Long-Term Care Insurance Planning

One of the most important decisions a client can make is to purchase an inflation rider. Inflation riders offered today may be based on the consumer price index or a percentage amounts of 2.5% to 5%. The riders come in two different forms. The simple style increases the policy benefits at set incremental amounts.  For example, a monthly benefit of $5,000 with a simple 5% inflation ride would increase the monthly policy benefit by $250.00 annually. At the beginning of the policy’s tenth year, the monthly benefit would be $7,500.  In our previous example of a 48-month plan, if we apply the 5% simple inflation rider, the new maximum policy limit would be $7,500 x 48 or $360,000.

Compound inflation riders are options as well. They work similarly to the simple rider, except the increases are compounded upon each other. A $5,000 monthly benefit would grow at a rate of 1.05 x the previous year’s monthly benefit.  Policy year two would be the same $5,250 as the simple rider, but after that, the acceleration of benefits caused by the compound rider is substantially more. In year ten, the monthly benefit would be $8,144.47.

There are some instances where inflation riders are mandatory. There are Long-Term Care Partnership Programs between State and private insurers. Most of the programs require an inflation rider for the policy to qualify under the particular State partnership program. For example, Florida requires anyone purchasing a partnership policy which is 

60 and younger purchase automatic compound inflation, 

61–75: purchase any inflation protection (compound or simple),

and anyone 76 and older: the purchase inflation protection is discretionary.

Inflation riders do come with a hefty price, and many carriers with existing blocks of business are increasing premiums. Insured are receiving letters with options to increase premiums or reduce benefits by eliminating, lowering, or freezing inflation riders.

You probably are recognizing some similarities between Long-Term Care insurance policies and disability insurance.  They share a common bond that they both pay claims upon after the insured succumbs to health impairments.  They both have elimination periods and waivers of premium when on a claim.

A waiver of premium occurs when the insured is under an active claim, that is, the insured is receiving benefits. Premiums are waived or not payable until the insured comes off the claim. If the insured paid premiums in advance, a pro-rata refund would be paid to the insured. 

Another feature that offered as a rider to a Long-Term Care insurance policy is a non-forfeiture benefit. A non-forfeiture benefit protects the aggregate premiums paid into the plan in the event of a policy cancelation.  If a policy is terminated, the insured can still submit a claim and be reimbursed to the aggregate premiums paid into the plan.

Consumers can often take advantage of discounts when applying for LTCI coverage.  Couples discounts are available if one or both spouses apply for coverage. Couples discounts typically range from ten to twenty percent. LTCI policies are often provided through associations like the American Association of Retired Persons (AARP).  Association discounts range in the five to ten percent range.  Some carriers will even allow multiple discounts.

LTCI is a popular employer-sponsored benefit. Employer-Sponsored plans may be discounted and have reduced underwriting requirements, thus providing uninsurable employee applicants the opportunity to secure coverage. Coverage may also be offered to other family members such as spouses and parents of company employees. Employers believe the benefits are significant because they recognize the loss of productivity when an employee is required to care for an ailing parent.

Another option benefit available in some LTCI policies is a rider called “Shared Care.” A Shared Care rider provides cross access to a spouse’s coverage.  The thought behind the rider is that the need and cost for care are unpredictable.  Therefore spouses can purchase an option that will allow each other to utilize their partner’s benefits should they exhaust their own.

Various other riders and benefits exist. Clients and advisors need to be cautious in choosing and recommending “Bells and Whistles.” Each policy rider adds dollars to the plan’s premium and may not be economical or useful.

LTCI policies contain benefit triggers or prerequisite requirements that insureds must meet to have a claim paid. The triggers are an inability to perform two out of six Instrumental activities of daily living or suffer from cognitive impairment.  However, additional factors are now present in modern tax-qualified LTCI policies.

