Effective January 1, 1997, the Health Insurance Portability and Accountability Act (HIPAA), codified as IRC Section 7702B, created Qualified Long Term Care Insurance (QLTCI). For business owners and high net worth individuals, QLTCI represents an enlightened decision to implement an efficient Income and Estate tax reduction strategy wrapped around an unparalleled insurance buying opportunity: a triple tax benefit.
In addition to the tax reduction opportunities, QLTCI provides business owners and high net worth individuals with income tax-free indemnification for potential LTC-related losses, while contributing to the preservation of current and accumulated assets. Further, a limited number of insurance companies offer QLTCI contracts guaranteeing that upon the death of the insured, 100% of all premiums paid will be refunded, regardless of claims.
Income Tax Reduction for Business Owners
IRC Section 7702B(a)(1) provides that a QLTCI contract shall be treated as an accident and health insurance contract. This is extremely favorable treatment for “C” Corporation business owners and self-employed individuals (other than “S” corporation owners) who legitimately employ the owner-employee’s spouse. When a business owner purchases a QLTCI contract, premiums are 100% tax deductible, and the indemnity benefits received in the event of a QLTCI loss are income tax free, subject to limitations provided by IRC Section 7702B(d). For year 2001, the maximum income tax free daily indemnity benefit is $200. In addition, the IRC imposes no non-discrimination coverage requirements and QLTCI contracts are an “excepted” benefit from ERISA reporting and disclosure requirements. (Reference IRC Sections 162, 105, 213, 7702B and 29 USC 1191b)
Estate Tax Reduction for High Net Worth Individuals
High net worth clients can apply the power of the tax law to remove substantial sums of money from their estates simply by purchasing a single premium or ten-pay QLTCI contract for others. With such a purchase, the donor has an unlimited gift tax exclusion for payment of “medical care expenses” of a donee. [IRC Sections 2503(e)(2)(B), 7702B and 213(d)(1)(D)]. Donees of the QLTCI contract do not have to be a dependent or family member. Under this definition, QLTCI premiums qualify as a medical care expense as long as the payment is made directly to an insurance company and not the insured. Indemnity benefits received for a QLTCI loss are income tax free up to the maximum daily benefit stated above. In addition, 100% of all premiums paid may be refunded to the donee’s beneficiary, regardless of claims. This results in an efficient income tax free transfer of wealth.
How QLTCI Premium Refunds are Taxed
The special rules under IRC Section 7702B(b)(2)(C) specifically state that premium refunds on a complete surrender or cancellation of a QLTCI contract shall be included in gross income to the extent any deduction or exclusion was allowable with respect to QLTCI premiums. However, in the authors’ opinion, the special rules imply that premium refunds received by a beneficiary upon the death of an insured are not included in gross income.
QLTCI simply makes sense
The most compelling reason QLTCI coverage should be considered is in the HIPAA law itself. Congress passed, and the President signed, a law that essentially declared private long-term care insurance as the preferred way to finance the cost of long-term care expenses facing Americans, and supported that proposition with mandated benefits and tax incentives.
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