[searchlight] Dan Melson: Long Term Care Insurance:
Non-Tax-Qualified versus Tax-Qualified, and Partnership
searchlight at lists.powerblogs.com
searchlight at lists.powerblogs.com
Wed Dec 21 10:02:05 EST 2005
Posted by Dan Melson:
Long Term Care Insurance: Non-Tax-Qualified versus Tax-Qualified, and Partnership
http://www.searchlightcrusade.net/posts/1135177243.shtml
(Part 2 of a three part Series on Long Term Care)
I wrote in the [1]previous column a lot about long term care issues.
This column deals with the insurance policies available for long term
care. There are two major types, with one subtype available for people
who are lucky enough to live in one of four states. There is
non-tax-qualified (NTQ), tax qualified (TQ), and for those lucky
enough to live in California, Connecticut, New York, and Indiana,
there is a superior brand of tax-qualified, Partnership. In many
states, there are indemnity policies available for those who don't
like paperwork, but the gotcha is that they are all NTQ,
non-tax-qualified.
Let me explain what's going on here.
In all of the legal policies, there are listed Activities of Daily
Living, or ADLs. For non-tax qualified, there are seven, and for
tax-qualified, there are six. It is the inability to perform a certain
number of these activities without assistance that triggers
eligibility for benefits. For tax-qualified policies, these are
Bathing, Eating, Transferring, Continence, Toileting, and Dressing.
Non-tax qualified adds the ADL of Ambulating, for a total of seven
possible qualifiers. Note that the preparation of food is not a
qualifying factor, hence Meals on Wheels and similar programs, as well
as the traditional family support structures. "Assistance" ranges the
gamut from just having somebody there in case something happens
("Standby assistance") to having to have someone do it completely for
you.
Bathing is performing the functions to clean yourself.
Eating is feeding yourself food you are given.
Transferring is being able to "transfer" from one support mechanism to
another - for example, bed to wheelchair or wheelchair to toilet.
Continence is what you'd think.
Toileting is ability to perform the tasks necessary to eliminate waste
material in a normal fashion.
Dressing is the ability to get clothing on and off as required.
Ambulating is moving yourself under your own power on your own feet
from place to place.
Of these ADLs, bathing is almost always among the first to go and
hence a trigger for the policy. Eating is probably the least prevalent
trigger for benefits, followed by dressing, but there are no solid
study figures I can find. Ambulating always goes before or with
Transferring. Within broad parameters, each individual insurance
company can write their own definitions of each of these. For
instance, a number of companies used to define "Transferring" more or
less the same as most people think of as walking, thus making it
easier to qualify for benefits, and hence, a better policy than
competing policies. Of course, they will be priced accordingly, as
well, but there is a lot of variance on pricing within the industry.
Of the policies I used to sell, the one with the broadest coverage was
usually the second-cheapest in the competitive quotes. So shop around.
Now the point needs to be made that just because you qualify for
benefits now doesn't mean you have to start taking benefits now.
Sometimes people are in situations where family can take care of them
right now, but may not be able to do so indefinitely. Taking care of
someone in this manner is brutally tough, and there is no shame in not
doing so, or in saying "That's enough, I can't take it any more!" For
this reason, every policy sold also includes respite care, where a
caregiver who is usually a family member can get relieved by a paid
provider. If you think about it, it's to the insurance company's
advantage as they pay out less money this way, as opposed to the
person starting to use full benefits right away.
Non-tax-qualified (NTQ) policies have one more trigger for care -
ambulating, which tends to make them attractive-seeming to most
laymen. However, they usually require three triggers to be pulled
(ADLs requiring assistance), as opposed to a limit of two for
tax-qualified. This is kind of like showing pictures of something that
looks like a Rolls-Royce, but the the interior is vinyl, the body is
made out of plastic, and the engine came out of an old Yugo.
Indeed, almost all of the games you will hear about being played are
with NTQ policies. The issue is this: In order to become
Tax-qualified, the policies have to toe the line of legal
requirements. So the NTQ folks, who don't meet the guidelines anyway,
offer all kinds of bells and whistles that don't really mean anything
to make their policies appear more attractive to those who don't know
any better.
You see, NTQ policies are NOT generally deductible on schedule A of
your income tax as a medically related expense. Furthermore, if and
when they pay you any benefits, those benefits are taxable income.
