Tax Treatment of Long-Term Care
Insurance Policies Part II
The quality of care that Medi-Cal patients receive may be substantially lower than what private pay patients receive in the same facility. Increasingly, Medi-Cal is developing ways to recover its costs after the death of the patient. A budget shortfall is a growing problem. Funds for this program are in continuous danger of being cut.
“Medicare is the next possible level of government long-term care funding. But, it will only partially cover long-term care costs under certain conditions for a maximum of 100 days. The average period of benefits is only several weeks. Since Medicare only steps in for a short-term rehabilitative scenario, long-term care benefits don’t exist at all. As our population ages, Medicare is under increasing financial pressure. As with MediCal, so-called long-term care benefits under this program are in continuous danger of being left out.
“So, the government has decided that the less needy will have to fund most of their long-term care costs. Unlike other countries, our government does not have the revenue to fund all or even most of our long-term care costs. Citizens are now encouraged to purchase private long-term care insurance and are given tax incentives to do so.
The Tax and Non-Tax-Qualified Policy Distinction
“IRS told Congress that there would be runaway costs if it did not provide fairly strict health qualifications for individuals to receive favorable tax treatment of long-term care insurance policies.
“So a compromise was struck in a new act, the Health Insurance Portability and Accountability Act (HIPPA), which eventually became law. Under HIPPA, in a tax-qualified policy, a person would have to meet a special definition of ill health and be “chronically ill” to qualify for the favorable tax treatment offered in the policy. A physician would have to certify that the policyholder’s illness was expected to last 90 days.
“There would still be non-tax-qualified policies that did not impose this strict health requirement for benefits. Because of the absence of the 90-day physician certification requirement, they would provide fewer tax incentives, but more liberal benefits than the tax-qualified policies would provide. California consumer groups persuaded the Legislature to require tax-qualified and non-tax qualified policies to be offered in California and to be presented by insurance agents at each individual presentation.