Do you know the
difference between a long-term care rider and chronic illness rider? Section
7702B and Section 101(g)? If you're contemplating a life insurance policy or
annuity with a long-term care rider, make sure to understand the key terms.
by: Carlos Dias Jr., Wealth Adviser September 27,
2019
The
insurance industry has changed since I began my career. Long-term care
insurance policies were the recommended option, and the company I started with
even had their own stand-alone home health care policy.
A
New York Times article “Aged, Frail, and Denied Care by Their Insurers”
left me stunned on how insurance companies that sell traditional long-term care
insurance policies deny claims when needed most and I had witnessed this on
multiple occasions. It was difficult endorsing this product after all the
backlash. According to AARP, 52% of people who turn 65 today will
develop a severe disability that will require long-term care at some point in
retirement. The U.S. Department of Health and Human Services reports that 70% of people over 65 will need
long-term care at some point in their lives.
So,
how do you approach such a delicate subject? Of course, you can always self-pay
or apply for government benefits — such as Veterans Aid and Attendance or
Medicaid — but the qualification rules are strict and continually changing. For
instance, the Department of Veterans Affairs implemented new guidelines on net worth and
asset transfers in September 2018.
Long-term
care insurance is still an option, but even large companies, such as GE, intend
to impose a $1.7 billion premium increase through 2029 on its roughly 274,000
long-term care insurance policyholders. The average policyholder age is 77. Can
you visualize getting hit with a substantial premium increase on your long-term
care insurance policy after paying on it for over 12 years? (Learn more by
reading 6 Options to Fund Long-Term Care in Retirement.)
While
there are other options to traditional long-term care insurance — including
life insurance and annuity long-term care riders — not all are structured the
same. In fact, there are two styles of riders that are often confused: 1.)
long-term care riders; and 2.) chronic illness riders.
What is a long-term care rider?
A
long-term care rider is an add-on or feature to a life insurance policy or an
annuity under IRC §7702B (the
Internal Revenue Code concerning the treatment of long-term care) designed to
help pay for the costs of long-term care services. Claims paid on these can be
either temporary or permanent (as opposed to chronic illness riders, which are
only for permanent conditions). In order to qualify for services, they must be
recommended by a licensed health practitioner — such as your doctor.
Long-term
care benefits from a life insurance or annuity rider are paid in two ways:
Indemnity policy
With
an indemnity policy, once the insured person qualifies for benefits, monthly
payments are paid out according to the contract. The policy automatically pays
the specified dollar amount directly to the policyholder each month, regardless
of what the care actually costs.
Benefits
paid in excess of the HIPAA “per diem” (or per day) limitation are subject to
taxation. The HIPAA per diem rate for 2019 is $370 per day (up from $360 per
day for both 2017 and 2018).
For
example, say a 65-year-old woman purchases an annuity with a long-term care rider
for $100,000 that provides an immediate benefit of about $300,000 (or $137 per
day for up to six years). If she were to qualify for long-term care benefits in
the following year (age 66), she’d receive about $141 per day, as the benefit
grows over time based on the contractual guarantees. (It’s important to note
that not all insurance companies operate the same way.) Since this amount is
below the HIPAA per diem rate of $370 per day, all benefits paid would be
tax-free!
Reimbursement policy
With
a reimbursement policy, you’d only be “reimbursed” for your actual long-term
care costs, instead of receiving a steady amount, like an indemnity policy.
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