Considerable interest has been shown in recent years regarding ways of making long term care insurance coverage more affordable and otherwise more attractive to consumers.
Insurers have examined innovative product ideas, how those ideas might fit into existing state and federal regulatory regimes, and consumer goals for protecting against the potentially high LTC costs.
LTC-annuity products offer many attractive features in these regards, but uncertain tax treatment has been a significant practical barrier to product development. A great opportunity exists, however, in pending pension legislation that would eliminate this barrier.
House and Senate conferees currently are working to reconcile different versions of pension bills passed in each chamber. Only the House version includes tax clarifications and enhancements for LTC combination insurance products. However, optimism continues that the market barrier of tax uncertainty that currently exists for LTC-annuity products will be removed from the legislation.
Why is legislation needed in the first place? Good question. The answer lies with the one common feature in LTC-annuity products–the presence of the annuity contract, with its cash values and annuity purchase rate guarantees. That presence raises a number of issues for the LTC coverage under section 7702B(b) of the Internal Revenue Code, which defines a “qualified long term care insurance contract” for tax purposes.
If LTC insurance coverage is provided under a “qualified” contract, benefits generally are received tax-free as accident and health insurance benefits. Section 7702B(b) states, however, that subject to a very narrow exception, qualified contracts may not provide a cash value. Section 7702B(b) also requires qualified contracts to provide insurance coverage only of “qualified long term care services.”
With respect to both requirements, the issue is whether values or coverage associated with the annuity portion of a contract would result in the disqualification of its LTC portion.
Thus, for example, for a contract to be tax-qualified, it would be necessary to conclude that the annuity’s cash value is not part of the LTC portion of the contract. It also would be necessary to conclude that any insurance coverage provided under the annuity (e.g., with respect to annuity purchase rate guarantees) is also not part of the LTC portion of the contract.