For example, a person who buys an LTC policy at age of 60 for an annual premium of $1,000 would have $750 eligible for deduction in the tax year when he was age 60, but would have full $1,000 eligible deduction in later years, all subject to his meeting other limits applied to medical expense deductions. Remember than all medical expense must exceed 7.5% of adjusted gross income to become deductable.
This legislation makes all benefits received under "reimbursement" policies tax free. These policies are ones like the CNA Preferred Advantage Series products which reimburse policy holders for the actual cost of service received, up to a certain maximum amount per day or per week. The legislation sets a limit "per diem" polices, however, of $175 per day. These policies are ones that pat regardless of whether or not services are being provided. This is a competitive disadvantage for "per diem" policies and could cause some companies to move away from this type of policy design.
The legislation specifies requirement for a benefit trigger. It requires the use of 5 or 6 of the following activities of daily living (ADLs); eating, toileting, transferring, bathing, dressing, and continence. A policy holder qualifies for benefits if he fails at least two of these ADLs. This benefit trigger will likely become common, as companies try to become certain that their policies are tax qualified. The legislation also requires a separate benefit trigger for connotative impairment and does not permit the use of a medical necessary benefit trigger.
The legislation requires that tax qualified policies coordinate with Medicare so that there is no overlap between Medicare and private LTC insurance policies. This clarifies the conflicting interpretations of existing laws relating to "Medicare duplication" that have caused disruption during the last year.
The legislation also includes strong customer protection provisions. One of these is a mandated offer of a nonforfeiture benefit. Companies that do not offer such a benefit today will need to develop and file one with state insurance departments before they can sell a tax qualified LTC product.
Policies Grandfathered
This legislation confers all of the above favorable tax treatment on any LTC policy issued in the past or any LTC policy issued before 1/1/97, provided that the policies met the requirements of the state of insurance at the time they were issued. This is a tremendous relief to existing policyholders because they do not need to exchange their policies for newer ones in order to receive favorable tax treatment. It is also a relief to agents because they will not have their existing clients become targets for replacement.
To view a detailed description of tax defered policy requirements please
Can't Win Them All
The legislation does not allow for penalty free withdrawals from IRAs and 401(k)s plans, as earlier versions had done. This was disappointing because it would have made an additional source of funding available for customers to purchase LTC insurance.
Also, the legislation does not allow long term care to be included on a pre-tax basis in a section 125 cafeteria plan for employers. This is disappointing, but had been expected. Other incentives for employers and employees should be sufficient to simulate the growth of the group LTC market.
Conclusion
This new legislation provides the strongest endorsement yet for private LTC insurance. With these tax incentives, insurance companies and their producers now have the tools to meet their client's needs for protection form the high cost of long term care.
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