Long-Term Care Insurance

THE NEW GUIDELINES

"You've heard by now that long-term-care insurance (LTCI) is treated like health insurance for tax purposes, as long as it meets certain requirements. In order to qualify, insurance companies have to change their policies to meet the new federal guidelines and resubmit them to state insurance departments for approval.
If you bought a policy prior to this year, your policy will be grandfathered under the new law and will qualify for the tax benefits as well.

The New Tax Benefits
The law says qualified LTCI should now be considered a form of accident and health insurance used to pay for long-term-care services. It defines long-term care as "necessary diagnostic, preventive, therapeutic, curing, treating, mitigating and rehabilitative services, and maintenance or personal care services" required by a chronically ill person. As a result of the change, you should be aware of the following:
Policy premiums may be tax deductible. If you itemize deductions, premiums you pay for a qualified LTCI policy may be deducted to the extent that premiums plus other medical expenses exceed 7.5% of your adjusted gross income.
In 1997, if your age before the close of a tax year is 40 or less, up to $200 of LTCI premiums can be included as a medical expense per year. If you're 41 to 50, the limit is $375; 51 to 60, $750; 61 to 70, $2,000; 71 or older, $2,500. Amounts will be adjusted annually for inflation.
Policy reimbursements are tax-free. The new law says that reimbursements from qualified policies are not taxable income. However, if you have a per diem policy-one that pays a set amount regardless of actual expenses-income is tax-free up to $175 per day. Above that amount, payments are tax-free only when they reimburse actual expenses. The limit will be adjusted annually for inflation.

New Long-Term-Care Provisions
In order to qualify for beneficial tax treatment, policies must, among other things, no longer use language that would permit you to tap benefits in your policy just because your doctor determines that long-term care is medically necessary. (Insured individuals whose grandfathered policies contain such language may still obtain benefits that way.)
Along with consumer protections, such as inflation protection and protection in case of unintentional policy lapses, new tax-qualified policies must include the following provisions:
Certification. Before a policy-holder can file for benefits under a policy, he or she must be certified as chronically ill by a licensed health-care practitioner, such as a physician, registered nurse or social worker. A chronically ill person is one who has:

  • Severe cognitive impairment and requires substantial supervision for his or her own protection, or
  • Is unable to perform without substantial assistance from another individual at least two activities of daily living. In addition, the disability must be expected to last for at least 90 days.
  • Older policies may say that benefits will be paid once an insured person needs regular human assistance or supervision rather than substantial assistance and may not include the word "severe" with cognitive impairment. They don't include a 90-day test either.
    According to Richard Garner, vice president of long-term care at CNA Insurance Companies, the exact meaning of the new language must be determined by Treasury Department regulations. Also, it's not yet clear whether the government intended the language to be more restrictive.
    The 90-day test has nothing to do with the policy's elimination period, says Garner. If a qualified policy has a 30-day elimination period, for example, payments would start after 30 days as long as the practitioner expects the chronic illness to last for at least 90 days and no payments are coming from Medicare (see below).
    Activities of daily living (ADLs). Benefits start when a person can't perform at least two of the specified ADLs. The law lists six ADLs-eating, toileting, transferring, bathing, dressing, continence-and requires insurers to include at least five in their contracts. As a result, the law allows insurers to sell qualified LTCI contracts that don't include bathing as an ADL.
    This is bad for consumers because bathing is often the first thing individuals have difficulty doing by themselves. Experts advise that you not buy a policy that doesn't include bathing as an ADL.
    Coordination of benefits. All tax-qualified reimbursement policies must be coordinated, which means LTCI benefits won't start until Medicare coverage ends. (Per diem policies operate with different rules.) The new coordination requirements don't apply to policies bought before 1997.
    Despite these changes to LTCI contracts, premiums for qualified policies will be roughly the same as those on comparable policies issued last year. For example, CNA is adding or enhancing several benefits and keeping premiums at the same levels. John Hancock's policies may be a bit less expensive for those age 60 to 74, and bathing will be added as an activity of daily living.

    Excerpted with permission from Kiplinger's Retirement Report. 1997 by The Kiplinger Washington Editors, Inc. Special subscription price for Grand Times readers, $29.95 for one year (regularly $59.95). 800-544-0155. or visit their web site at http://www.kiplinger.com


    BOOKS WITH MORE INFO

  • Medicare/Medigap. Consumer Reports Books. $13.95 800-500-9759.
  • You've Earned It, Don't Lose It. Newmarket Press. $22. 800-733-3000.
  • Long-Term Care and Its Alternatives. People's Medical Society. $16.95. 800-624-8773.
  • The All-New Avoiding the Medicaid Trap. Henry Holt & Co. $30. 800-288-2131.
  • The Over 50 Insurance Survival Guide. Merritt Publishing. $16.95. 800-638-7597.
  • Retiring Right. Avery Publishing. $14.95. 800-548-5757.
  • OTHER RESOURCES

  • California Partnership for Long Term Care. 800-227-3445.
  • HICAP Information 800-434-0222.