Member of National Academy of Elder Law Attorneys. ©1998
Jump to information on Long Term Care Insurance Tax Implications
On August 21, 1996, President Clinton signed into law the Health Insurance Portability Act (HIPAA). This Act included long-term care insurance consumer protection standards and provisions addressing the federal tax treatment of qualified long-term care insurance premiums and benefits. Long-term care insurance comes in two basic types qualified and non-qualified. Qualified means that the premiums may be included as a medical expense deduction. This article addresses the consumer protections that the HIPAA created. A later article will discuss the tax implications of qualified long-term care insurance policies.
Qualified long-term care insurance is defined as a contract that provides insurance coverage only for qualified long-term care services; does not pay or reimburse for expenses that are covered by Medicare; is guaranteed renewable; does not provide a cash surrender value or that could be assigned or pledged as collateral for a loan; provides that all refunds of premiums and policy holder dividends are to be applied as a reduction of future premiums or to increase future benefits. In addition to the above, a qualified plan must meet certain consumer protections which are set out in the Model Regulations and Long-Term Care Insurance Model Act. Further, the policy must meet disclosure and nonforfeitability requirements.
The benefit trigger clause of qualified long-term care insurance is more restrictive than pre-HIPAA policies. The benefit trigger clause is the provision in the policy which defines when the policy benefits will be paid. The services under a qualified plan must be triggered by certification by a licensed health care provider that the beneficiary is chronically ill. Chronic illness is defined 1) as being unable to perform, without substantial assistance, at least two activities of daily living for at least 90 calendar days due to a loss of functional capacity or 2) requiring substantial supervision in order to be protect from threats to health and safety due to cognitive impairment. The 90 day period may be presumptive, which means that the doctor may certify that in her opinion the impaired performance will last at least 90 days.
In order to be qualified an insurance contract which includes a renewal provision must use the terms 'guaranteed renewable and 'noncancelable. This term must be defined. 'Guaranteed renewable means the insured, i.e. the senior holder of the policy, has the right to continue the long-term care insurance by timely payment of premiums and the insurance company does not have a unilateral right to change or decline to renew the policy. Further, the premium rates may only be revised for the whole class of holder and not just for the individual. "Noncancelable" means that the insurance company may not cancel, change the provisions of the policy or revise the rates while the insured is paying the premiums in a timely manner.
The policy may not limit or exclude coverage by type of illness, treatment, medical condition or accident. However, the Model Regulations allow for a limited number of exclusions such as pre- existing conditions, mental or nervous disorders (except for Alzheimer's Disease), alcoholism and drug addictions, suicide, injuries due to war, riot or insurrections, service in the armed forces. In addition, exclusions may be included for treatment provided in a government facility reimbursed by Medicare, workers' compensation coverage, auto insurance no-fault coverage, services by family members, and employer's liability or occupational disease coverage. A qualified plan may exclude coverage for services provided outside the United States.
If an insured is receiving benefits and the policy is terminated, the insurance company must continue to pay for any institutionalization that began before the policy termination and has continued uninterrupted. The insurance company may limit the payments to the policy limits or maximum benefits.
A group qualified long-term care policy must provide for continuation of coverage or conversion. In the event that the insured is no longer in the group and is subject to loosing coverage. The insured must be able to maintain his/her coverage under the group policy by the payment of premiums. If the benefits or services covered are restricted to certain providers, which the insured can no longer use, the insurance company must provide for a continuation of benefits which are substantially equivalent. Similarly, if a group policy it terminated the insurance company must provide the insured with an converted policy which is substantially equivalent to the policy which was terminated. In order for an insured to benefit from this provision, he or she must have been covered under the terminated plan for at least six month immediately prior to the termination.
A qualified plan must have a provision to protect the insured against unintended lapse. The policy must not be issued until the company has received a written designation from the applicant identifying at least one other person who is to receive notice from the insurance company before the policy may be terminated. The form used to identify the additional person must have a space for the person's full name and address. If for any reason the policy is to lapse, the insurance company is required to provide written notice to the insured and his/her designated agent identified on the form. Further, the insurance company may not terminate a policy for nonpayment of premiums until it has given the insured 30 days notice of the potential termination. Notice must be provided by first class mail, postage paid to the insured and all the persons identified by the insured.
Another important feature of qualified plans, is that post-claim underwriting is restricted and limited. Post-claim underwriting occurs when after a claim is filed by the policyholder, the insurance company declines the coverage on the ground that it would not have issued to policy if it had know about some medical condition. Under HIPAA , applications for long-term care insurance must contain clear and unambiguous questions designed to elicit information about the healthy status of the applicant. Further, if the application asks whether the applicant takes prescribed medications, it must ask for a list of those medications. The insurance company, if it receives the medication list, may not deny coverage for any condition which was being treated by any of the medications listed, even if that condition would have been grounds for a denial of coverage at the application stage. The application must contain a clear bold caution to applicants that states that if the answers on the application are incorrect or untrue, the company has the right to deny coverage or rescind the contract. Therefore, it is important for applicants to fill out the application fully and correctly and list all the prescribed medications being taken.
The new law also established minimum standards for home health and community care benefits in qualified policies. If the policy provides benefits for home health or community care, it may not limit or exclude benefits by requiring that skilled care be required first or that the services be provided by registered or licensed practical nurses or that the provider be Medicare-certified. The policy may not exclude coverage for personal care services provided by a home health aide or adult day care service. The policy may not require that benefits be triggered by an acute illness.
Inflation protection is also included as a required element of a qualified plan. It is intended that meaningful inflation protection be provided. The legislation requires that the insurance company use reasonable hypothetical or graphic demonstrations that disclose how the inflation protection will work.
