1. Are there alternative ways to fund long-term care?
A. Yes! With Life Insurance Policies that contain special riders:
• Policies with long-term care riders may include a rider that prepays the death benefit to cover expenses of convalescent care.
• -Policies with accelerated-benefit riders: reduce the death benefit by any amounts paid as long-term care benefits. If long-term care benefits are unused, the death benefit remains in full. The contract is designed to pay a benefit for either long-term care, or death, or both. Accelerated-benefit riders are available in the case of chronic or terminal illness.
• Critical Illness Policies: may cover:
Policies with a benefit payable for certain diseases will pay the death benefit early to meet the needs of long-term care or medical necessity.
Critical illness policies pay out in the event that the person is stricken with one of the major diseases or disabilities outlined in the policy.
Most products have a 100% one-time payout in the event of cancer that has spread, and for all heart attack, strokes, major organ transplants and kidney failure.
Richer policies also cover Alzheimer’s, blindness, deafness, multiple sclerosis, paralysis and death.
Most critical illness policies offer a portion of the benefit (usually 25 percent) for serious medical conditions such as angioplasty, bypass surgery and certain contained cancers(the remaining benefit is paid at a later date, if needed).
Policies with multiple coverages may include:
• Life insurance
• Disability income protection
• Terminal illness protection
• Chronic illness protection
• Annuity Contracts: These provide a certain income for life after a qualifying event, such as 90 days in a nursing facility or hospital. Immediate payment contract can be purchased that will guarantee a certain income upon an event requiring institutionalization. However, any funds not paid out before death are lost to the insured’s estate.
Private Annuities between parent and child: Assets are given to the children, who then guarantee and provide the parent a life income. This guarantees that the principal will not be lost to an insurance company upon the parent’s death. The risk is that the parent outlives the expected payments and the children have to make up the difference.
Variable Annuity Contracts: In the past twenty years, annuity contracts have been created by most major insurance companies, which are categorized as variable annuity contracts. They are variable because they have separate accounts into which the insured can choose to place capital for investment. Investments can include mutual funds with stock portfolios, bond portfolios, international investments, and real estate, and natural resources, money market accounts and guaranteed rate contracts.
These contracts have no front-end sales charges. There is normally a contract charge of $30 to $35 per year and the expenses of the contract vary greatly.
• Veterans Administration (VA) Benefits: Long-term care in VA or private nursing homes may be provided for veterans who are not acutely ill and not in need of hospital care. If space and resources are available, the VA may provide VA nursing-home care. Veterans with compensable, service-connected disability are given first priority for nursing-home care and may not need an income eligibility assessment. Service-connected disabilities are determined by the VA.
• Continuing Care Retirement Communities: Continuing Care Retirement Communities provide a guaranteed residence regardless of the level of care eventually needed. The resident pays for lifetime care and the costs are known in advance. However, there are a number of disadvantages to this arrangement:
• These facilities may have upfront costs ranging from $25,000 to $450,000 or more, plus fees ranging from a few hundred dollars to a few thousand dollars per month. There may be no rebate of upfront costs in the case of early death.
• The actual costs may vary from the original contract for several reasons:
1. The resident may be dissatisfied with the facility benefits that are provided and have no recourse but to go a different facility.
2. The costs of care are increasing at 8 to 10% around the country. It is unrealistic for these facilities to be able to project fifteen to twenty years into the future what their costs will be, for those individuals who might live that long.
3. The facility my not qualify for Medi-Cal/Medicaid benefits, so costs could be substantially higher than anticipated. (Check how much the facility charges for incidental expenses such as adult diapers, medical appliances, clothing and other special needs-are these charges reasonable?
The contract should be reviewed as to the different levels of care that are provided once a person requires nursing or home health care. Is the entire cost covered? Are there additional charges that apply?
• Self-Insurance Using Personal Assets: Self-insure needs both substantial capital, in excess of $500,000 to $750.000 and expert professional tax and income advice to maximize that capital and not suffer the diminution of the benefits that they have worked so hard to achieve during their lifetimes
• Viatical Settlements: Provide income to the individual in return for the sale of their life insurance contract to a third party. Viatical Settlements involve, in most cases, several different groups of people:
• The company (the buyer of the contract)
• The Viatical Investor (a person funding through the company the purchase of the contract, or several people buying a piece of that contract).
