 Assets that would have been used, absent a policy, now stay in the
estate and if large enough could subject the estate to federal estate
tax
 Generation skipping transfer tax consequences
 No consequences
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Taxation of Long-Term Care
Chapter 27
Risk Management For Financial Planners
Insurance
 Tax implications (cont’d)
 Design features
 Qualified
 Benefit triggers based are specified by the internal revenue code
 Activities of daily living
 Chronically ill - Cognitive impairment trigger
 ADL benefit trigger safe harbor definitions
 Substantial assistance means hand-on assistance or standby
assistance
 Hands-on assistance means physical assistance of another person
without which an individual would not be able to complete the ADL
 Standby assistance means presence of another individual that is
needed to prevent an individual from injury while performing an ADL
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Taxation of Long-Term Care
Chapter 27
Risk Management For Financial Planners
Insurance
 Tax implications (cont’d)
 Design features (cont’d)
 Cognitive impairment safe harbor definitions
 Severe cognitive impairment means loss or deterioration in
intellectual capacity that is similar to Alzheimer's disease and the
like forms of irreversible dementia . . .
 Substantial supervision means continual supervision by another
person that is needed to protect the severely cognitively impaired
person from threats to his health or safety
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