From the February 2001 Health Insurance Underwriter magazine. HIU is the official publication of the National Association of Health Underwriters(www.nahu.org), which represents the interests of 16,500 health insurance professionals nationwide.

The Great LTC Debate Continues

Agents dilemma over the sales of TQ and NTQ long-term care plans

Opinion by John F. Jones, Jr., CLTC Winchester, VA

It has been nearly four years since HIPAA was implemented and agents are still facing the dilemma of which long-term care policy to sell: the tax-qualified (TQ) or the non tax-qualified (NTQ). The dilemma is real and today several issues continue to find their way into the debate. For example, which type of policy carries the best value for the policyholders? Do TQ policies pay client benefits adequately? What are the differences in the possible tax deductions and real savings between these two types of policies? What liabilities do industry professionals need to recognize?

Many senior citizens buy the TQ policies believing in the assurance of financial savings through tax deductions and the promise of non-taxation of benefits. However, without understanding all the details on the unique differences of the two standard policies, including benefit triggers and specific terminology for benefits, seniors are often led to purchase TQ plans based solely on the assumed savings advantages. These savings, guaranteed in the form of a supposed tax deduction, significantly have an effect on a small percentage of the LTC clients nationally, a fact that refutes the benefits of a TQ policy to most individuals.

Congress, the United States Treasury and HIPAA (the legislation that governs these matters) have remained silent on the taxation of non-TQ benefits. This lack of action has left many companies to assume that benefits paid by NTQ plans are subject to taxation. This assumption, however, has not been confirmed by the enforcement of the Internal Revenue Service.

For example, insurance companies have detailed the monetary benefits that policyholders have received from their LTC claims through the issue of 1099Cs. With the 1099 filing, the filing requirement is met, but benefits remain untaxed. According to a letter from the Department of Treasury, "The fact that all LTC benefits must be reported does not necessarily mean that all LTC benefits are taxable."

In seeking clarification on the taxation issue, Congressman George Nethercutt, Jr. (R-WA) inquired about the position of the IRS on the matter. In response to Congressman Nethercutt's query, the IRS wrote, "Long-term care benefits from non-qualified policies that satisfy the definition of accident or health insurance and are amounts received for personal injuries are also not taxable." (A complete copy of this letter has been widely circulated in our industry.) Simply stated, under normal circumstances, benefits of both NTQ and TQ policies are non-taxed.

The state of West Virginia has officially eliminated the confusion about which LTC premiums policyholders can deduct by implementing legislation that makes all LTC plans completely tax-deductible. With this legislation in place, the citizens of West Virginia can now deduct all premiums directly from their state income tax. This landmark legislation is an example to every state in the country, and each state should implement a statute of equal merit.

Another real problem with the TQ policies is a senior citizen's access to benefits. All TQ policies use definitions such as substantial assistance and adjectives such as severe to possibly deny benefits to policyholders.

A policyholder of a NTQ policy recently appeared on CNN's morning news program. Eighty-six-year-old Roberta Webb of Fairfax, Virginia, testified that she purchased a non-tax qualified LTC policy for herself. Her early planning and good choices have served her well over the years, providing her with financial security at the time of need. Far from any "severe" impairment, Mrs. Webb is using the benefits from her NTQ policy for maintenance of her instrumental needs and chores of daily living such as shopping, dressing and other household activities. "Because of an automobile accident, I am not able to care for myself completely. Without this policy, I would have had to go to a nursing home, and I would hate that. I would miss my friends and being in my own home," she said.

The around-the-clock, in-home care provided by her NTQ policy provides Mrs. Webb the help she must have to remain in her home where she is happy and secure. With a TQ policy, the benefit triggers would have denied her the funds needed to do so. Today, this retired schoolteacher is able to maintain her own residence and independent lifestyle. "I have told my children how well this policy has provided for us, and now they are buying policies also," Mrs. Webb reported.

Agents who sell LTC coverage should be responsible for fully explaining the details of policies and, therefore, must be fully aware of the benefit triggers and how these triggers influence payments to policyholders. Agents should ask their companies for a complete explanation of how they apply the terms substantial assistance and severe in their benefit triggers. Ambiguous terminology used to determine benefits indicates an HMO approach to LTC insurance payments. The industry should eliminate this practice and abolish this disservice to the senior citizens of America.