• The Viatical Agent (representing the seller of that contract-normally an insurance agent).
• The policyholder (the insured).
Viatical settlements are, in many cases, funded by corporations, by individuals or by institutional money. The Federal Health Insurance and Accountability Act (HIPAA) states that the proceeds from a Viatical Settlement and also the settlement from an accelerate-death-benefit rider to an existing policy are to be tax-free for a terminally or chronically ill person. The major disadvantage of viaticals is that the insured is giving up a death benefit and also possibly the cash value of the policy. If the insured dies in a year or two, he or she will have given up 50 to 75% of the value of the death benefit, and his estate, spouse and offspring could suffer substantial financial loss.
• Family or Private Foundations: Tax-planning trust vehicle to provide substantial benefits to themselves, their spouses and their offspring.
Advantages include:
• If properly structured, contribution amounts are not limited
• The foundation can be in addition to any other existing retirement plans
• The plan does not require participation by employees, co-workers or any person other than the donor if created during a working person’s life.
• Trust assets cannot be reached by creditors and will not be included in the donor’s estate.
• Income for the foundation manger is available without penalty before age 59-1/2.
• The gains in a private foundation are taxed at 2 percent if the trust has properly filed for tax-exempt status and made proper yearly charitable contributions to recognized 501(C) 3 organizations.
Disadvantage:
• The funds are not liquid (a donor cannot withdraw funds for personal use except for reasonable compensation).
• Reverse Mortgages (Home Equity Conversion Programs): An increasing-balance, declining-equity home loan that pays an elderly homeowner tax-free income but requires no monthly payments, sometimes called a reverse annuity mortgage. The reverse-mortgage lender can never demand payment until the borrower:
• Permanently moves out of the home
• Sells the home
• Dies
The residence is the only loan security; other assets never become liable for repayment, so the loan in non-recourse in nature. Also, since the reverse mortgage must be a first lien on the residence, any existing mortgage balance must be paid off with a lump sum advance from the new reverse mortgage.
Reverse mortgages should be considered only by a qualified senior-citizen-homeowner with no mortgage or a small mortgage balance, who could use:
• Additional monthly, tax-free, lifetime income.
• A credit line or lump sum amount for paying major expenses such as home repairs, property improvements and property taxes.
• For pleasure or investment purposes such as travel or college education for the grandchildren since there are no restrictions on the use of the funds.
The disadvantage of Reverse Mortgages:
• The use of a reverse mortgage could disqualify the homeowner from Medicaid/Medi-Cal benefits.
2. May I use the equity in my home for long-term care?
A. Yes. Under the old law, a house was considered an asset for Medicaid purposes if the owner planned to return home or a spouse continued to live in the home. Only if and when both spouses die could Medicaid force the sale of the property to recover the cost of care.
3. What are the benefits of reverse mortgages for seniors?
A. Reverse mortgages allow homeowners 62 years and older to borrow a portion of the equity and receive payments in a lump sum as monthly income, or via a line of credit. No payment is due until you move, die, or sell the house.
4. Are there alternative ways to help fund nursing home and/or long-term care?
A. Yes, there are:
Association Plans and Health Savings Accounts
Federal Long-Term Care Insurance Program
Medical Reimbursement Plans
COBRA Continuation Coverage
Corporate Group Plans (guaranteed & simplified issue)
Uninsured or Self-Insured Plans
Cafeteria Plans
5. Can you provide more detailed information on the alternative methods of funding nursing home care and/or long-term care?
A. Association Plans and Health Savings Accounts: Contracts with individual members through the association. These contracts cannot be cancelled as long as the premiums continue to be paid. The individual may leave the association and still continue the coverage with the insurance carrier. The criteria for qualifying for coverage are less stringent than in the open market place. Coverage is often available to members of their extended family, by blood or by marriage, whether older or younger. Health Savings Account: An account that you put money into to save for future medical expenses. The advantages include favorable tax treatment. Those eligible include any adult if:
• They have coverage under an HSA-qualified “high deductible health plan” (HDHP).
