Taxation of long-term care insurance.

• Author: Sasaki, Carl

Today, medical science allows people to live longer, meaningful, independent lives; however, it is still likely that elderly individuals will become ill and need care. Long-term care (LTC) is a topic often avoided, but for many individuals it will prove to be one of the most significant issues they will have to deal with during their lifetime. Discussing LTC insurance should be a priority for all professional advisers in order to help protect the best interests of their clients and families as they enter the "golden years" of their lives.

Qualified LTC Insurance Policy

Qualified LTC insurance policies are allowed special tax treatment. However, an LTC policy can cover only qualified long-term care services (defined below). Under Sec. 7702B(b), the contract must:

* In general not pay for or reimburse expenses incurred for services or items if the expenses are reimbursable under Medicare;

* Be guaranteed renewable;

* Not provide for a cash surrender value or all refunds of premiums, and all policyholder dividends under the contract must be applied as a reduction in future premiums or to increase future benefits; and

* Include certain consumer protection clauses.

Under Sec. 7702B(g), an LTC policy is considered to meet the consumer protection requirements if it includes provisions relating to:

1. National Association of Insurance Commissioners model regulations, including:

   * Guaranteed renewal or noncancellability;

   * Prohibitions on limitations and exclusions;

   * Extension of benefits;

   * Continuation or conversion of coverage;

   * Discontinuance and replacement of policies;

   * Unintentional lapse;

   * Disclosure;

   * Prohibitions against post-claim underwriting;

   * Minimum standards;

   * Offers of inflation protection; and

   * Prohibition of preexisting conditions and probationary periods in replacement policies or certificates.

2. Disclosure requirements under Sec. 4980C, including those related to:

   Application forms and replacement coverage;

   * Reporting requirements;

   * Filing requirements and standards for marketing;

   * Appropriateness of recommended purchase;

   * Standard format of coverage;

   * Requirements to deliver a shopper's guide;

   * Right to return;

   * Requirements for certificates under group plans;

   * Policy summaries;

   * Monthly reports on accelerated death benefits;

   * Incontestability period; and

   * Policy disclosures in the outline of coverage that the policy is intended to be a qualified LTC insurance contract under Sec. 7702B.

3. Nonforfeiture...