General Rules Of Long Term Care Insurance

March 13, 2024

481 / What are qualified long-term care services?

<div class="Section1"> Qualified long-term care services are any necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal care services that are 1) required by a chronically ill individual and 2) provided under a plan of care set forth by a licensed health care practitioner.<a href="#_ftn1" name="_ftnref1">1</a> <hr /> Practice Point: A licensed healthcare practitioner can be a physician, registered nurse or licensed social worker. <hr /> A chronically ill individual is a person who has been certified by a licensed health care practitioner as 1) being unable to perform, without substantial assistance from another individual, at least two activities of daily living (“ADLs”) for at least 90 days due to a loss of functional capacity, 2) requiring substantial supervision to protect such individual from threats to health and safety due to severe cognitive impairment, or 3) having a level of disability similar to the level described in (1) above, as determined by the Secretary of Health and Human Services. In all cases, a licensed healthcare practitioner must have certified the need for such requirements within the preceding 12 months. <hr /> Practice Point: Prior to 1997, benefit triggers in long-term care insurance policies were not standardized, but this should not be taken to mean that common triggers weren’t widely found, including those described above. The significance of HIPAA in creating tax-qualified (TQ) policies was thjollowing: <blockquote>1. Eliminating the “medical necessity” trigger, and 2. Creating the 90-day certification requirement.</blockquote> <hr /> The 90-day requirement for the ADL benefit trigger does not establish a waiting period (i.e., elimination period), but simply a duration over which the individual’s disability is certified to last.<a href="#_ftn2" name="_ftnref2">2</a> <hr /> Practice Point: Many commentators (and even some insurance company documents) employ the expression “expected to last” [90 days], but curiously, the source material does not use this phrase. However, the intent is similar: “chronic illness” should be long-lasting, and long-term care policies should pay for care over the long-term. In this way, TQ policies were a break from the past, when these policies had no qualms about paying for short-term claims (i.e., less than 90 days). <hr /> To clarify, one’s elimination period states how soon after qualifying care begins that claim payments start, acting like a deductible. There is no conflict in saying, “As a tax-qualified policy, my plan will only pay for claims that last longer than 90 days, but I still want reimbursement from Day 1.” Nevertheless, since 1997 there’s been an explosion in the choice of 90-day elimination periods, which now make-up nearly 90 percent of the market. Having established an ADL trigger, the six activities of daily living are defined as: <blockquote>(1) eating; (2) toileting; (3) transferring; (4) bathing; (5) dressing; and (6) continence.</blockquote> In determining an individual’s inability to perform two or more ADL’s, a TQ policy must take into account at least five of these six. Much ink has been spilled debating the merits of “hands-on” assistance versus “stand-by” assistance. The former means the physical assistance of another person without which an individual would not be able to complete an ADL. Stand-by assistance is the presence of another individual necessary to prevent injury while performing an ADL (such as being ready to catch the individual if they fall while getting in the tub while bathing). However, HIPAA uses the umbrella term “substantial assistance”, which the IRS has subsequently clarified is either. The IRS also expanded its definition of the cognitive impairment (CI) trigger by advising taxpayers they could rely on a number of “safe harbor” provisions. These included a broadened definition of “severe cognitive impairment” as a loss or deterioration in intellectual capacity that is similar to Alzheimer’s disease and forms of irreversible dementia, and is measured by clinical evidence and standardized tests that reliably measure impairment in short term memory, long-term memory, orientation to people, places or time, and deductive or abstract reasoning. </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 7702B(c)(1). <a href="#_ftnref2" name="_ftn2">2</a>. Notice 97-31, 1997-1 CB 417. </div>

March 13, 2024

478 / Can a life insurance policy or annuity contract be used to provide long-term care coverage?