• Have no other first dollar medical coverage (other types of insurance, like specific injury insurance, or accident, disability, dental care, vision care, or long-term care insurance, are permitted.
• Are not enrolled in Medicare.
• Cannot be claimed as a dependent on someone else’s tax return.
Contributions to your HAS can be made by you, your employer, or both. However, the total contributions are limited annually.
Federal Long-Term Care Insurance Program: Sponsored by the United States Office of Personnel Management (OPM), the Federal Long-Term Care Insurance Program is a federal program that is the largest employer-sponsored long-term care insurance program. The policies offered have lower premiums than those available in the private market. Those eligible include:
• Federal and postal employees (excluding employees of the District of Columbia government).
• Members and retired members of the uniformed services.
• Annuitants.
• Qualified relatives (current spouses and adult children of employees and annuitants, and parents and parents-in-law of living employees but not annuitants). FLTCIP does not provide self and family coverage under one application, each eligible person must apply for coverage separately. Once a person applies for insurance their coverage will continue as long as they pay their premiums.
Medical Reimbursement Plans: A Medical Reimbursement Plan is set up by an employer to reimburse employees for medical expenses not covered by their regular medical insurance. Reimbursable expenses include dental expenses and expenses in excess of policy limits. Payments are generally received by the employee income-tax-free.
COBRA Continuation Coverage: Under COBRA, an employer must give covered employees (including spouses and dependent children) the opportunity to continue medical coverage under an employer group health plan (including plans to which the employer does not contribute financially) after any of the following events:
Death of the covered employee.
Divorce or legal separation of the covered employee.
Termination of the employee’s employment, unless for gross misconduct, or a reduction in hours that results in a loss of coverage.
The covered employee becomes entitled to Medicare.
A dependent child ceases to be covered by the plan.
The employer files for Chapter 11 bankruptcy.
Corporate Group Plan: A contract with the group itself rather than with the individuals in the group. Certificates of coverage are issued rather than individual policies. It has the serious disadvantage of being cancelable by the insurance carrier. Of greater concern to the consumer is that when an insurance carrier terminates coverage, the consumer immediately also loses coverage and may not be able to replace the contract at any cost due to failing health.
Uninsured and Self-Insured Plans: Uninsured Plan reimburses employees for medical expenses from the general funds of the business. When the corporation pays premiums to an insurance company and thereby shifts the risk to an unrelated third party, it is called and insured plan. Self-Insured Plan require both substantial capital, in excess of $500,000 to $750,000 and expert professional tax and income advice to maximize that capital and not suffer the diminution of the benefits that they have worked so hard to achieve during their lifetimes. The use of investments can lead to serious income and capital gains tax consequences, as well as major estate planning problems.
Cafeteria Plan: Formally, health care spending accounts, are employer-established benefit plans that reimburse employees for specified medical expenses as they are incurred. These accounts are allowed under section 125 of the Internal Revenue Code and are also referred to as “125 plans”. The employee contributes funds to the account through a salary reduction agreement and is able to withdraw the funds set aside to pay for medical bills.
6. Are the alternative ways of funding nursing home care and long-term care allowed in conjunction with Medicaid and/or other federally funded long-term care programs?
A. Yes, but these resources must be exhausted before Medicaid or other federally long-term care programs will provide funding or support.
7. Are there health and/or medical insurance policies that provide long-term care coverage?
A. Yes.
8. What advantages do Life Settlements offer seniors?
A. It offers an advantage to seniors who have unwanted, unnecessary, or unaffordable life insurance policies.
9. Why and when to consider selling and insurance policy?
A. For unplanned illnesses, increased healthcare and assisted-living expenses, rising premium costs, availability of better coverage, and changing tax laws.
10. Is a life insurance policy beneficial when considering long-term care options?
A. Yes, life insurance benefits can be used to improve a senior’s current financial security or reduce the financial burden on a senior’s family.
11. Can a life insurance contract be beneficial to long-term care?
A. Yes, by adding a long-term care (LTC) rider to the life insurance contract, referred to as a buy-sell agreement; an indemnity Long-Term Care Rider on Universal Life.
12. What does the rider add to a life insurance contract?
A. The rider of the life insurance contract pays by the use of an indemnity plan, which pays benefits directly to the owner of the contract.
