What a mess.
Nearly a year after the government introduced new tax breaks for long-term care insurance, the industry is divided and consumers are more confused than ever.
“People now not only need to know about long-term care insurance, they need to get tax advice,” says Bonnie Burns, a consultant to California’s senior health insurance counseling program. “It has gotten a lot more difficult.”
How did something that sounded so good turn out to have caused so much trouble?
In setting up rules under which policies could qualify for tax-favored treatment, the government, in effect, created two classes of coverage: “qualified” policies, which are assured of tax benefits, and “non-qualified” policies, which aren’t. The tax breaks would allow people to deduct part of their premiums in certain situations and, more important, exclude benefit payments from long-term care policies from their taxable income.
That isn’t to say that non-qualified policies are certain to face the tax ax. But because the provision passed by Congress as part of the Health Insurance Portability and Accountability Act is silent and the Treasury hasn’t made any rulings on the matter so far, no one knows whether such policies will or won’t be taxed.
The Treasury, which issued interim guidance on some other long-term care issues in May, is maintaining a characteristically sphinx-like stance on how it will rule on the question of non-qualified policies–if, that is, it makes any ruling at all.
“We are considering whether we could resolve this large and very difficult question,” a Treasury official says.
But what if you are in the market now for one of these policies, which people buy to protect their assets from the potentially devastating costs of nursing-home and other types of long-term care not covered by Medicare, the federal health insurance program for seniors.
The easy solution: Just buy a tax-qualified policy. But while buying a tax-qualified policy may minimize tax hassles, it may not be the best type of coverage, consumer advocates and even some industry officials say.
“Without a doubt, the tax-qualified policies are inferior,” says Jim Heyer, a vice president of Penn Treaty American Corp., an Allentown, Pa., company that markets long-term care policies through subsidiaries Penn Treaty Life Insurance Co. and Network America Life Insurance Co. He says some companies are promoting more restrictive tax-qualified policies “because it’s going to save them a lot of money.”
Under a tax-qualified policy, to collect benefits a person must be unable to perform either two out of six–or in some cases, two out of five–“activities of daily living”: eating, bathing, dressing, transferring (as from a bed to a chair), toileting and continence.
Moreover, a doctor or other health-care professional must certify that a person will have those disabilities for at least 90 days. Thus, a senior recovering from a broken hip, who might need help for several weeks, wouldn’t be eligible for coverage.
Non-qualified policies don’t have that 90-day requirement and many also add another activity, walking or otherwise ambulating, as a potential area of trouble that could help trigger benefits. Many non-qualified policies also have a more lenient “medical necessity” trigger that allows seniors to get coverage upon a doctor’s determination that they can’t take care of themselves anymore. Both tax-qualified and non-qualified policies also offer benefits for people who have major “cognitive impairment,” such as Alzheimer’s disease.
Consumer advocates say many seniors who are frail and need help might not be eligible for benefits under a tax-qualified policy.
Penn Treaty, which sells both tax-qualified and non-qualified policies, expects to pay 20 percent fewer claims for nursing-home care and 40 percent fewer claims for home care under tax-qualified policies, even excluding claims that wouldn’t meet the 90-day requirement, Heyer says.
Some of Penn Treaty’s current beneficiaries who wouldn’t be eligible for coverage under a tax-qualified policy include an 89-year-old woman with diabetes and heart problems who has trouble bathing, a 93-year-old man whose doctor said he could no longer live alone safely and an 87-year-old woman who needs help taking medication, Heyer says.
Many insurers are marketing the tax-qualified policies and, in some cases, selling only those policies. For instance, Metropolitan Life Insurance Co. in New York is selling only a tax-qualified policy through a group long-term care plan it offers through the American Association of Retired Persons.
John Hancock Mutual Life Insurance Co. in Boston is selling both types of policies but recommending the tax-qualified version. Chicago-based CNA also is offering both types, but encourages its agents to sell qualified policies.
Richard Garner, a senior vice president of CNA long-term care, says most seniors won’t have a more difficult time getting benefits under a tax-qualified policy. Many insurers also say they are promoting tax-qualified policies because they are the only way consumers can be certain of tax-favored treatment.
The true safest bet for now? Figure out your potential tax liability. For example, a policy that promises to pay $60,000 a year could leave you on the hook for $18,600 in federal income tax if you are in the 31 percent tax bracket and the government decides to tax non-qualified policies. If you are able to take that chance, buy a more lenient, non-qualified policy, advises Burns. “If you can afford it . . . they’re better policies,” she says.
Another option is to hedge your bets. Ask the insurer if it is one of the companies letting people who buy non-qualified policies swap them for tax-qualified policies if the Treasury rules unfavorably on the non-qualified policies this year. Fortis Long Term Care, owned by Belgian Fortis AG and Dutch Fortis AMEV, is allowing a two-way exchange, letting people also convert tax-qualified policies to non-qualified coverage if the Treasury were to rule in favor of non-qualified policies.
Finally, if you already owned a policy before Jan. 1, you are grandfathered under the law and thus have the tax-favored status. But, at least based on the Treasury’s guidance to date, certain changes you make to your policy, such as increasing or reducing your benefit level, could place that tax-favored status in jeopardy. Before making any such changes, ask the company about tax implications and consult an accountant or other authority.
