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Long Term Care Insurance products underwritten and issued byBerkshire Life Insurance Company of America, Pittsfield, MA, a wholly owned stock subsidiary of

The Guardian Life Insurance Company of America, New York, NY.

8509-3-05

Tax Treatment of Qualified

Long Term Care Insurance

A Continuing Education Course for Agents & Brokers

For educational & training purposes only. Not for use with the general public.

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Today’s Agenda

Overview of Long Term Care

HIPAA 1996 & Long Term Care Insurance

Defining tax qualified LTCI

Tax treatment of LTCI for individuals

Tax treatment of LTCI for business owners

Health Savings Accounts & LTCI

State tax treatment of LTCI

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What Is Long Term Care?

Skilled, custodial or maintenance careassistance with activities of daily living (ADLs)

Wide range of services for those with… Chronic illnessPermanent disabilityCognitive impairment

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Where is LTC Provided?

Home Health Care

Adult Day Care

Assisted Living

Nursing Home

Source: The Wide Circle of Caregiving. Kaiser Family Foundation. et al, June, 2002

82%

18%

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Who Needs Long Term Care?

35 million people in the U. S. areover age 656 million need long term care*

77 million baby boomers will begin turning 65 in 2011

*Long Term Care Planning: A Dollar and Sense Guide. United Seniors Health Council,January 2002

"Study: Baby boomers could 'strengthen community life,'" Janet Kornblum, USA Today, June 14,2004

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Who Needs Long Term Care?

Longer life expectancy = greater probability of need for care

People over age 85… the fastest growing segment of our population50%+ will need nursing care*

Source: A Profile of Older Americans, Administration on Aging, 2002

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Long Term Care is a Family Issue

Care-giving: difficult decisions &economic consequences

Geographically dispersed families

Baby Boomers:The “sandwich” generation

Two income families (the caregiver works)

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Source: National Study by the National Alliance for Care giving and the National Center on Women and Aging, Brandeis University

Formal Adjustments to Work Schedule Due to Caregiving

13%

16%

20%

22%

33%

64%

0% 25% 50% 75%

Use Sick Days/Vacation Time

DecreasedHours

Leave ofAbsence

Full- toPart-Time

Quit Job

Retired Early

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Annual Average Cost of Care*

Home care - $23,556 Based on hourly rate of $18.12 at 5 hrs/visit

and 5 visits/wk

Nursing home - $70,080 Based on private room rate of $192.00

Nursing home (high cost areas) - $93,947

*Metlife Mature Market Institute Market Survey of Nursing Home and Home Care Costs, September 2004

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The Cost of Care

Annual Nursing Home Costs are projected to increase at 5.8% per year.

Based on the previous example:

Source: Health Spending Projections Through 2013, Office of the Actuary, Centersfor Medicare and Medicaid Services, February 2004

Rate ofInflation

2004 2014 2024 2034

$70,080

5% $114,153 $185,943 $302,882

5.8% $123,155 $216,425 $380,333

6% $125,503 $224,756 $402,504

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Who Pays for Long Term Care?

Medicare8%

Medicaid41%

Private LTC Ins.5%

Out of Pocket46%

Source: www.ltcfeds.com, 2000 Medicare15%

Medicaid17%

Private LTC Ins.5%

Out of Pocket63%

Nursing Home

Home Care

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Medicare & Private Health Insurance Are Not The Answer

Medicare only pays for “skilled” care designed to get you better most long term care is non-skilled care

Examples of non-skilled care: oxygen therapy or respiratory therapy for

emphysema patients catheter maintenance colostomy drain help with bathing, dressing or other ADLs

Source: Shelton Marketing Services, Inc. 2003

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Medicaid Is The Wrong Answer

Medicaid pays for what you do not want: nursing home care

Medicaid is welfare: stringent income & asset requirements to qualify

Limits your choices

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Medicaid Limitations*

Generally below $2,000 in assets

Spousal monthly income allowance $1561

Look Back Period 3 years 5 years for transfers into certain trusts

Unlimited penalty period

* Refer to your state’s Medicaid rules

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Is Medicaid “Planning”the Solution?

Converts countable assets into inaccessible assets by giving themaway or placing them in trust.