Remember I told you in the previous column that median billing was
about $200 per day? So if you're in there the whole year, that's about
$73,000 of taxable income, on which someone in the 28 percent federal
bracket pays $20,440 on federal taxes, never mind state taxes.
Tax Qualified, or TQ, policy premiums are deductible as medical
expenses, and the benefits they pay out are not taxed.
Now, for those readers who like myself, may have some knowledge of the
nature of the tax code, let me take a minute for an aside. I am well
aware that, in general, the IRS only allows, at most, one end of a
transaction to get away from taxes. So this kind of got my attention,
and before I sold any policies I verified it extensively. I confirmed
a few days ago that it is still that way. To further ease your mind,
remember that these are health insurance policies. The premiums I pay
to my HMO are deductible, and the dollar value of the care I receive
is not taxed. Tax Qualified policies of Long Term Care Insurance are
treated the same way.
What this means is that it is very hard for me to imagine a scenario
where an NTQ policy is better than a Tax-Qualified one. Indeed, I've
never sold any policies that weren't. It is for this reason that the
state of California requires all Long Term Care Policies to state
whether or not they are designed to meet the requirements to be tax
qualified. Ask the agent looking to sell you one of these straight out
whether it's a tax qualified policy. Any answer other than a one word
straight "yes" or "no" is grounds for terminating the talk. Walk out
of their office or throw them out of your home, and go find an agent
who knows what they're doing and is willing to give you straight
answers. And if the answer is "no", ask them to tell you about a
policy that is tax qualified. You see, one of the ways NTQ policies
get sold is by paying higher commissions. They are harder to sell,
because they aren't as good for most people, so the companies give the
agents a reason why they want to sell them. More $$$. It's your call,
but I wouldn't do business with anyone who tried to sell me an NTQ
policy, and yes, that means jettisoning them and finding someone else
for your future needs, even if you've been doing business with them
for decades. They've just demonstrated that they don't have your best
interests at heart.
I also want to make the point that agent's commission should not, in
general, be one of your criteria for choosing a policy. That's a good
way to end up with a policy that's too small to do you significant
good, as smaller policies pay less in commission also. Shop by the
cost and benefits to YOU. A good agent will show you how they arrived
at the figure of the coverage they are recommending, and if you shop
around, the good agents will all come up with similar figures and the
same way of calculating it.
Back to the main subject: we can regard it as settled that, in
general, you want a tax qualified policy. Let me tell you about a
subtype of tax qualified policy that people who are lucky enough to
live in California, Connecticut, Indiana, and New York are able to
buy: Partnership.
All Partnership policies are tax qualified. But in addition to their
ordinary benefits and their tax qualified nature, Partnership policies
have an extra feature: Medicaid asset protection. If you'll remember,
when I was talking about Medicaid (Medi-Cal here in California), I
explained that before they will give you benefits, you are required to
spend your assets on your care (or give them a lien in the case of
your house) down to where you are basically poverty stricken. And
indeed, if the benefits you have purchased under any other long term
care policy have run out, that is precisely what you still have to do.
Indeed, many people give their assets away during their policy benefit
periods, so that when the policy runs out, they no longer own or
legally control the assets and are eligible for benefits without a
spend down. Since California's thirty month lookback was the shortest
in the nation last I checked (many states are at five years), this
means you need to buy a policy where the benefits are going to last
longer than that.
But once a Partnership policy's benefits are exhausted, it protects
from Medicaid recovery not only the same assets everyone else gets to
protect, but additional assets as well, on a dollar for dollar basis.
For every dollar the policy paid out before you applied for medicaid,
you get to keep an additional dollar in assets, in addition to
whatever everyone else gets to keep. Say you had a two year policy at
$200 per day. That's $146,000 you still have and that you get to keep.
The Partnership instructor I had told us in class that she calls her
policy her Visitors Insurance. Because she's still going to have
money, her family and heirs are going to want to keep visiting her so
that they don't get written out of the estate. Horrible thought, but
this wonderfully funny lady is in her sixties and has been working
with nursing home issues her whole life. She has seen too much of what
really happens in these instances to be ignored. Visitors also means
better care. Not to mention the fact that she will have had a policy
in the first place, which means that if the facility she ends up in
takes Medi-Cal patients at all, they have to keep her, and that means
if there's no Medi-Cal bed, she stays in the non-indigents ward until
there is, so she's not going to end up in Barstow, where it's tough
for friends and family to visit, and she will have hundreds of
thousands of dollars to make her life more tolerable when she is moved
to the Medicaid ward.
