477 / What is a qualified long-term care insurance contract?
A long-term care insurance policy issued after 1996 is a qualified long-term care insurance contract under IRC Section 7702B(b) if:
(1) The only insurance protection provided under the contract is coverage of qualified long-term care services ( Q 481);
Planning Point: Although this is one of the foundational principles of qualified long-term care insurance, there is a notable exception to this rule. Since 1996 there have been scores of policy designs which pay either an indemnity (i.e., the full daily or monthly benefit without regard to costs incurred) or a cash benefit (i.e., some flat amount based solely on the insured’s ability to trigger benefits—without even the prerequisite that services have been received.) Such designs are permitted under 7702B(2)A, which permits “per diem” payments without otherwise contradicting this principle.
(2) The contract does not pay or reimburse expenses incurred for services that are reimbursable under Title XVIII of the Social Security Act or that would be reimbursable but for the application of a deductible or coinsurance amount;
Planning Point: This paragraph refers to Medicare, which may pay for limited home health care benefits, and—subject to gatekeepers—a limited skilled nursing facility benefit as well (no more than 100 days). Prior to HIPAA, long-term care insurance policies were permitted to “duplicate” Medicare (assuming any were received by the policyholder). After HIPAA, tax-qualified (TQ) plans had to “coordinate” with Medicare.
As a result of the relatively confounding manner in which this section of the regulation is written, many producers have wondered: on the chance Medicare does pay for nursing facility care on days 1 – 100, can the LTCI policy pay anything? The answer is: yes, a TQ plan can reimburse for any charges over and above what Medicare pays. Nevertheless, either believing that it cannot, or that Medicare pays much more frequently than it does, most producers overwhelmingly sell a 90- or 100-day elimination period (in approximately nine out of 10 policies).
(3) The contract is guaranteed renewable;
Planning Point: Guaranteed renewability means the insurer must not fail to renew a policy if premiums are timely paid. The insurer may not single out any policyholder for a rate increase solely because they grew older, get sick, or file a claim. Unfortunately, many consumers have interpreted this to mean their rates would never increase. That’s not the case.
“Guaranteed Renewable” policies do permit the insurer to file a rate increase request, by state, by policy form, and by “class” (e.g., those with compound inflation protection might be a different class than those without).
Planning Point: TQ plans may also be “non-cancellable”, although many think the re-appearance of such designs highly unlikely.1
(4) The contract does not provide for a cash surrender value or other money that can be paid, assigned, or pledged as collateral for a loan or borrowed; and
(5) All premium refunds and dividends under the contract are to be applied as a reduction in future premiums or to increase future benefits. An exception to this rule is for a refund made on the death of an insured or on a complete surrender or cancellation of a contract that cannot exceed the aggregate premiums paid. Any refund given on cancellation or complete surrender of a policy will be includable in income to the extent that any deduction or exclusion was allowable with respect to the premiums.2
Planning Point: Premium refunds paid on the insured’s death are generally not taxable income to the beneficiary or estate.
In addition, a contract must satisfy certain consumer protection provisions concerning model regulation and model act provisions, disclosure, and nonforfeitability.3
A policy will be considered to meet the disclosure requirements if the issuer of the policy discloses in the policy and in the required outline of coverage that the policy is intended to be a qualified long-term care insurance contract under IRC Section 7702B(b).4
The nonforfeiture requirement is met for any level premium contract if the issuer of the contract offers to the policyholder, including any group policyholder, a non-forfeiture provision that:
(1) Is appropriately captioned;(2) Provides for a benefit available in the event of a default in the payment of any premiums and the amount of the benefit may be adjusted only as necessary to reflect changes in claims, persistency, and interest as reflected in changes in rates for premium paying contracts approved for the same contract form; and
(3) Provides for at least one of reduced paid-up insurance, extended term insurance, shortened benefit period, or other similar approved offerings.5
Planning Point: The standard non-forfeiture benefit is one of the all-time least popular benefits, almost never elected. It generally provides that—should a policyholder lapse any time after the first three years due to non-payment—they will still be entitled to claim against a “pool of money” the size of their aggregate premiums paid (but not less than 30 times the daily benefit). The hitch is that additional premium is required for this rider, the cost of which never makes sense when compared to the paltry benefit conferred.
A qualified long-term care insurance contract that is approved must be delivered to a policyholder within 30 days of the approval date.6 If a claim under a qualified long-term care insurance contract is denied, the issuer must provide a written explanation of the reasons for the denial and make available all information relating to the denial within 60 days of a written request from a policyholder.7
Planning Point: This regulation suggests the need for policy delivery receipts. Although not all states require them, and not all carriers employ them, they do provide liability protection by proving one’s policy has been timely delivered. (At which point, the clock starts on the 30 day “free look” period.)
For the treatment of long-term care insurance contracts issued before 1997, see Q 482.
1. IRC § 7702B(g).