Tax Treatment of Long-Term Care
Insurance Policie Part I

“It is vital for those of us in the long-term care insurance industry to understand the government’s role in protecting citizens against rising long-term care costs. But, this role is often ill defined and confusing, especially with issues such as the IRS’ current tax treatment of long-term care, the potential for passage of additional favorable tax treatment for long-term care insurance premiums, and the future of the estate tax.

“In this article, we’ll discuss the IRS’ current tax treatment of long-term care insurance policies. A lot of prose has been written about this issue. Most of it is of little value because the major questions have been posed but not answered. This article will give specific answers and leave it up to the reader to decide whether the logic is valid.

The U.S. Government’s Role

“In 1988, lawmakers encouraged insurance companies to get into the long-term care insurance field. Then in 1993, Hillary Clinton proposed significant government intervention into the entire health care area, including government funding for long-term care costs. But special interest groups and the Republicans, led by Newt Gingrich, effectively killed the proposed bills. In fact, the mood of the country became so anti-government intervention that this issue was a major reason that the Democrats lost control of the Congress in 1994. Substantial further government intervention in long-term care has not been seriously considered since. It has been a political hot potato.

“But, the long-term care problem has grown since 1993. Both major political parties and President Bush now agree that funding long-term care costs is a major problem. The big issue is how to fund the cost, which is currently about $100 billion per year and rising steeply.

Government Support Levels

“Under California’s Medi-Cal, the most needy can get benefits for skilled nursing home costs and sometimes other facility costs. Normally, there are strict spend-down qualifications, which means that a patient must be virtually impoverished to qualify for benefits. There are two exceptions. First, partnership policies can help patients to retain assets. Second, some people try to take advantage of loopholes in the law and transfer assets to qualify for Medi-Cal benefits. These loopholes have been closing over time.

“The federal government and the State of California participate in funding the costs. The State must administer this program under federal guidelines, but has broad authority within these guidelines. Benefits to facilities are often less than the actual costs of care.

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