55 / Are there any special rules that apply to chronically ill insureds?

There are several special rules that apply to chronically ill insureds. Generally, the tax treatment outlined in Q 54 will not apply to any payment received for any period unless the payment is for costs incurred by the payee (who has not been compensated by insurance or otherwise) for qualified long-term care services provided to the insured for the period. Additionally, the terms of the contract under which the payments are made must comply with: (1) the requirements of IRC Section 7702B(b)(1)(B); (2) the requirements of IRC Sections 7702B(g) and 4980C that the Secretary specifies as applying to such a purchase, assignment, or other arrangement; (3) standards adopted by the National Association of Insurance Commissioners (NAIC) that apply specifically to chronically ill insureds (if such standards are adopted, similar standards under number (2) above cease to apply); and (4) standards adopted by the state in which the policyholder resides (if such standards are adopted, the analogous requirements under number (2) and, subject to IRC Section 4980C(f), standards under number (3) above cease to apply).¹

“Qualified long-term care services” are defined as “… necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal care services, which…” are required by a chronically ill individual and are provided under a plan of care set forth by a licensed healthcare practitioner.²

1.     IRC § 101(g)(3)(B).