It’s a guessing game impossible to judge the correct timing who do you plan for?

If not done right, assets are still subject to mandated estate recovery upon death

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LTC: Growing Consumer Awareness

71% of Americans claim to be aware of the problem*

50% of Americans age 45 or older have discussed the possible need for long term care with their adult children*

American workers rank the importance for LTCI equal to that of group life insurance**

*American Council of Life Insurers, 2003

** Insurance Employee Benefit Survey. Prudential Financial, 2003

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Tax Treatment ofQualified Long Term

Care Insurance

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National Association ofInsurance Commissioners

NAIC Model Regulations, 1993Must provide at least 12 months of coverageMust be reimbursement or indemnity contractsMust cover treatment provided in settings

other than hospitals

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Health Insurance Portability and Accountability Act of 1996 (HIPAA)

Federal law that defined tax qualified LTCI

Qualified LTCI policies receive favorable tax treatment

Any LTCI policy issued prior to January 1, 1997 is grandfathered

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Tax Qualified LTCI:Federal Guidelines

Required Benefit TriggersChronically ill-unable to perform 2 ADLsDisability must be expected to last at least 90

daysor

Cognitive impairment must require “substantial supervision”

Must follow a plan of care prescribed by a licensed health care provider

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Benefit Triggers

Chronically IllRequires substantial assistance with at least

two of six activities of daily living (ADLs)ADLs: dressing, eating, bathing, toileting,

transferring and continenceRequires assistance for more than 90 days

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Benefit Triggers

Cognitive ImpairmentDeterioration or loss in intellectual capacity

Substantial supervisionAnother person must protect you from threats

to your health & safety, such as associated with Alzheimer’s

– e.g. supervision of patient

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Tax Qualified LTCI:Other Requirements

Must be guaranteed renewable

May not, in general, duplicate Medicare

Must meet NAIC regulations

Must have no cash surrender value

Must apply all refunds or dividends as a reduction of future premiums or an increase to future benefits, except upon death or total policy surrender

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Tax Treatment of Qualified LTCI

Qualified LTCI is treated as accident & health insurance1

Premiums can be deductible2

Benefits received are not generally taxable income3

Un-reimbursed cost of qualified LTC services are deductible as medical expenses

1 IRC Sec. 7702B(a)(3)

2 IRC Sec. 213(d)(1)(D), 213(a)

3 IRC Sec. 105(b), 7702B(a)(2), 7702B(d), 213(d)(1)

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Tax Qualified LTCI Benefits

100% of the proceeds on a reimbursement policy are tax free

Policy benefit $300/day

Actual cost of care $250/day

Reimbursement amount $250

Total Taxable Benefit $0

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Tax Qualified LTCI Benefits

With indemnity policies the first $240 or actual cost of care is tax free

Policy benefit $300/day

Actual cost of care $250/day

Taxable benefit $50/day

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Taxation of Premiums: Individuals

For income tax purposes, qualified LTCI premiums qualify as a medical care expense.

Deduction is subject to age-based eligible premium limitations, which are adjusted annually. IRC Sec. 213(d)(1)(D)

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2005 Eligible Premium Amounts

Eligible LTCI Premium

Age* Limits

40 or younger $270

41-50 $510

51-60 $1,020

61-70 $2,720

71 or older $3,400

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Taxation of Premiums: Individuals

Only eligible premium is deductibleMust itemize deduction on schedule A line 1Added to other unreimbursed medical

expensesAmount that exceeds 7.5% of Adjusted Gross

Income (AGI) is deductible

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Married Couple (ages 62 & 58)

Adjusted Gross Income $65,000

Eligible premiumAge 62 $ 2,720

Age 58 $ 1,020

Other medical expenses $ 2,200

Total medical expenses $ 5,940

7.5% of $65,000 $ (4,875)

