Long Term Care Insurance: Non-Tax-Qualified versus Tax-Qualified, and Partnership

(Part 2 of a three part Series on Long Term Care)



I wrote in the 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 California, as well as New York, Connecticut, and 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 here and here and here)



However, back in 1993, 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 Iowa and 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:

California

New York

Connecticut

Indiana



(Continued in Part III here.)

Caveat Emptor

Originally here