1. 27 - 1Copyright 2008, The National Underwriter Company Taxation of Long-Term Care Insurance  Definition of “Qualified” Long Term Care Insurance Contract  IRC Section 7702B –HIPAA act of 1996  Requirements  Only coverage provided is long term care services  Contract does not reimburse for services reimbursed under Title XVIII of the Social Security Act  Contract is guaranteed renewable  Contract does not provide for a cash surrender value or other money that can be paid, assigned, or pledged as collateral for a loan or borrowed Chapter 27 Risk Management For Financial Planners

2. 27 - 2Copyright 2008, The National Underwriter Company  Definition of “Qualified” Long Term Care Insurance Contract (cont’d)  Requirements (cont’d)  All premium refund and dividends are to be applied as a reduction in future premiums or to increase future benefits  Contracts satisfies certain consumer protection provisions concerning  Model regulation and model act provisions  Disclosure  Nonforfeitability Chapter 27 Risk Management For Financial Planners Taxation of Long-Term Care Insurance

3. 27 - 3Copyright 2008, The National Underwriter Company  Definition of “Qualified” Long Term Care Insurance Contract (cont’d)  Requirements (cont’d)  Meet provisions of the NAIC Long term care Model Regulation  Guaranteed renewal or noncancellability  Prohibitions on limitation and exclusions  Extension of coverage  Replacement of policies  Unintentional lapses  Requirement to offer inflation protection  Disclosure  Prohibition against preexisting conditions and probationary periods in replacement policies Chapter 27 Risk Management For Financial Planners Taxation of Long-Term Care Insurance

4. 27 - 4Copyright 2008, The National Underwriter Company  Definition of “Qualified” Long Term Care Insurance Contract (cont’d)  Disclosure requirements  Nonforfeiture provisions  Properly captioned  Benefit provided in the event of default of payment  Benefit adjusted only as necessary to reflect changes in claims, persistency and interest  Provides for at least one of the following options  Reduced paid-up insurance  Extended term insurance  Shortened benefit period Chapter 27 Risk Management For Financial Planners Taxation of Long-Term Care Insurance

5. 27 - 5Copyright 2008, The National Underwriter Company  Definition of “Qualified” Long Term Care Insurance Contract (cont’d)  Policy must be delivered within 30 days of approval  Claim denials must be responded to a policyholders written request for explanation within 60 days of receipt Chapter 27 Risk Management For Financial Planners Taxation of Long-Term Care Insurance

6. 27 - 6Copyright 2008, The National Underwriter Company  Definition of “Qualified” Long Term Care Services  Definition of “Chronically Ill Individual”  Activity of Daily Living (ADL’s) Benefit  Person is classified as chronically ill  Unable to perform, without substantial assistance, at least two of the ADL’s for at least 90 days  Eating, toileting, transferring, bathing, dressing, and continence  Qualified policy must take into account at least five of these ADL’s in determining whether a person is chronically ill. Chapter 27 Risk Management For Financial Planners Taxation of Long-Term Care Insurance

7. 27 - 7Copyright 2008, The National Underwriter Company  Definition of “Qualified” Long Term Care Services  Cognitive Impairment  Individual requires substantial supervision to protect himself from threats to is health and safety due to severe cognitive impairment  Must be certifies by a health care practitioner  Business uses  Group long term care policies offered by employers  generally participating employees pay the full cost of this coverage Chapter 27 Risk Management For Financial Planners Taxation of Long-Term Care Insurance

8. 27 - 8Copyright 2008, The National Underwriter Company  Tax implications  Nonqualified policy  Taxation for premiums paid for and benefits received from such a policy is uncertain  It is believed the tax benefits applicable to qualified long term care policies are not applicable to nonqualified long term care policies  Qualified policy  Premiums deductible as a medical expenses  To the extent they and all other eligible medical expenses exceed 7.5% of adjusted gross income  Subject to additional dollar limitation  Based on age brackets  Example – for ages 51 through 60 limitation is $1,150 in 2008 Chapter 27 Risk Management For Financial Planners Taxation of Long-Term Care Insurance

9. 27 - 9Copyright 2008, The National Underwriter Company  Tax implications (cont’d)  LTC owned by self employed individuals  Premiums are eligible for deduction  Subject to the same dollar amount limitations  Exception  Deduction not available if self employed individual id eligible to participate in any subsidized health plan maintained by any employer of the self employed individual or his spouse  If the employer plan provides for qualified long term care coverage  Gift tax consequences  Neither the purchase nor receipt of benefits will trigger federal gift tax consequences  Gift tax liability may occur if the fund to purchase the policy are given by one individual to another. Chapter 27 Risk Management For Financial Planners Taxation of Long-Term Care Insurance

10. 27 - 10Copyright 2008, The National Underwriter Company  Tax implications (cont’d)  Estate tax consequences  Generally no significant estate tax implications  One indirect effect  Assets that would have been used, absent a policy, now stay in the estate and if large enough could subject the estate to federal estate tax  Generation skipping transfer tax consequences  No consequences Chapter 27 Risk Management For Financial Planners Taxation of Long-Term Care Insurance

11. 27 - 11Copyright 2008, The National Underwriter Company  Tax implications (cont’d)  Design features  Qualified  Benefit triggers based are specified by the internal revenue code  Activities of daily living  Chronically ill - Cognitive impairment trigger  ADL benefit trigger safe harbor definitions  Substantial assistance means hand-on assistance or standby assistance  Hands-on assistance means physical assistance of another person without which an individual would not be able to complete the ADL  Standby assistance means presence of another individual that is needed to prevent an individual from injury while performing an ADL Chapter 27 Risk Management For Financial Planners Taxation of Long-Term Care Insurance

12. 27 - 12Copyright 2008, The National Underwriter Company  Tax implications (cont’d)  Design features (cont’d)  Cognitive impairment safe harbor definitions  Severe cognitive impairment means loss or deterioration in intellectual capacity that is similar to Alzheimer's disease and the like forms of irreversible dementia...  Substantial supervision means continual supervision by another person that is needed to protect the severely cognitively impaired person from threats to his health or safety Chapter 27 Risk Management For Financial Planners Taxation of Long-Term Care Insurance