What You Don’t Know About
Long-Term Care Insurance
That Can Hurt You

by Betty Diamond

My interest in long-term care insurance arose out of a search for a policy of my own.  Because this insurance is expensive, I resolved to become an educated consumer so that I would not be solely dependent on the insurance agents’ sales presentations. Unfortunately, I found much of the information to be confusing and misleading.  By the end of my research, however, I had acquired information that I feel compelled to share with others who are also looking for the best long-term care coverage their money can buy.

What is the best long-term care protection for consumers?

It is a policy that includes all three benefit triggers:

1.  Physical impairment benefit trigger

2.  Cognitive impairment benefit trigger

3.  Doctor certification of medical necessity

What are benefit triggers?

Benefit trigger is the term a company uses to describe the ways it decides when to pay benefits. The three types of benefit triggers are Physical Impairment, Cognitive Impairment and Medical Necessity. Companies may use different benefit triggers for home health care coverage than for nursing home care.

1.   PHYSICAL IMPAIRMENT BENEFIT TRIGGER: This is based on Activities of Daily Living or ADLs. The inability to do activities of daily living is the most common way insurance companies decide when you are eligible for benefits. The ADLs most companies use are bathing, continence, dressing, eating, toileting and transferring. The number of ADLs in a policy will vary from five to six (a few states require seven.)   A policy pays benefits when you cannot do a certain number of the ADLs such as two of the six or two of the five. The less restrictive policy will have more ADLs and the more restrictive policy will have fewer.

To be eligible for benefits, some policies require that you be unable to do activities of daily living or ADLs without substantial assistance. Specifying substantial or hand-on assistance makes it harder to qualify for benefits and represents a more restrictive policy.

Consumer-friendly policies, on the other hand, require standby assistance which means you need only occasional assistance in doing the activities of daily living or ADLs and they represent the least restrictive policies.

Remember, it is important that you purchase the least restrictive policy!

2    COGNITIVE IMPAIRMENT BENEFIT TRIGGER: The policy usually pays benefits for mental incapacity, when you cannot pass certain tests of mental function. Coverage of cognitive impairment is especially important if you have been told you have Alzheimer’s disease or other dementia.

3.   DOCTOR CERTIFICATION OF MEDICAL NECESSITY BENEFIT TRIGGER (referred to as “medical necessity”): Some long-term care insurance policies will pay benefits if your doctor certifies that care is MEDICALLY NECESSARY EVEN THOUGH YOUR ILLNESS OR INJURY IS UNRELATED TO PHYSICAL IMPAIRMENT OR COGNITIVE IMPAIRMENT.

                  “Medical necessity” is the third benefit trigger that is essential for best consumer protection. Information to follow will explain why it is becoming less and less available to the consumer.

What has become of the “medical necessity” benefit trigger?

I was shocked to learn that since 1997 most (not all) insurance companies have stopped selling the type of long-term care policies that can provide the best protection for consumers. Instead, the insurance companies are promoting only those policies that minimize their future benefit payments.

I found only one company in Pennsylvania out of three (from your own research you may find others) that sells desirable long-term care policies of the type that best protect consumers. It is puzzling to me, however, as to why it required persistent research to locate that company.

Who took away the “medical necessity” benefit trigger from

most  policies?

CONGRESS!

Tax-Qualified Policies versus Non Tax-Qualified Policies

In 1997, Congress created two insurance policy categories: Tax-Qualified policies and Non Tax-Qualified policies, and excluded “medical necessity” from Tax-Qualified policies.  Prior to 1997 there were no long-term care insurance policy categories!   All policies received the same treatment in terms of taxation and tax-deductibility, and some policies included “medical necessity” while others did not.

You might be led to believe that preferential tax treatment is the most important distinction between Tax-Qualified and Non Tax-Qualified policies.  In truth, only a small percentage of consumers with catastrophic health care costs will be able to benefit from the Tax-Qualified tax deduction!

Under the 1997 law, only the Non Tax-Qualified policies were permitted to include the medical necessity benefit trigger. Conversely, Tax-Qualified policies were prohibited from including the medical necessity benefit trigger! Without the medical necessity benefit trigger, the Tax-Qualified policies are more restrictive and thus do not provide consumers with the best long-term care insurance protection.

And there are other important ways that Tax-Qualified policies are more restrictive than Non Tax-Qualified policies.

§    Non Tax-Qualified policies do not require the doctor to certify that the disability be expected to last for at least ninety (90) days. However, a Tax-Qualified policy does include this 90-day requirement, hence, it is a more restrictive policy.

§    Non Tax-Qualified policies require that a person need only standby assistance, indicting that only occasional assistance is required to do the activities of daily living or ADLs. Tax-Qualified policies, on the other hand, require that you be unable to do at least two ADLs without substantial assistance. Therefore, Tax-Qualified policies are more restrictive than Non Tax-Qualified policies.

§    Non Tax-Qualified policies do not require substantial supervision to trigger benefits for cognitive impairment. Conversely, Tax-Qualified policies do require substantial supervision for cognitive impairment thereby making Tax-Qualified policies more restrictive than Non Tax-Qualified policies.

The insurance companies are touting the 7.5% tax deduction included in Tax-Qualified policies as an inducement for you to buy them. What they do not explain is that the 7.5% tax deduction can be used by only a small percentage of consumers who incur catastrophic health-care costs. The tax deduction holds no advantage for the average long-term care consumer.