Excess which can be deducted $ 1,165

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Employer-Paid LTCI

Employer may deduct 100% of premiums paid on behalf of W-2 employees & spouses1

Age based eligible premium limits do not apply

C-Corp. may deduct 100% ofpremiums for:Owner-employees,spouses, tax dependents,

& retirees

1 PL 104-491, IRC Sec. 7702B(a)(3)

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Employer-Paid LTCI

Premium excluded from employee’s income1

Benefit is generally tax free to employee2

1 IRC Sec. 106(a), 7702B(a)(3)

2 IRC Sec. 105(b), 7702B(a)(2), 7702B(d), 213(d)(1)

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Employer-Paid LTCI

Employer designates or “carves-out” specific classes of employees that will be covered with LTCI.1

1 IRC Sec. 1.105-5, 1.106-1

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Employer-Paid LTCI

May not be paid through:Cafeteria plan1 Flexible spending account2 Salary reduction

1 IRC Sec. 125(f)

2 IRC Sec. 106(c)(1)

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Sole Proprietorship

May deduct 100% of eligible premium for:Owner Spouse Tax dependents i.e. parents & other relatives

Form 1040 line 30

May deduct 100% of actual premium for:Non-owner employeesTheir spouses

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Sole ProprietorshipEligible Premium Deduction

Self-employed 55 year old owner.

Premium for owner $ 3,280

Owner’s adjusted gross income (AGI) $ 100,000

Deduction for eligible premium $ ( 1,020)

Taxable Income $ 98,980

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Sole ProprietorshipTotal Premium Deduction

55 year old owner employs his49 year old wife

Wife is the owner of the joint policy

She and her owner/husband are the insureds

Premium $ 4,264

Company’s

Taxable Income $100,000

Deduction for actual premium $ 4,264

Taxable Income $ 95,736

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Sole ProprietorshipPaid up (10 Pay) Deduction

55 year old owner employs his49 year old wife

Wife is the owner of the joint policy

She and her owner/husband arethe insureds.

Premium $ 10,248

Company’sTaxable Income $100,000

Deduction for actual premium $ 10,248

Taxable Income $ 89,752

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Partnerships & S-Corporation Shareholders*

Premiums are deductible by the firm1

Premiums represent income to these owners2

These owners may deduct the eligible premium3

*Greater than 2% shareholder

1 IRC Sec. 162 (a)

2 IRC Sec. 707(c)

3 IRC Sec. 162(I), 213(D),213D(10)

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Rules of Attribution:S-Corporations

Situation:

Spouse of shareholder is a W-2 employee of the corporation

Corporation pays & deducts premium for both

Premium must be added to income of both shareholder & spouse

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Health Savings Accounts (HSAs)

Tax exempt account established to pay qualified medical expenses

Individuals, under 65, covered by a high deductible health plan (HDHP)

Contributions are tax deductible

Distributions for qualified medical expenses are tax-free

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Health Savings Accounts (HSAs)

HSA Contribution Limits (2005) the lesser of the annual deductible or $2,650

for single / $5,250 family“catch-up” for 55+ starts at $600 in 2005

HDHP Limitationsminimum deductible: $1,000 single /

$2,000 familymaximum out-of-pocket: $5,150 single /

$10,200 family

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HSA’s & Long Term Care Insurance

Distributions generally cannot be used to pay health insurance premiums

However, long-term care premiums are treated as qualified medical expenses

HSA’s offered under a cafeteria plan may be used to pay LTCI premiums

Tax deduction limited to the eligible premium

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State Tax Treatment of LTCI

More than half of states offer some form of tax incentive on an individual’s or employer’s state taxes for 2004

17 states offered some form of above the line tax incentive (not subject to exceeding a % of AGI) without respectto income.

See the handout - Quick Reference Guide to State Tax Treatment of Long Term Care Insurance

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Summary

Overview of Long Term Care

HIPAA 1996 & Long Term Care Insurance

Defining tax qualified LTCI

Tax treatment of LTCI for individuals

Tax treatment of LTCI for business owners

Health Savings Accounts & LTCI

State tax treatment of LTCI

46

Long Term Care Insurance products underwritten and issued byBerkshire Life Insurance Company of America, Pittsfield, MA, a wholly owned stock subsidiary of

The Guardian Life Insurance Company of America, New York, NY.

8509-3-05

Tax Treatment of Qualified

Long Term Care Insurance

A Continuing Education Course for Agents & Brokers

For educational & training purposes only. Not for use with the general public.