The growth and high cost of retirement and assisted living communities that provide the full range of care and services to the elderly has spawned a multitude of long term care insurance options that give people more choice in life styles and health care and an opportunity to maintain their assets and avoid becoming a burden to their families.
Qualified Policies
Generally, long term care insurance policies are regulated by the states. However, to qualify for favorable federal tax treatment, a long term care insurance policy must:
- Provide long term services as its sole insurance coverage
- Be guaranteed renewable
- Provide that refunds must be used to reduce future premiums or increase benefits unless the reason is by death of the insured or termination of the policy
- Not duplicate coverage provided by Medicare unless Medicare is the secondary payor or the policy pays benefits on a per diem or periodic basis
- Contain required consumer protection provisions
Required Consumer Protection Provisions
To protect consumers, states generally require that long term care insurance policies must address the following:
- Guaranteed renewal or non-cancellation of policies
- Prohibitions on both limitations and exclusions
- Extension of benefits
- Continuation or conversion of coverage
- Discontinuance and replacement of policies
- Unintentional or accidental lapse of policies
- Disclosures
- Prohibitions against post-claims underwriting
- Minimum standards
- Inflation protection
- Treatment of existing conditions
- Prohibitions on replacement of policies or certificates
Because there are various types of long term care insurance policies available on the open market, consumers should carefully compare and evaluate policy options. When evaluating policies, consider asking the following questions:
- Does the policy provide for guaranteed level premiums?
- Is there a ceiling on the amount of benefits payable?
- Under what circumstances may the insurer raise the premiums?
- Does the policy provide for inflation protection?
- How many days comprise the elimination period before policy coverage begins?
- Does the elimination period require out-of-pocket expenditures or can it be satisfied by the family caregiver?
- What is the benefit trigger (assistance with two or more activities of daily living (ADL) or cognitive impairment)?
Under the Health Insurance Portability and Accountability Act (HIPAA), the benefit trigger is assistance with two or more ADLS out of a list of five. HIPAA has also provided some favorable tax treatment to long term care insurance policy owners.
Tax Treatment
Under HIPAA, premiums paid for long term care insurance policies are deductible as a medical expense and any benefits received are excluded from income.
Further, the type of deductible medical expenses has been expanded to include diagnostic, preventive, therapeutic, curing, treating, mitigating and rehabilitative services and maintenance provided at assisted living facilities, retirement homes and retirement communities. However, these deductions can only be taken if:
- The insured is a chronically ill person (severe functional or severe cognitive impairment)
- The care must be provided under a plan of care prescribed by license health care practitioner