Short Term Care vs. Long-Term Care Insurance
by Phyllis Shelton
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Which is better for the consumer? At first glance, policies that pay
for short-term episodes like broken hips and mild strokes and benefit
triggers that are easier to hit seem to be more beneficial to the client.
For example, policies that do not contain a requirement for a 90-day certification
and/or policies that pay benefits if help is needed with one ADL instead
of two may appear to be best for the consumer. Or, policies with
a medical necessity trigger may seem better because a doctor just has
to say the patient has an illness or an injury that warrants care,
or maybe a condition, like severe arthritis. Of course, policies that
meet any of these characteristics are non-tax qualified policies.
Moving to tax-qualified policies, however, which is better - a policy
in the lower third of premiums available for a specific benefit plan compared
to other policies? Or a 0-elimination period when most of the policies
written for that specific company are issued without a waiting period?
(Perhaps the only options are 0 or 100 day, and the common choice
is 0.) Or a policy with a company that accepts a large number of
Three years after the Health Insurance and Portability Act of 1996 (HIPAA),
concern over the TQ vs. NTQ controversy seems to be relaxing. "The
IRS isn't taxing anyone who has received benefits from a non-qualified
policy," I'm starting to hear from companies and agents --
like the mouse who ventures out of the mousehole with some trepidation,
then gets increasingly braver as he looks around and sees no cat.
Has the IRS forgotten that there is no ruling on NTQ benefits, even though
letters have gone out to a number of taxpayers questioning the difference
between an individual tax return and a 1099 from an insurance company?
Was it an accident that the federal tax forms related to long-term
care insurance consistently affirm that qualified policies are
exempt from income taxation, and that all of these forms introduce the
word "qualified" in bold?
(For the record, insurance companies are required to send 1099's to
policyholders who receive benefits from any type of long-term care insurance
policy, TQ or NTQ. Policyholders who receive benefits are required to
report benefits on Form 8853, Medical Savings Accounts and Long-Term
Care Policies with individual tax returns. Taxation of benefits from
policies issued 1/1/97 or later that do not meet the benefit criteria
established by the Health Insurance Portability and Accountability Act
of 1996 is uncertain since HIPAA only clarified that benefits from
qualified policies will not be taxed as income. LTC policies effective
prior to 1/1/97 are grandfathered and out of danger of income taxation
unless a benefit increase after 1/1/97 resulted in a material change;
e.g. adding inflation coverage, increasing the benefit period or daily
benefit, or shortening the elimination period.)
But is taxation of benefits the real issue? I think not.
I think the non-clarity of this point is the velvet hammer from the government
to preserve LTC insurance for the long-term by preventing payment of short-term
claims and payment of claims too quickly due to lax benefit triggers,
such as one ADL, medical necessity or the "policyholder's discretion"
benefit trigger that is in a few policies. That one means "you
say you want to go to a nursing home, we'll pay your claim"
-- and the part you don't hear -- "as long as we're in business".
In other words, I see HIPAA as a consumer protection measure
that instead of making TQ policies less beneficial to consumers, that
HIPAA may be the very thing that preserves LTC insurance for future
claimants by ensuring reasonable payout terms instead of lenient terms
that will likely result in serious rate increases in the future.
(By the way, "future claimants" is a diplomatic way of
saying baby boomers - and that's us, folks!) I think the forces behind
HIPAA were trying to avoid repeating the marketing mistakes of disability
income and health insurance products due to easy benefit triggers, liberal
underwriting, low rates and yes, even inappropriately high agent commissions!
Another impetus for HIPAA, I believe, came from the provider side of
the equation. Prior to HIPAA, home health agencies and skilled nursing
facilities that specialized in short-term, rehabilitative care (physical,
speech, occupational therapy, etc.) were pushing hard for payments from
LTC policies. LTC payments look even more desirable now since the
cuts from the Balanced Budget Act deeply affected Medicare's benefits
for nursing homes and home health agencies. (For the record, consumers
normally have coverage for this short-term, skilled care. It's the
beyond 90 day stuff that constitutes the largest concern, as neither conventional
health insurance nor Medicare pay for chronic, maintenance care with no
progress, such as paralysis or coma due to an automobile or sporting
accident.) However, taking care of short-term rehabilitative care
on the front end will break the reserves of any insurance company
on the back end as the millions of baby boomers enter the fray.
HIPAA set the pace for preserving LTC insurance for the future, and many
insurance companies are contributing with conservative benefit features.
Most policies today are reimbursement, not indemnity, which means
they don't pay more than the actual charge and most sales today
(about 85%) are tax-qualified products which don't pay for short-term
care due to the 90-day certification requirement. A third HIPAA
requirement is non-duplication of Medicare benefits in keeping with
the intent to conserve benefit dollars - TQ policies are not allowed
to make a payment when Medicare pays, even on days 21-100 of nursing home
care when there is a $97 copayment for the consumer. (Think about it -
most people already have coverage for that copayment with a Medicare supplement
policy, retiree health insurance, HMOs, etc.) A few LTC policies are beginning
to coordinate with any other health coverage, including other LTC policies.
These product trends exist due to the intense need for rate stability
for a product that no one in the year 2000 has the proverbial "actuarial
Or another way to make the point - ever hear of the goose that laid the
©1999 Shelton Marketing Systems, Inc.