Long term care insurance policies are not standardized like Medicare supplement insurance. Companies sell policies that combine benefits and coverage in different ways.
How Benefits Are Paid Insurance companies that sell long term care insurance generally pay benefits using one of three different methods: the expense-incurred method, the indemnity method, or the disability method. It is important to read the literature that accompanies your policy (or certificate for group policies) and to compare the benefits and premiums. When the expense-incurred method is used, the insurance company must decide if you are eligible for benefits and if your claim is for eligible services. Your policy or certificate will pay benefits only when you receive eligible services. Once you have incurred an expense for an eligible service, benefits are paid either to you or your provider. The coverage will pay for the lesser of the expense you incurred or the dollar limit of your policy. Most policies bought today pay benefits using the expense incurred method. When the indemnity method is used, the benefit is a set dollar amount. The benefit is not based on the specific services received or on the expenses incurred. The insurance company only needs to decide if you are eligible for benefits and if the services you are receiving are covered by the policy. Once the company decides you are eligible and you are receiving eligible long-term care services, the insurance company will pay that set amount directly to you up to the limit of the policy. When the disability method is used, you are only required to meet the benefit eligibility criteria. Once you do, you receive your full daily benefit, even if you are not receiving any long-term care services.
Whether you are considering buying a tax-qualified or a non-tax-qualified policy, consult with your tax consultant or legal advisor regarding the tax consequences in your situation.
FEDERALLY TAX QUALIFIED POLICIES
- Premiums can be included with other annual uncompensated medical expenses for deductions from your income in excess of 7.5% of adjusted gross income up to a maximum amount adjusted for inflation.
- Benefits that you receive and use to pay for long-term care services generally will not be counted as income. For policies that pay benefits using the expense incurred method, benefits that you receive in excess of the costs of long term care services may be taxable. For policies that pay benefits using the indemnity or disability methods, all benefit payments up to the federally approved per diem (daily) rate are tax free even if they exceed your expenses.
- To trigger the benefits under your policy, the federal law requires you to be unable to do two ADLs without substantial assistance.
- “Medical necessity” cannot be used as a trigger for benefits.
- Chronic illness or disability must be expected to last for at least 90 days.
- For cognitive impairment to be covered, a person must require “substantial supervision.”
FEDERALLY NON TAX QUALIFIED POLICIES
- You may or may not be able to deduct any part of your annual premiums. Congress and the U.S. Department of the Treasury have not clarified this area of the law.
- Benefits that you receive may or may not count as income. Congress and the U.S. Department of the Treasury have not clarified this area of the law.
- Policies can offer a different combination of benefit triggers. Benefit triggers are not restricted to two ADLs.
- “Medical necessity” and/or other measures of disability can be offered as benefit triggers.
- Policies don’t have to require that the disability be expected to last for at least 90 days.
- Policies don’t have to require “substantial supervision” to trigger benefits for cognitive impairments.