Problems with benefit triggers can also exist in the form of omission, such as the omission of the phrase "medical necessity as determined by the insured's personal physician" as a reason for benefits. While this critical terminology is a part of many NTQ plans, the absence of "medical necessity" terminology in all TQ policies creates an issue of concern for agents and policyholders alike. An article in Consumer Reports (October 1997) explains the caveat of the TQ plans that exclude "medical necessity" as a reason for covered care:

A third pathway to benefits is "medical necessity.” The policy will pay if you have a medical condition -- congestive heart failure, say, or coronary-artery disease that makes you too frail to care for yourself even though you may be able to perform all activities when taken individually. Note that certain "tax qualified" policies . . . do not include medical necessity among the recognized reasons for long-term care. Beware of them.

Citing Mrs. Webb's claim again, she would not have qualified for benefits under a policy that did not include medical necessity as a qualification for benefits. This single provision made her policy a major asset to her financial security in her retirement years. Agents should be completely clear and thorough when explaining the benefit triggers and other policy language issues. Policyholders need to understand that they are much more likely to have easy access to benefits with the more liberal NTQ plan.

Though some agents fear lawsuits resulting from selling the NTQ plans and their supposed taxation, they should be more apprehensive of suits filed as a consequence of errors and omissions exposure. Policyholders purchase policies with the expectation of benefit payments when the need arises and proper filings are made. When companies have a high rate of denials for whatever reason, omission of medical necessity coverage or inclusion of words such as severe to define conditions, policyholders will react strongly and negatively. Frankly, agents should be concerned about exposure to lawsuits for claim denials that will be filed by unhappy policyholders who needed help but did not qualify for the promised benefits.

For example, in March 2000 the Virginia Retired Teachers Association put out to bid its LTC program, as mandated by its bylaws. One of the questions that was asked of the potential insurers was the percentage of claim denials. One carrier who promotes the TQ plan admitted to an 18% claim-denial ratio. Another carrier who places emphasis on NTQ plans reported a 1.7% claim-denial ratio. Being a discriminating consumer, the association chose the company with the NTQ plan, which paid 98.3% of claims submitted.

Agents face a tremendous liability when nearly one out of five claims filed by their policyholders is denied. Many of these claims are in assisted-living facilities where clients can pay more than $40,000 per year out of pocket while their LTC companies continue to collect payments and deny benefits. This is especially frustrating for policyholders when they bought their LTC policies in good faith to provide for their financial security at the time of need.

I believe the insurance industry should implement the following to clean up this market:

1) Companies should stop arm-twisting agents into scaring seniors about the taxation of benefits.

2) The LTC insurance industry should advocate that all LTC plans be tax-deductible in order to preserve the claim paying integrity of our industry. We should be fair to seniors who place their trust in us, and let open competition drive the marketplace.

3) The term medical necessity should be included as a legitimate benefits trigger in all plans.

4) Stop the restrictive HMO-style approach in paying legitimate LTC claims.

5) Develop minimum loss ratio requirements in order to properly price products.

Our senior citizens deserve more from their LTC insurance companies than some policies are currently providing. To better serve them, it is time to put aside the ambiguous terminology and policy omissions that plague the LTC insurance industry. It is time to clarify the assumed taxation benefit of TQ policies versus the more liberal benefits of NTQ policies. It is time to call for leadership in the industry that will assist agents in eliminating the potential for errors and omissions exposure through nonpayment of LTC claims. It is time for policies to provide a claim-denial ratio that will make our industry unilaterally proud. This challenge cannot go unanswered.

John F. Jones, Jr., CLTC, has more than 20 years of experience and has produced annualized premiums in long-term care insurance of more than $4 million. Mr. Jones can speak with authority on the subject of insurance sales to senior citizens. His agency, Central Atlantic Insurance Service, located in Winchester, VA, primarily markets long-term care insurance and has more than $11 million of LTCI in force.

Pull quotes: Ambiguous terminology used to determine benefits indicates an HMO approach to LTC insurance payments. The industry should eliminate this practice and abolish this disservice to the senior citizens of America.

Agents should be completely clear and thorough when explaining the benefit triggers and other policy language issues. Policyholders need to understand that they are much more likely to have easy access to benefits with the more liberal NTQ plan.

                                                                                                
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