For this reason, the thing that makes sense with Partnership policies
is to buy enough to protect your liquid assets (The New York program
uses a different, in my mind far more onerous and less cost effective,
plan where you have to buy a minimum of three years of policy
benefits). In other words, the dollar value of whatever investments
you may have. Since I'm in a Partnership state, this makes it easy to
calculate how much of a policy would accomplish that. In
non-partnership states, there's more guesswork involved, and a large
amount of sheer guts on behalf of the client.
Let me state emphatically that by inducing people who can afford them
to actually buy Long Term Care Policies, Partnership policies save the
states who have them a large amount of money - billions of dollars -
as those people who would have needed state based aid now have
insurance policies to cover their needs. The folks at the
[2]California, as well as [3]New York, [4]Connecticut, and [5]Indiana
Partnerships for Long Term Care, have saved their states blortloads of
money by having this program in place. Luckily for all concerned, this
includes two of the three most populous states.
(Supporting articles [6]here and [7]here and [8]here)
However, back in 1993, [9]OBRA (Section 1917 Paragraph 3, about
halfway down the page, is the reference) was passed, which at the
explicit insistence of Congressman Henry Waxman, who was then chair of
the Commerce Committee's Subcommittee on Health and the Environment,
removed from all future states the ability to waive or modify the
asset recovery requirement of medicaid. (I understand that [10]Iowa
and [11]Massachusetts also have plan documents dated early enough, but
have not actually implemented a Partnership program, and the
Massachusetts document is even more onerous than the New York one, but
better something than nothing). I understand Congressman Waxman's
concern for the budget, yet nonetheless by their propaganda you would
expect Democrats to be in favor of something that benefits the middle
class like this - particularly the lower middle class blue collar
worker, and actually ends up saving the taxpayers money, to boot. Of
course, Congresscritter Waxman is from California, which already had a
program in place, and he grand-standed against "Money for the poor
being used to pay for care of millionaires". He represents a heavily
blue collar district in Los Angeles, so you'd have thought he'd have
done more research as to who it actually benefits. So due to this
gutting of the primary benefit of having a Partnership policy, there
will be no more of these wonderful programs until the law is changed
back to what it was prior to 1993. In my opinion, whichever politician
gets such a law through Congress should be a national hero. It gives
people real incentive to buy a policy if they can afford it, secure in
the knowledge that even if it doesn't cover everything they need, they
won't be destitute after it runs out, while saving the Medicaid
program tens to hundreds of thousands of dollars per patient.
So there really is such a thing as an insurance policy that keeps
paying you even after the benefits are exhausted. Partnership policies
are no more expensive that any other policy, and they provide asset
protection, as well as additional benefits. If you are in a state that
has a Partnership for Long Term Care, I would not consider any policy
that was not a Partnership policy. Here in California, every policy
sold must state whether it is or is not a Partnership policy. If it
makes sense for you to buy a Policy for Long Term Care Insurance (a
subject I will tackle in the next article), and you are in a state
that has such a program, make certain that the policy you buy is one
of those policies available through your state's Partnership for Long
Term Care.
Links to the four states with Active Partnership Programs:
[12]California
[13]New York
[14]Connecticut
[15]Indiana
(to be continued)
References
1. http://www.searchlightcrusade.net/posts/1135004450.shtml
2. http://www.dhs.ca.gov/cpltc/
3. http://www.nyspltc.org/
4. http://www.opm.state.ct.us/pdpd4/ltc/home.htm
5. http://www.in.gov/fssa/iltcp/
6. http://www.findarticles.com/p/articles/mi_m4149/is_n2_v33/ai_20828187
7. http://www.gmu.edu/departments/chpre/research/PLTC/
8. http://www.gmu.edu/departments/chpre/research/PLTC/
9. http://www.gmu.edu/departments/chpre/research/PLTC/obra.html
10. http://www.shiip.state.ia.us/factsheet24.pdf#search='Iowa%20Partnership%20for%20Long%20term%20Care'
11. http://www.rwjf.org/reports/grr/015602.htm
12. http://www.dhs.ca.gov/cpltc/
13. http://www.nyspltc.org/
14. http://www.opm.state.ct.us/pdpd4/ltc/home.htm
15. http://www.in.gov/fssa/iltcp/
More information about the searchlight
mailing list