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Putting aside all of the technical terminology, tax issues and underwriting requirements any type of insurance is analogous to the lottery. Because the mathematical odds of winning the lottery are terrible in order to induce people to participate the premium (the price of a ticket) is very low usually $1. This calculation is the essence of establishing the price for insurance. When the occurrence of a claim spread over a large number of people is estimated to be minimal the charge (the premium) to the participants is affordable. Insurance and a game of chance (the lottery) have comparable results in that those not receiving a claim payment pay for those who are and the non-winners pay for the winner.
This fundamental rule is not present in the case of long term health care insurance. The probability of a claim-taking place is very high; therefore, the premium is not inexpensive at advanced ages. In addition, the possibility of a premium increase for all those being insured after the policy is issued is a thoughtful consideration. However, the purchase of a policy that can be fully paid-up in 10 years or at age 65 provides assurance that the premium can never be increased.
In my judgment long term health care insurance is only to be purchased by those people who have what I call-discretionary money. This type of currency is not necessary to maintain a given lifestyle-in financial terms it is cash, which is set aside to meet unexpected expenses.
Why Long Term Health Care Insurance?
It is assumed that at least 50 percent of all people age 65 and older will most likely need substantial financial assistance for: (1) in order to remain in their homes, (2) or if necessary to live in an assisted living facility (3) or, as the last resort, to live in a nursing home. Most experts believe that long term health care insurance should be considered for the following reasons.
Independence
Financial freedom is priceless. It does not guarantee happiness, good self-esteem or good health-but it does allow individuals, within reason, to have total control of their lives.
Family Consideration
Most parents want to eliminate the need to depend upon their children or personal family members for individual emotional or financial well being.
Purchasing Extraordinary Dependability
"You only get what you pay for"-this time-honored universally accepted truism applies to hiring professionals for home care, the cost for an assisted living facility-in addition to the nursing home of your choice as the last resort. The cash payment for these services is paid either from your assets or by the insurance company.
Dislike for Governmental Assistance
Jurisdictional aid by its very nature is bureaucratic and most people when given the choice simply do not want to depend on someone else for a yes answer.
Estate Shrinkgage
It takes years of hard work to accumulate property usually with after-tax money. The majority of people with discretionary money would rather have their residence (s), savings, retirement plan assets, business interests and other assets go to their children or personal family members or the charity of their choice versus a nursing home or paying for extraordinary dependability home care.
Psychological Consideration
The elimination of financial and emotional stress is essential for our physical and philosophical well being. Recent studies are now providing empirical versus hypothetical evidence that stress is one of, if not, the primary cause of heart disease because of its affect on the immune system.
These six reasons may provide sufficient rationale for people with discretionary money to purchase a long-term health care insurance contract. Its purpose is to provide financial reimbursement or indemnification to keep people in their homes if at all possible.
Reimbursement Versus Indemnification Payments
There are two types of long term health care insurance contracts. The first type is the reimbursement payment contract. The insured is reimbursed only for the actual daily expenses. For example: the insured has a $200 per day daily benefit with a three-year benefit period for total dollar coverage of $219,000. The insured during the three years had documented financial costs of $200,000 leaving $19,000 of unused monetary coverage that is still available.
The second type is an indemnification contract. The insured is compensated for the actual daily benefit disregarding the every day actual documented expenses. For example: the insured has a $200 per day daily benefit with a three-year benefit period for total dollar coverage of $219,000 (which may be more than the actual expenses) leaving no unused monetary coverage at the end of the three-year benefit period. The daily benefit is tax-exempt only up to $190 per day in 2000 regardless of actual expenses. However, if the insured is indemnified for an amount in excess of $190 and can provide documented health care expenses for the additional amount-it is not reportable income.
The Tax Issue
The premiums paid for a non-qualified long-term health care insurance contract are not tax deductible for the following: C corporation, S corporation, Partnerships, Unincorporated self employed owners and Individual taxpayers. In addition the Treasury Department has not yet ruled on the tax status of benefits received by the (in all probability the insured) contract owner. As of right now there is no promise that the money when received will be tax-exempt.
"Because there is no guarantee the IRS won't decide to tax payments from non-qualified policies, and because there isn't enough evidence to settle the [which will give easier access] question (many experts believe the disparity won't prove significant for most long-term care insurance purchasers), it's safer to go with a tax-qualified policy." This quote is from Long-Term-Care Insurance - A Special Guide from Kiplinger's Retirement Report June 1999.
Qualified Versus Non-Qualified Contracts
Generally a long-term health care insurance contract pursuant to Internal Revenue Code section 7702 (b) is a qualified contract, if:
The only insurance protection provided under the contract is coverage of qualified long-term care services. In general, the term "qualified long-term care services" means necessary diagnostic, preventive, therapeutic, curing, treating, and mitigating rehabilitative services, and maintenance or personal care services which:
Some companies still sell non-qualified contracts. The purpose in doing so is because a non-qualified contract may be easier to receive a benefit from. It is easier for you to be compensated from a non-qualified contract because your physician only has to certify that care, is medically necessary (some contracts eliminate this language). This differs from qualified contracts, which contain language that place, a restriction on your right to be compensated. The payment is not unconditional since your physician must certify that you are chronically ill as defined by the contract. In addition your disability is expected to last at least 90 days.
The Contract
The peculiarity of any insurance (life, disability, long-term health care, etc.) contract is such that a knowledgeable professional must clarify it. It is a one-sided legal document in favor of the policy-owner. It is an unequal legal document because only the policy-owner can change the contractual stipulations. The insurance company cannot make any alterations (although consumer friendly companies usually make new improvements retroactive to an existing policy-owner). It is essential that the policy-owner understands all of the contractual clauses-failure to do so may result in frustration and economic disappointment. Because it is an intangible product lacking physical properties it should not be purchased over the Internet or through the mail-and it certainly should not be considered a commodity.
William D. Brownlie is a Massachusetts Licensed Life Insurance Adviser, a Chartered Life Underwriter, a Chartered Financial Consultant, and earned a certificate in Investment Planning from the Boston University Program for Financial Planners. He is the author of Life Insurance Boot Camp Buyer's Guide - Second Edition 2000 ISBN 0-9662791-3-1 now in print. This article is based upon condensed material from Chapter 19 Life Insurance Boot Camp Buyer's Guide - Second Edition 2000
(c) 2000 William D. Brownlie all rights reserved.Sign up for our free eNewsletter Dollar Stretcher Tips.
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