Long-Term Care Insurance Is No Lay-Up For Biz Owners
The appeal of long-term care (LTC) insurance as an employee benefit seems obvious. It helps insulate workers from the high cost of nursing home care, and there can be tax advantages for both employer and employee. But choosing worker coverage that provides the best tax break may result in a policy that doesn’t help employees when they need long-term care.
LTC insurance helps cover the high costs of health care later in life. When an individual loses the ability to complete certain daily tasks, insurance benefits are paid to help finance living costs and treatment, usually in a nursing home. Most LTC policy owners are over age 60, though insurers suggest that anyone over 50 may want to consider coverage.
LTC policies come in two basic flavors: tax qualified and non-tax qualified. “Qualified” refers to the taxation of benefits and how the premium payments are treated for tax purposes by employers and employees. The attraction of qualified plans is that they guarantee that benefits won’t be taxed; but in practice, benefit payments from non-qualified plans are unlikely to be considered taxable. In addition, businesses can generally deduct the cost of providing either type of LTC insurance; though again, only qualified plans ensure you can take a deduction.
Where the two types of LTC plans clearly differ, however, is in how readily they pay benefits when an insured employee needs care. Tax-qualified plans require a policy owner to be chronically ill. That’s defined as: Being unable, without significant assistance, to perform two out of six activities of daily living (ADLs) for at least 90 days; or requiring significant supervision as a result of severe cognitive impairment.
In contrast, non-tax-qualified plans are a bit more flexible, giving you three ways to qualify for a benefit payment
- The inability to perform two out of six ADLs without assistance
- Cognitive impairment (though these plans don’t specifically require it to be “severe”)
- Certification by a physician that care is medically necessary
Qualified plans all require that disability be severe if benefits are to be paid. But severity is subjective, and insurers frequently decide that an insured person’s impairment isn’t sufficient to trigger coverage. Non-qualified plans, in general, tend to be more liberal in approving benefit payments.
Approximately 85% of the policies that are sold are tax qualified. In the past, some of the insurance companies that have offered non-tax qualified LTC plans are Bankers Life and Casualty, Mutual of Omaha, Penn Treaty Network America, Physicians Mutual, and United of Omaha Life.
Though small businesses, like individuals, are always looking to minimize their tax burden—all the more when providing expensive employee benefits—opting for a tax-qualified LTC plan may be a false economy, providing minimal tax benefits and possibly short-changing employees just when they need the help the insurance is intended to provide.
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