13. Can you explain the provisions of Universal Life Insurance policies with no-lapse guarantees?
A. Universal Life Insurance policies with no-lapse guarantees provide a guaranteed death benefit for the entire life of the insured.
14. Will the Universal Life Insurance policy have any cash value?
A. The police will have a cash value, which may fluctuate. Also, these cash values may disappear in the late years of the contract due to policy charges.
15. As a consumer, should I be concerned with no-lapse guarantees and/or cash values?
A. Remember, the purpose of this product is to guarantee the death benefit for life at the lowest cost to the consumer, no matter how long the life. When there is no more cash value, the policy stays in force through the secondary guarantees contained within the policy as ling as the owner has paid the no-lapse premium as agreed to in the contract.
16. Are Universal Life Insurance policies with no-lapse guarantees in opposition with buy-sell agreements?
A. No, this type of policy can work well with buy-sell agreements in effect it guarantees a death benefit for a potential buyout and provides cash value that can be surrendered if the owners retire and no longer wish to maintain the policy.
17. How and why is this beneficial to the owners?
A. The owners will have a product they cannot outlive if they buy each other’s policies at retirement and keep them for the traditional purpose of life insurance.
18. What consequences, if any, must be considered with the various techniques that purportedly safely transfer a home within a family?
A. The techniques that can be used to safely transfer the home within the family can be a treacherous area and consideration must be given to issues regarding capitol gains, reassessment and the possible loss of the step up in basis, which would normally be afforded to a surviving spouse or from parents to children.
19. Can you explain further the issues regarding capital gains, reassessment and step up in basis when transferring a home within the family?
A. Because this (these) issue(s) is so complex we must recommend that you speak with competent income and relevant county/state advisers regarding the solutions to this question. Transfer of a home is very complicated, and has serious tax implications and expenses if not properly handled. It can also cause the individual(s) to lose control of their property at an inappropriate time in their lives, or even cause added taxes and costs to the estate after death of the owner(s).
20. Is it possible to transfer title from parents to children, while reserving an interest such as a life estate or right of occupancy to the parents, in order to avoid capital gains and reassessment issues?
A. Yes, but if certain of the children have liens against them, those liens will attach to the property when the deed records, thereby adversely affecting the title for all of the children.
21. Is there a technique to safely transfer title from parents to children, but also protects the parents if the children become unreliable?
A. Yes. The technique is to transfer the title to an asset preservation trust known as an Irrevocable Grantor Trust. The children are named as the beneficiaries of the trust, and receive title when the parents pass away. The parents can retain a right of occupancy or life estate over the property. They also retain a “power of appointment” which is the power to change the beneficiaries among the children; if a child is “bad” for any reason, he or she can be removed as a beneficiary by the parents.
22. Why can’t I pay for my health care and long-term care needs through private pay?
A. People don’t realize that any kind of accident or illness that requires rehabilitation, medication, operations, medical test, or lab work will cost, and costs a lot if paid for via private pay-privately.
23. How can a life insurance policy cover long-term care costs?
A. Referred to as, Accelerated Death Benefits, some life insurance companies offer life insurance policies wit a special feature that allows payment of a portion of the death benefit while the insured person is still alive. Although such payment is usually limited to situations in which the individual is terminally ill.
24. How can a life insurance contract provide for long-term care?
A. A life insurance contract can provide for long term care needs by offering a long-term care rider.
25. Are there any other alternatives regarding life insurance contracts and long-term care?
A. Another alternative is to purchase a life insurance policy with an accelerated benefit rider (ABR). Normally, the rider will pay out to an insured with a terminal illness and an one-year life expectancy, but some policies have up to five years life expectancy. The policy would provide up to one-half of the death benefit (DB) to be paid to the insured in a lump sum, or over a very short period of time.
26. Are these funds limited for use for medical expenditures only?
A. No. The funds could be utilized for various items, such as emergency surgery, taking a trip around the world, paying off bills and debts before the insured dies, etc.
27. Do all banks and mortgage brokers offer reverse mortgages?
A. There are three major nationwide reverse mortgage lenders, plus several state and local lenders. However all reverse mortgages are originated by local representatives.