<div class="Section1">Yes.<div class="Section1"> A life insurance or annuity contract may provide long-term care insurance benefits. Any long-term care insurance coverage, qualified or otherwise, that is provided by a rider or as part of a life insurance or annuity contract will be treated as a separate contract for purposes of the treatment of long-term care benefits paid.<a href="#_ftn1" name="_ftnref1">1</a> As such, benefits paid for qualified long-term care services are generally tax-free (regardless of the treatment otherwise applicable to a withdrawal from the underlying life or annuity contract) ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="491">491</a>).<a href="#_ftn2" name="_ftnref2">2</a> <hr> Planning Point: By linking two distinctly fundamental needs, such products have earned the moniker “combination”, “hybrid”, “linked-benefit” or “asset-based long-term care”. There is no legal difference in these terms, which were instead born of marketing. (The IRS employs the term “combination contracts”.) <hr> There is no premium deduction permitted under IRC Section 213(a) for charges made against the cash surrender value of a life contract or cash value of an annuity contract which pay for qualified long-term care insurance (QLTCI).<a href="#_ftn3" name="_ftnref3">3</a> Rather, such charges serve to reduce the investment (i.e., cost basis) in the underlying contract by the amount of the charge—but not below zero. Since these charges are withdrawn from the policy’s cash value to pay for the QLTCI (albeit internally), they are considered “distributions”. Nevertheless, the amount of these charges is not included in gross income.<a href="#_ftn4" name="_ftnref4">4</a> <hr> Planning Point: In certain situations, a combination policy may be a modified endowment contract, or MEC. (Generally, most single-premium life combo products are MECs, i.e., they fail the seven-pay test.) When they were first established in 1988, MECs received less favorable income tax treatment than non-MECs: <ul> <li>Distributions (including withdrawals and loans) are received taxable gain first, tax-free principal last (LIFO), and</li> <li>Any distributions received prior to age 59½ are subject to a 10 percent penalty (unless taken for death, disability or as part of a life annuity).</li> </ul> <hr> The above MEC rules (LIFO tax treatment of distributions, and the 10 percent early withdrawal penalty) are the same treatment found in nonqualified deferred annuities. However, the Pension Protection Act (PPA) modified these rules effective January 1, 2010. Specifically, the PPA targeted distributions from life insurance (even MECs) and nonqualified annuities when used to pay for QLTCI: going forward, they would not be subject to immediate taxation or the early withdrawal penalty. Instead, these charges would simply reduce cost basis in the contract (but not below zero). To be clear, the linchpin of this favorable tax treatment is the requirement that the qualified long-term care coverage be made part of (or included as a rider on) the life or annuity contract from which cash value charges are made. None of the tax provisions cited above for combination life/long-term care or annuity/long-term care policies apply to any of the following:<a href="#_ftn5" name="_ftnref5">5</a> <blockquote>(1)     A tax-exempt (under a Section 501(a)) trust described in IRC Section 401(a) ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3837">3837</a>)); (2)     A contract purchased by a tax-exempt (under a Section 501(a)) trust described in IRC Section 401(a)); (3)     A contract purchased as part of a plan under IRC Section 403(a); (4)     A contract described in IRC Section 403(b) ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4027">4027</a>); (5)     A contract provided for employees of a life insurance company under IRC Section 818(a)(3); (6)     A contract from an IRA or individual retirement annuity ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3641">3641</a>); or (7)     A contract purchased by an employer for the benefit of an employee or an employee’s spouse.</blockquote> </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 7702B(e)(1). <a href="#_ftnref2" name="_ftn2">2</a>.     IRC § 7702B(e)(1). <a href="#_ftnref3" name="_ftn3">3</a>.     IRC § 7702B(e)(3). <a href="#_ftnref4" name="_ftn4">4</a>.     IRC § 72(e)(11). <a href="#_ftnref5" name="_ftn5">5</a>.     IRC § 7702B(e)(4). </div></div>

March 13, 2024

480 / Do COBRA continuation coverage requirements apply to long-term care insurance?

<div class="Section1">No, they do not.<div class="Section1"> The COBRA continuation coverage requirements applicable to group health plans do not apply to plans under which substantially all of the coverage is for long-term care services.<a href="#_ftn1" name="_ftnref1">1</a> This provision is effective for contracts issued after 1996.<a href="#_ftn2" name="_ftnref2">2</a> A plan may use any reasonable method to determine whether substantially all of the coverage under the plan is for qualified long-term care services ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="356">356</a>).<a href="#_ftn3" name="_ftnref3">3</a> <hr> Planning Point: After a qualifying event at work (e.g. the employer’s failure to pay premiums), group health plans generally require that each qualified plan beneficiary be given the election to continue identical coverage. This is not the case with qualified long-term care insurance (QLTCI). <hr> As a practical matter, most QLTCI sold through the worksite, or sponsored by an employer, are individual policies. They are the exact same contracts sold on the retail market. However, by meeting certain participation thresholds, the insurer may extend premium discounts and underwriting concessions. But since they are individual policies, they are completely “portable” and not tied to employment in any meaningful way. There are some “true group” QLTCI plans—many of which have existed for some time, and some that are newly sold. These policies do operate under group regulations, where employees receive “certificates” (not policies), and an employee who works in Oregon, for example, might be covered by an Idaho policy form if that is where his employer’s “situs” is located. Although COBRA does not apply, one will find conversion privileges in group long-term care which, for instance, give certificate holders the right to continue making premium payments (and keep coverage in-force) in the event their employer discontinues the plan. </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 4980B(g)(2). <a href="#_ftnref2" name="_ftn2">2</a>.     HIPAA ’96, § 321(f)(1). <a href="#_ftnref3" name="_ftn3">3</a>.     Treas. Reg. § 54.4980B-2, A-1(e). </div></div>