In Summary

The Tax-Qualified policy is a more restrictive policy as compared to the Non Tax-Qualified policy. The Non Tax-Qualified policies have more advantages than Tax-Qualified policies. (Please refer to the “PRO AND CON” chart that was derived and expanded from information published by the National Association of Insurance Commissioners, Shoppers’ Guide to Long-Term Care Insurance.)

Should you be concerned about the remote possibility that if you buy a Non Tax-Qualified policy you could end up paying a tax on benefits?  No!  Why?  You are better off paying the tax instead of being denied benefits because your Tax-Qualified policy excludes the “medical necessity” trigger you may require, or because of other restrictions found only in Tax-Qualified policies (see Pro and Con Chart.)  It is better to pay a tax rather than to be denied medical coverage. 

NOTE:  Non Tax-Qualified policies with medical necessity must be compared and analyzed just as one needs to do with Tax-Qualified policies. Upon careful examination, some Non Tax-Qualified policies will be found desirable and others not acceptable. In other words, when a Non Tax-Qualified policy includes medical necessity, it does not guarantee that it is a desirable policy. You need to do your own comparison of the many factors that can determine whether or not a policy is right for you.   For instance, you should be looking for a company that is financially strong, has been selling long-term care insurance for at least ten years, and that thoroughly inspects your medical history.   In addition, you should compare all the other benefits contained in each policy.

So why is it that since 1997 most (not all) insurance companies have dropped their Non Tax-Qualified policies with the “medical necessity” benefit trigger?  Is it possible that they want to minimize paying benefits in the future to maximaize profits?

*********

Beware of possible legislative strategies!

If most of the long-term care insurance companies want to eliminate medical necessity from the marketplace, but are prevented from reaching this goal because a few companies persist in offering Non Tax-Qualified policies with medical necessity, they could conceivably engage one or both of the following legislative strategies:

§    One strategy could be for the insurance industry to gain legislation that would tax Non Tax-Qualified benefits. Tax-Qualified benefits legally cannot be counted as income.

- OR -

§    The insurance industry would push for legislation to make only Tax-Qualified premiums fully deductible for the average person. Only consumers with catastrophic health care costs can benefit from the current 7.5% tax deduction.

Either one of the above strategies would be blatantly unfair to Non Tax-Qualified policies and ultimately to the consumers!

Is it time for consumer protest?

If you believe as I do that benefits of Non Tax-Qualified policies should remain tax free (the law prohibits taxation of Tax-Qualified benefits) and if you believe premiums of all long-term care policies should be fully tax deductible, here’s what you can do.  Let your voice be heard. Research has shown that one letter or phone call represents the viewpoints of 10,000 consumers, so speak up!

WHAT YOU CAN  DEMAND FROM WASHINGTON:

1.   If legislation is proposed to make long-term care insurance premiums fully tax deductible, then the tax deduction should apply EQUALLY to both Non Tax-Qualified AND Tax-Qualified premiums.

 2.  Tax-Qualified benefits are not considered income so they cannot be taxed. Currently Non Tax-Qualified benefits are NOT taxable and they should remain non-taxable.

3    While some states like California require insurance companies to provide both Tax-Qualified and Non Tax-Qualified policies, some companies in those states are excluding the medical necessity benefit trigger from their Non Tax-Qualified policies.  Since the law now requires that Tax-Qualified policies EXCLUDE the medical necessity benefit trigger, consumers should demand legislation requiring Non Tax-Qualified policies to INCLUDE medical necessity!

WHAT YOU CAN DEMAND FROM YOUR GOVERNOR:

You want your State Department of Insurance to do the following:

1.   When a long-term care insurance company applies for permission to sell in your state, the company should be required to provide both Tax-Qualified and Non Tax-Qualified long-term care policies. Some states, like California, already have this requirement.

2.   Require that Non Tax-Qualified insurance policies INCLUDE the medical necessity benefit trigger. (Tax-Qualified policies must EXCLUDE medical necessity).

3.      During sales presentations, long-term care insurance agents should be required to inform consumers of the pros and cons and availability of both Tax-Qualified AND Non Tax-Qualified insurance policies.

Betty Diamond , M.Ed., former businesswoman and teacher, lives in Bethlehem, Pennsylvania.

Comparison of Features of Tax-Qualified and Non-Qualified Policies

 

Tax-Qualified			Non-Tax Qualified
PRO	CON		PRO	CON
If you itemize deductions on your individual income tax return, premiums up to a maximum amount adjusted for inflation can be included with other annual uncompensated medical expenses. Total medical deductions must exceed 7.5% of adjusted gross income.	Only a small percentage of consumers with catastrophic health-care costs can qualify for the deduction of premiums.			No deduction of any part of the premiums.
Benefits that you may receive will not be counted as income.				Currently, benefits are not taxable. However, the U.S. Dept. of Treasury has not yet ruled on whether benefits that you may receive count as taxable income. If the benefits become taxable, the insurance company will issue Form l099.
	Benefit triggers may be more restrictive than those which may be allowed in Non-Tax Qualified policies. Federal law requires you be unable to do 2 of 5 out of 6 possible ADLs without substantial assistance.		Benefit triggers may be less restrictive. A person needs only standby or occasional assistance for ADLs.