Mentioned earlier in the text was a reference to the Health Insurance Portability and Accountability Act of 1996. This bill sponsored by Senators Nancy Kassebaum & Theodore Kennedy set forth some rules for income taxation of long-term care insurance policies. The rules were formalized in Internal Revenue Code Section 7702B, which spells out the requirements that a long-term care insurance policy must meet to be considered a “Qualified” plan. Policies sold before the legislation passed are considered non-tax-qualified. Many non-tax-qualified plans contain benefits that may not be directly related to care and would be taxable upon receipt. However, the Internal Revenue Code 7702B grandfathered these policies to prevent adverse tax consequences when receiving benefits.

IRC Section 7702B dictates that in a qualified LTCI policy, an insured needs certification from a health professional stating the person is suffering from a chronic illness that will last for a minimum of 90 days.

Additionally, the insured must be unable to perform two out of six activities of daily living and, in some cases, two out of five. The Activities of Daily Living in Tax-Qualified Policies are as follows;

Bathing

Continence

Dressing

Eating

Toileting

Transferring

The code also states the insured may also qualify if they are diagnosed with a cognitive impairment that is severe and requires substantial supervision. 

As mentioned above, benefits received on or after January 1, 1997, will not be taxed, even if they exceed the cost of your care and cover expenses that are not qualified Long-Term Care services. Non-tax-qualified LTCI does not require a 90-day certification by a health professional to access benefits. Insureds, whose period of care lasts for less than 90 days, still receive payments.

Non-tax-qualified (NTQ) plan benefit triggers varied among insurers. The most liberal benefit trigger offered was Medical Necessity. A can doctor certifying that the insured needed care by simply indicating it medically necessary. Other benefit triggers in non-tax-qualified plans included the standard two out of six activities of daily living. NTQ LTCI has no benefit caps or benefit period limitations.  Many policies sold contained lifetime benefit periods.

Hybrid Life Policies With LTC EOB Coverage

We now move into a very popular LTC product rider called “Extension of Benefits Riders” EOB riders expand long-term care coverage amounts above the policy’s death benefit.  The underlying policy design used is similar to a single or limited premium guaranteed death benefit plan. The policies have low death benefits or benefits equal to the aggregate premiums paid for the contract. Initially, these policies were only available in single premium formats, but today premiums can be paid annually and vary in length from single pays to lifetime durations. However, shorter premium periods are still popular.  Commissions payment can also mirror older single-premium designs with a small overall percentage paid for the aggregate premiums.  For example, a single premium of $100,000 may pay commissions in the single-digit percentage range. Four to six percent is typical.

We can think of the policy in terms of bifurcated benefits or pools. Generally, there are two pools of money available for LTC benefit payments. The first pool is the death benefit. The death benefit is accelerated after the client qualifies with standard LTC rider benefit triggers. Upon exhaustion of the first pool, the other pool or extension of benefits rider takes over and continues paying monthly reimbursement or indemnity benefits. If the insured dies without ever using the policy, the death benefit gets paid to their designated beneficiary.

When contrasting LTC riders on permanent insurance without bifurcated benefits with linked benefit products, we can see a few significant differences.  Linked-Benefit products’ death benefits are much lower, but their LTC benefits may be up to four times as large as their death benefits. The EOB rider may even have escalation features similar to traditional LTCI inflation riders. Linked benefit plans are also know as “asset based” Linked benefit plans are also known as asset-based products because their funding can come from 1035 exchanges or other savings and retirement plans.

Life Policies With LTC & Chronic Illness Riders

The President of the U.S signed the Pension Protection Act of 2006 on August 17. The statute focused on revising Exempt Organization Tax Rules. The new law created substantial changes in the life insurance industry to help Americans buy Long Term Care Insurance. Consumers worried that traditional LTCI premiums were rising, and if they died without using the policy, all of their investment would be lost. The Pension Protection Act altered the tax treatment of distributions from life insurance during one’s life to fund long-term care expenses.

The Pension Protection Act (PPA) paved the way for life insurance and annuity/asset-based long-term care expense solutions.  New hybrid products hit the market while traditional LTCI product offerings contracted.