Qualified vs. Non-Qualified: How do you know which is right for you?

If you have questions about the potential tax impacts of these two types of policies, you may wish to consult a tax adviser before deciding which type of policy you wish to purchase.

The Health Insurance Portability and Accountability Act of 1996 (the Act) also referred to as the Kassebaum-Kennedy Bill became effective January 1, 1997. This new law is an amendment to the Internal Revenue Code and is intended to set standards and provide tax incentives to those in the private sector who take responsibility for planning for their own long-term care needs. Under The Act, long-term care insurance policies that meet certain requirements may qualify you for federal and state tax benefits. Such policies are known as Qualified Long-Term Care Insurance policies. Policies that do not meet these specific requirements are known as Non-Qualified Long-Term Care Insurance policies. As a consumer you have these two choices:

Qualified

Policies intended as QUALIFIED long-term care insurance contain the following provisions, which differ from the non-qualified policies described later.

Tax Incentives

1. Under the qualified plan, premiums paid for qualified LTC insurance, up to "certain limits," will be tax deductible as an itemized deduction if the premiums and other qualifying unreimbursed medical expenses exceed 7.5% of adjusted gross income. These "certain limits" for the 2002 tax year are: $240 in annual premiums for individuals 40 or less, up to $450 for individuals 41-50, up to $900 for individuals between 51 and 60, and $2,390 for individuals between 61-70, and $2,990 for individuals 71 and over. (2002 figures. These amounts will increase annually by the Medical Consumer Price index.)

2. Benefit dollars paid out from qualified LTC policies (subject to certain limitations) are NOT considered taxable income.

Qualified Benefit Triggers

1. Individuals will be eligible for benefits if they meet the following criteria of a Chronically III Individual under the policy definitions: Chronically III means an individual who has been certified within the previous 12 months by a Licensed Health Care Practitioner (such as a Physician, Registered Nurse, or Licensed Social Worker) as:

• Being unable to perform without substantial assistance from another individual, at least TWO of the six "Activities of Daily Living" (bathing, continence, dressing, eating, toileting, and transferring). The Licensed Health Care Practitioner must certify that an individual will require such substantial assistance for a period of at least 90 days; or
• Requiring substantial supervision to protect such individual from threats to health and safety due to severe Cognitive Impairment (e.g. Alzheimer's Disease, Senility Dementia).

2. Under the Home Care provisions and the Residential Care Facility for the Elderly Rider, benefits are NOT payable for expenses incurred for services or items to the extent that such expenses are reimbursable under Medicare or would be so reimbursable but for the application of a deductible or coinsurance amount.

Non-Qualified

The income tax treatment of non-qualified plans is presently unclear. Under current law it appears that the premiums paid on a non-qualified long-term care insurance policy may not be deductible and the benefits received may have to be included in taxable income. We strongly recommend that you consult your tax advisor prior to the purchase of a non-qualified long-term care insurance policy.

1. An individual will be eligible for Nursing Facility Confinement benefits in a Nursing Facility if a Physician, Registered Nurse or Licensed Social Worker recommends that you receive such care as part of a plan of care due to:

• Medical Necessity; or the inability to perform ONE or more of seven "Activities of Daily Living" (ambulation, bathing, continence, dressing, eating, toileting and transferring) without the hands-on assistance of another person; or
• Cognitive Impairment which requires supervision or verbal cueing by another person to protect yourself or others.

2. An individual will be eligible for Nursing Facility Confinement benefits in a Residential Care Facility for the Elderly or for Home Care benefits if a Physician, Registered Nurse or Licensed Social Worker recommends that you receive such care as part of a plan of care due to:

• Inability to perform TWO or more "Activities of Daily Living" without the hands-on assistance of another person; or
• Cognitive lmpairment which requires supervision or verbal cueing by another person to protect yourself and others.

3. If you purchase a non-qualified long-term care insurance policy you will be required to sign a disclosure statement that addresses the purchase of a non-qualified policy.

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