28. Do you know who the three major reverse mortgage lenders are?
A. The “big three” nationwide reverse mortgage lenders are FHA Home Equity Conversion Mortgage (HECM), Fannie Mae “Home Keeper,” and the Financial Freedom Cash Account.
29. What is the basis of reverse mortgages?
A. All reverse mortgages are based on : (a) the principal residence’s current market value (b) the age of its youngest homeowner (c) the current interest rates.
30. What governs the interest rates for reverse mortgages?
A. Most reverse mortgage interest rates are adjustable, tied to the U.S. Treasury market interest rate.
31. Can invested capitol and growth on an annuity contract be used to pay for long-term care expenses or medical expenses without subjection to surrender fees?
A. These contracts allow complete removal of the original invested capital and all growth to pay for long-term care expenses or medical expenses without back-end surrender fees.
32. What will the Veterans Administration (VA) pay for?
A. The Veterans Administration (VA) will pay for:
• Home improvements necessary to provide disability access to the home and essential facilities.
Domiciliary care, rehabilitative and long-term health-maintenance care for veterans who require minimal medical care but do not need the skilled nursing services provided in nursing homes.
33. What tax consequences are there regarding the proceeds from a Viatical Settlement?
A. The Federal Health Insurance Portability and Accountability Act states that the proceeds from a Viatical Settlement is tax-free for a terminally or chronically ill person. Under HIPPA, the viatical company must be a qualified “Viatical Settlement provider.”
34. What are the conditions for the tax-free status of a Viatical Settlement?
A. The Viatical Settlement provider must be licensed to do business in the state in which the policyholder resides, otherwise the tax-free status is lost.
35. What is the advantage of funding long-term care through private and/or family foundations?
A. A tax planning trust vehicle can be created to provide substantial benefits to an individual, their spouses and their offspring, while at the same time taking of long-term care needs and estate planning. Advantages:
• If properly structured, contribution amounts are not limited.
• The foundation can be in addition to any other existing retirement plans.
• The plan does not require participation by employee, co-workers or any person other than the donor if created during a working person’s life.
• Trust assets cannot be reached by creditors and will not be included in the donor’s estate.
• Income for the foundation manager is available without penalty before age 59-1/2.
• The gains in a private foundation are taxed at 2 percent if the trust has properly filed for tax-exempt status and made proper yearly charitable contributions to recognized 501 (C) 3 organizations.
36. Are there any disadvantages to family or private foundations?
A. The funds are not liquid (a donor cannot withdraw funds for personal use except for reasonable compensation).
37. What types of homes are eligible for a reverse mortgage?
A. Vacation or second homes are ineligible, as are farms, co-op apartments, houseboats and mobile homes. Manufactured homes on their own foundations on separate lots are eligible.
38. What is the minimum age to qualify for a reverse mortgage?
A. To qualify for a reverse mortgage the homeowner must be at least 62 years of age.
39. Are the qualifications similar when the home is jointly owned?
A. If the husband and wife own the home, both must be at least 62 years old because the reverse mortgage payments are based on the life expectancy of the youngest homeowner.
40. What are private and/or proprietary reverse mortgage loans?
A. Private and/or proprietary reverse mortgage loans in some cases can be, or are much bigger and they tend to cost more.
41. Can you summarize the major characteristics of reverse mortgages?
A. Some characteristics of a reverse mortgage are as follows:
• Unlike a customary mortgage or a home equity credit line, which require monthly payments for the borrower to the lender, a reverse mortgage requires payments from the lender to the borrower.
• The reverse mortgage homeowner never need make any repayments to the lender until the loan “matures” and the homeowner sells, permanently moves out, or dies. There is no personal liability.
• The principal residence is the only reverse mortgage security.
• Homeowner credit and income are irrelevant for obtaining a reverse mortgage (although you can’t be in bankruptcy).
• The older you are, the more reverse mortgage money you can receive.
• A borrower can take the loan all at once, monthly or as needed or in amounts that the borrower selects.
42. When is a reverse mortgage the best option?
A. Potential borrowers must still do the fairly complicated math to determine whether a reverse mortgage is better than a home equity loan, buying a less-expensive house, renting an apartment, or moving t an assisted-living facility.
