How a Change in Tax Code
Might Help Sales of Long-Term Care Insurance
tHe natIonal ClearIngHouse For long-terM Care
InForMatIon estimates that private long-term care (ltC) insurance
accounted for only 7 percent of total ltC expenses (compared with
out-of-pocket expenses of 18 percent) in 2005 (see Figure 1).
Even though Medicaid and Medicare
accounted for around 70 percent of total
expenses, eligibility for these programs
comes at a cost. Assets must be divested
to qualify for Medicaid, and the coverage that is provided is often substandard
compared with coverage available
through private LTC insurance. The
number of people in the United States
who are likely to need LTC services
(those aged 85 and older) is projected
to rise from 5. 3 million in 2006 to 20. 9
million in 2050, further straining public
programs like Medicaid and Medicare.
Private LTC insurance pays for ex-
penses incurred in facilities like nursing
homes and assisted living facilities or in
private homes for people with chronic
illnesses or mental or physical disabili-
ties. Unlike other health care insurance,
LTC insurance is intended primarily to
pay for help with daily activities rather
than to cover the cost of treatment for
medical conditions.
Federal tax law (Section 7702 B of
the Internal Revenue Code) provides
tax clarification and limited tax benefits to people purchasing private LTC
insurance. Because the tax code treats
LTC insurance policies as accident and
health policies, they don’t have a cash
value. As a result, these very long-term
policies (with a significant amount of
prefunding) can’t be returned to the insured upon voluntary termination of the
policy. This lack of cash value might be
one of the reasons that the purchase of
private LTC insurance represents such a
small part of total spending on LTC for
the elderly.
national spending on long-term Care, 2005
Private Insurance
7 .2%
out of Pocket
18 .1%
other
5 .3%
Medicare
20 .4%
Medicaid
48 .9%
source: national Clearinghouse for long-term Care Information
The history of LTC Insurance
LTC insurance has evolved over time
from a product that was used to cover
only nursing home care to one that covers care in multiple settings, including
nursing homes, assisted living facilities, and the homes of insureds. Today’s
LTC insurance policies carry no pre-hospitalization requirements and offer
multiple options for how long services
will be provided and how many days the
insured has to pay for care before coverage begins.
Before the enactment of the Health
Insurance Portability and Accountability Act of 1996 (HIPAA), which set
requirements for tax-qualified LTC insurance, there was no clarity on the tax
treatment of LTC insurance contracts.
Although limited in scope, HIPAA was
the first piece of federal legislation that
encouraged people to assume financial
responsibility for their LTC needs. This
section of the tax code created significant restrictions on the liquidity of LTC
policies, however, because policyholders
can’t cash out their prefunding of premiums in the event of financial difficulties.
The Pension Protection Act of 2006 expanded tax-qualified LTC insurance to
include LTC coverage as part of, or as
a rider to, a life insurance or an annuity contract. The 2006 legislation added
some flexibility and liquidity to LTC insurance, but it also made the product
extremely complex.
Many states also have implemented programs creating a partnership
between Medicaid and private LTC
insurance, with the common goal of reducing a state’s Medicaid expenditures
by delaying the LTC expenses that Medicaid would pay. Under changes enacted
in 2006, Medicaid in the estate recovery
process excludes the amount an LTC
46 CONTINGENCIES JAN | FEB. 13