The Health Insurance Portability Act provides a number of new protections for senior citizens who purchase qualified long-term care health insurance. The policy documents may be technical and hard to understand. An Elder Law attorney may provide assistance in determining if long-term care insurance is a good idea and which policies may meet your particular needs.
Jump to Long Term Care Insurance Consumer Protections
On August 21, 1996, President Clinton signed into law the Health Insurance Portability Act (HIPAA). This Act included long-term care insurance consumer protections standards and provisions addressing the federal tax treatment of long-term care insurance premiums and benefits. The result, of the tax provisions, has been a marketing bonanza for insurance companies that sell long-term care policies. While, in general, HIPAA provided that premiums paid for and benefits received from qualified long-term care insurance receive favorable tax treatment, the practical application of these rules may not be of great benefit to most seniors.
The average age of onset for long-term care needs is 75. The majority of seniors receiving long-term care required non-medical services. The list of the most required needs includes 1)personal care, such as assistance with dressing, bathing, and toilet, 2) assistance with home tasks, and meal preparation, and 3) assistance with connecting to appropriate community services. The conditions which most frequently result in a loss of independence are heart disease, arthritis, and dementias. The average coverage period for most policies is 4 years but policies may be written for more or less time. The cost of long- term care insurance is dependent on the age and health of the policy holder. As a general observation the costs of premiums may run between $400 to $10,000 per year.
Taxpayers may claim a deduction for un-reimbursed medical care expenses, including insurance premiums for medical care, for cost exceeding 7.5% of the individuals adjusted gross income (AGI). Under HIPAA, the cost of qualified long-term care services and qualified long-term care insurance premiums are included in the definition of deductible medical care.
By including qualified long-term care insurance premiums in the definition of deductible medical care, these costs may now be included in the itemized list of medical costs on a taxpayer return. The deduction however is not unlimited. The deduction is age dependent and the maximum amount that can be deducted is capped per individual as follows: 40 years/less-$200; 40-less than 51 years-$375; 50-less than 61 years-$750; 60-less than 71 years-$2,000; over 70 years-$2500. This means that a husband and wife, each over 70, who have both paid qualified long-term care insurance premiums of $ 3,600, could jointly qualify up to $5,000 or individually up to $2,500 for the deduction. However, the medical care expense deduction applies only to those costs over 7.5% of the couples gross adjusted income.
In most cases the saving related to the cost of qualified long-term care insurance premiums are illusory. Since the deductibility of the premiums is dependent on the 7.5% of AGI limitation, unless the total cost of all medical expenses exceeds that limitation none of the expenses are deductible. For example, Ms. Smith, a 64 year old woman with $50,000 AGI has $3500 of medical expenses, unrelated to qualified long-term care expenses. She purchases a tax qualified long-term care insurance policy with an annual premium of $2,600. The HIPAA rules allow her to use $2,000 of the cost of the premium as potentially deductible medical expenses. Her total medical expenses are $5,500 ($3,500 + $2,000). Based on her AGI she may deduct the amount that exceeds 7.5% of $50,000 or $1,750 (7.5% of 50,000 = $3,750; $5,500-3,750= 1,750). So, Ms. Smiths tax benefit was considerably less than the total cost of the premium.
Generally, benefits paid under accident or health insurance for personal injury or sicknesses are excluded from gross income. Prior to HIPAA, there was no specific provision in the tax code dealing with the tax treatment of long-term care insurance benefits.
Under HIPAA, a qualified long-term care insurance contract is treated as an accident and health insurance contract. Therefore, benefits received under a qualified long-term care insurance contract are excluded from gross income. The exclusion is capped, however, to the greater of a) $175 (1997) per day or the equivalent amount when payments are made by different periodic basis, or b) the actual cost of long-term care services.
Ms. Smith, from the above example, is admitted to a skilled nursing care facility following surgery. She has some complications and Medicare covered 90 days of care. She remained in the facility for an additional 25 days at $200 per day, which was covered by her qualified long-term care insurance, for a total benefit of $5,000. The actual cost of care was determined to be $175 per day, which means that her benefits exceeded the deductibility cap by $25. Therefore, $4,375 ($175 x 25) of the benefits are excluded and $625 is taxable income. However, if the actual cost of care was determined to be $225 per day, nothing would be taxable because the actual cost of care would exceed the cap by $50 per day.
The Treasury Department has not clarified the status of benefits received under a non-qualified long-term care insurance plan. Therefore, the taxability of these benefits is open to further interpretation. This means that it is possible that individuals who receive benefits under a non-qualified long-term care insurance policy risk facing a large tax bill for these benefits.
In order for a senior to derive a tax benefit from purchasing a qualified long-term care insurance policy, he or she must be willing to itemize deductions and have medical expenses that exceed 7.5% of his or her gross adjusted income. Most seniors do not itemize deductions either because the record keeping is to cumbersome or their unreimbursed medical expenses are to low to bother. Therefore, most seniors will not benefit from the tax deductible status of qualified long-term care insurance premiums. If you have a question about qualified long-term care insurance, an Elder Law attorney may be able to assist you.
The information in this article was prepared as general and supplemental information and may not be applicable to the reader's particular legal needs or circumstances. It should not be relied upon as a substitute for legal or other professional services. For such services consult a competent professional advisor.
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| M. Robin Morris, R.N., L.L.C., Attorney At Law, 164 Waccamaw Medical Park Court, Conway, S.C. 29528; Tel. 843-347-7998. Member of National Academy of Elder Law Attorneys. ©1998 |