43. What are some of the disadvantages of reverse mortgages?
A. A reverse mortgage would be expensive for those who sell a house quickly, in part because of high closing costs attached to the loan. Because a borrower makes no monthly payments the amount owed grows larger over time and the money left after selling a house and paying off the loan generally grows smaller. The borrower must also continue to pay property taxes, insurance and repairs. If not, the reverse loan becomes due and payable in full.
44. With a reverse mortgage is it possible for the homeowner to owe more than a home’s value?
A. A borrower can never owe more than a home’s value at the time the loan is repaid.
45. Where is the best place to obtain information on reverse mortgages?
A. Additional information on reverse mortgages can be obtained from:
The American Association of Retired Persons (AARP) brochure “Home Made Money: A Consumer’s Guide to Reverse Mortgages,” call 1-800-209-8085, or visit the website, www.aarp.org/money/revemort/revmort_basics/a2003-04-07-homemademoney.html.
The National Reverse Mortgage Lender Association: 1-202-939-1760, or visit the website, www.reversemortgage.org.
46. What other benefits are offered through a reverse mortgage?
A. In some cases, the initial mortgage insurance premium charged by FHA for a reverse mortgage can be waived if some of the proceeds of the loan are used to purchase a qualified long-term care insurance plan.
47. Are there any estate implications involving reverse mortgages?
A. Once a senior homeowner with a reverse mortgage sells the house, moves out permanently or dies, and the reverse mortgage is satisfied, amounts available under the homestead exemption are paid to the homeowner before involuntary lien creditors receive anything.
48. Realistically, what funding is available for the provision of long-term care or assisted-care, etc?
A. There are three general funding streams available for the provision of long-term care and assisted-living care: personal assets, Medicaid or long-term care insurance.
49. How are the provisions of the Pension Protection Act of August/2006, specifically Section 844, beneficial for long-term care?
A. The Pension Protection Act allows life insurance and annuity companies to offer long-term care riders on top of regular policies. It provides that internal charges against the values in annuities and permanent life insurance policies used to pay long-term care insurance premiums are not taxed.
50. How much insight can you provide regarding details of the legislation involving life insurance, annuity contracts and long-term care insurance riders?
A. Section 844 of the Pension Protection Act of 2006, effective after 2009, will allow for life insurance and annuity contracts to carry a long-term care insurance rider on a tax-favored basis. Under the new Code Section 7702B(e)(1), such riders will be treated for tax purposes as a separate contract.
51. How did the Pension Protection Act of 2006 influence Code Section 1035?
A. The new law broadens the provisions for Code Section 1035 tax-free exchanges to allow for exchange of life and annuity policies into long-term care insurance contracts.
52. Are other Code Sections of the Pension Protection Act of 2006 influenced by the new law?
A. Under the new Code Section 6050U (a), insurance companies will now be required to file information reporting returns with the IRS disclosing:
1. The amount of aggregate charges made against each contract for the calendar year.
2. The amount of the reduction of the investment in the contract because of these charges,
3. The name, address, and TIN of the individual who is the holder of each contract.
53. Has the value of the new provision been compromised by the new rules of the Pension Protection Act of 2006?
A. The mechanism that Congress chose to implement the non-taxable use of insurance and annuity cash values substantially diminishes the value of the new provisions.
54. How much money is actually saved by having long-term care insurance?
A. Long-term care insurance saves an average of $1668 in out-of-pocket expenditures per month for those insured who use home care and $2458 per month for those insured who require nursing home care.
55. What are the significant benefits of a life insurance contract with a long-term rider?
A. The benefits are:
• A long-term care rider provides flexibility in paying monthly expenses using the death benefit of the policy.
• It allows the insured to extend the benefits for a significant period of, up to the limits of the policy (using only what is needed).
Depending on the insured’s age and the company used, a life insurance policy could be purchased providing $1,000,000 of death benefit and a long-term care rider that could be twice the death benefit; the long-term care rider could be set at 200% of the death benefit.
56. What are the advantages of a self-funded plan?
A. The primary advantages of a self-funded plan are control and cost.
57. Why would an employer choose self-funded plans?
A. Employers typically decide to self-fund coverage because (a) the risk represented by the benefits does not appear to warrant the risk and profit charges of the insurer, (b) if unfavorable fluctuations are system wide (such as low interest rates), the insurer will still expect the employer to pay for the bad experience and (c) it allows the employer more control over the design of the program.
58. How is the risk profile of long-term care coverage similar to that of most pension plans?
A. Long-Term coverage has a risk profile much like pension plans in that most of the funding for long-term care occurs well in advance of the need for services (a typical age of long-term care benefit initial users is age 80, compared to pension benefits, which typically start at age 65). If a fund has a gain or loss, these costs could be amortized over a period of years, as with a pension plan.
59. As an employer, what questions regarding tax-status in self-funding medical benefits should I be concerned with?
A. There are three salient tax-status questions in self-funding medical benefits:
1. Can an employer deduct contributions?
2. Do the funds accumulate without being taxed on the investment income?
3. Can an employer make pre-tax contributions?
60. Can an employer deduct contributions in self-funding medical benefits?
A. Under a Voluntary Employee Benefit Association, or VEBA the answer is yes, an employer can deduct contributions in self-funding medical benefits, but an employee must still contribute with after tax-dollars (as he must for insured long-term care).
61. Do the funds for self-funding medical benefits accumulate without being taxed on the investment income?
A. Yes, the funds do accumulate without being taxed on the investment income under a Voluntary Employee Benefit Association, or VEBA, but an employee must still contribute with after-tax dollars (as he must for insured long-term care).
62. Can an employer make pre-tax contributions?
A. Employer contributions are always excluded from employees’ income. Contributions must be “comparable” for all employees participating.
63. Is there a study or documented research that compares the financial desirability of buying long-term care versus the opportunity cost of investing the required funds at several rates of return?
A. Yes. In the Journal of Financial Planning, Nov 2006, a study which compares the financial desirability of buying long-term insurance versus the opportunity cost of investing the required funds found that because of the timing differences between premium payments and potential receipts of benefits, the study computes the net present value of buying long-term care insurance based on the present value of the expected receipts minus the present value of premium payments.
64. Can you identify forms of self-insuring?
A. Postponing the purchase of long-term care insurance until an older age, buying policies with high deductibles, or carrying fewer riders on potential perils that can be self-insured.
65. Is there specific data that supports whether it is prudent for an individual to self-insure for long-term care?
A. Specifically, various rates of return were used in a comparison of the present net value of expected (pretax) cash outflows and inflows when one buys long-term care insurance at quoted rates. The results: when the net present value (NPV).
66. Does the data on self-insurance give consideration to the length of stay in a nursing facility?
A. Yes. Information on the length of stay of each person, in each age range for males and females was considered in the 1999 NNHS Survey.
67. Is there additional data that may support and/or refute the data from the survey of the NNHS?
A. An alternative source is Kemper and Murtaugh’s 1991 study, which reported average stays of 19 months for males and 26 months for females.
68. Can you explain how that works?
A. If long-term care is needed, the insured has a pool of money to pay the long-term care bills, leaving their other assets intact to leave to beneficiaries. If long-term care is not needed or not all of the money was used for long-term care, the beneficiaries would receive any remaining funds in the pool via an income-tax free death benefit.
69. What are the proposed economics of combining long-term care insurance with a life insurance or annuity contract?
A. In combining long-term care insurance with a life insurance or annuity contract lower costs may be achieved by partially offsetting the otherwise separate insurance risks that the products cover. Combining long-term care insurance with a cash value life insurance or annuity contact enables an “asset-based” approach to coverage, allowing the cash value to be leveraged in order to achieve lower-cost long-term care coverage.
70. Why favor and what is the significance of an “asset-based” approach?
A. Under an “asset-based” approach the cash value is used to self-insure against part of the risk of chronic illness, reducing the insurance company-covered risk and the associated cost of insurance.
71. Under the Health Insurance Portability and Accountability Act of 1996, IRC Section 7702B are amounts paid in respect of the long-term care need subject to income tax?
A. If the long-term care component of the combination meets the qualifications requirements laid down in Section 7702B, all amounts paid in respect of the long-term care need are received free of income tax, including amounts funded by the life insurance cash values.
72. What of the long-term care related charges funded out of contract cash values?
A. Long-term care related charges funded out of contract cash values are treated as distributions for tax purposes, a disincentive that isn’t addressed by Section 7702B.
73. In the case of long-term care and annuity combinations is there a rule like IRC Section 7702B(e)?
A. No. In the case of long-term care and annuity combinations there is no rule like IRC Section 7702B(e).
74. Is there an alternative to long-term care and annuity combination in lieu of the Internal Revenue’s refusal to allow the long-term care component qualified status?
A. Yes. To overcome the problem, Title X of H.R. 2830 the Pension Protection Act of 2005 would treat the long-term care and annuity components of a combination product as separate contracts provided that the annuity is not part of a qualified retirement plan or otherwise employer purchased.
75. Would amounts received from either long-term care and/or annuity contracts be tax-free?
A. If the long-term care coverage meets the IRC Section 7702B qualification requirements and the long-term care needs is triggered, amounts received from both the annuity and the long-term care components would be tax-free.
76. Does H.R. 2830 have any other implications relative to IRC Section 7702?
A. H.R. 2830 also would accord “qualified additional benefits” status under IRC Section 7702 (f) (5) (A) for qualified long-term care coverage provided in connection with a life insurance contract; that the IRC Section 7702 guideline premiums and net single premiums and the IRC Section 7702A 7-pay premiums would be increased to enable pre-funding of the coverage.
77. According to Health Savings Account contribution rules are self-employed, partners and S-Corporation shareholders considered employees?
A. No! The self-employed, partners and S-Corporation shareholders are generally not considered employees and cannot receive an employee contribution according to HSA contribution rules.
78. Are benefits available for home care, nursing home care that are exclusive to veterans?
A. Yes! There is little known and often misunderstood Veterans Administration benefit known as Aid & Attendance.
79. What benefit and/or benefits do Aid & Attendance provide?
A. Aid & Attendance can help pay for in-home care, or car in nursing homes, assisted living facilities or board care homes.
80. Who qualifies for Veterans Administrations’ Aid & Attendance benefits?
A. Most veterans and surviving spouses of veterans who are in need of such care can qualify.
81. What are the qualifications for Aid & Attendance?
A. To qualify, a veteran must have a medical reason why he/she cannot live independently and he/she must need regular assistance and care with the activities of daily living, such as bathing and dressing. He/she can qualify if he/she is disabled due to the issues of old age such as dementia, Alzheimer’s, Parkinson’s disease, multiple sclerosis, and other physical and mental illnesses.
82. Who is qualified to give information to Veterans Administration regarding ability to live independently, need regular care with the activities of daily living?
A. A letter from the veteran’s physician is usually enough information for the Veterans Administration.
83. Is the veteran administration Aid & Attendance benefit based on income?
A. Yes! The program is means tested; the applicant must meet certain income and asset requirements.
84. Exactly, what is Veteran Administration’s Aid & Attendance?
A. It is a federal entitlement program offering a monthly payment from the Department of Veterans Affairs.
85. Who is eligible to apply?
A. Those who are eligible to apply for Aid & Assistance, any veteran who served 90 days or more on active duty, with at least one day during wartime, and was honorably discharged.
86. What is the maximum benefit payment amount?
A. A veteran is eligible for up to $1,554 per month, while a surviving spouse is eligible for up to $998 per month. A couple is eligible for up to $1,842 per month.
87. How long do benefits from Aid & Attendance last?
A. The benefits from Aid & Attendance are a lifetime benefits.
88. Are there any tax consequences applicable to the benefits provided by Aid & Attendance?
A. No. The benefits from Aid & Attendance are tax-free.
89. Is there an application process involved when applying for Aid & Attendance benefits?
A. Yes! The paperwork necessary to submit for Aid & Attendance benefits can be complicated and burdensome. Successful completion of the application process requires a familiarity with V.A. requirements, forms, preferences, and peculiarities.
90. If I have money in savings and assets, can I still qualify for Aid & Attendance benefits?
A. Yes! You don’t have to be poor to qualify. Even veterans and spouses with considerable assets and savings are receiving payments.
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