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At Fleming Financial Services, Inc., our role is to assist our clients in defining and realizing their financial objectives and goals. We work with our clients to implement personalized plans designed for their unique situations. Our areas of concentration are: Retirement planning, Estate and Wealth Transfer strategies, and Business Continuation planning. We emphasize the importance of conducting our business with integrity and professionalism. As a member of PartnersFinancial, an independent national financial services company, we are able to provide access to sophisticated resources for the benefit of our clients. Some of the professionals with our firm are currently registered to conduct business through NFP Securities, Inc. With those additional resources in place, we help facilitate the complex corporate and personal financial decisions our clients must make.
Today’s Long-term Care Coverage: Tax Consequences - Part 6
Uncle SamLTC and Accelerated Death Benefit for Chronic Illness riders are intended to be tax qualified, but under certain circumstances, the rider benefits may be taxable. Generally, income exclusion for all benefit payments from all sources to the insured will be limited to the higher of:
  • The Health Insurance Portability and Accountability Act (HIPAA) per diem limit, which is the maximum daily benefit used in determining the maximum monthly benefit and established by the Internal Revenue Service annually on Jan. 1 (for 2013 this limit is $320 a day), or
  • The actual costs incurred by the insured or by the policyowner on behalf of the insured (if insured and policyowner are not the same).
If the insured has more than one policy that will provide LTC or chronic illness benefits, receipt of benefit payments must be aggregated to determine taxability. To the extent aggregate benefits for the insured received from all sources exceed the tax law limits, the excess benefit amount will be taxable as ordinary income to the recipient. Additionally, charges associated with the rider may be taxable if the policy is a modified endowment contract and there is gain in the policy at the time the charges are dedu cted, or if the cost basis of the policy goes below $0 because charges are considered to be distributions from the policy for federal income tax purposes. The ownership structure of the life insurance policy with the rider will also affect how the benefits are taxed under various tax provisions (e.g., income tax, gift tax, estate tax). Careful consideration should be given to all situations where the owner and insured is not the same person, and particular consideration should be given to business-related scenarios.  Insureds or policyowners who collect benefits outside of the U.S. must also determine if those benefits will be subject to U.S. taxation, taxation from the country they are residing in or any other form of tax consequence. This information is based on a general understanding of current federal income tax rules and is not intended as legal or tax advice. Clients should consult their attorney or tax advisor for answers to specific tax questions. Other Considerations There are a few other aspects of these riders and their underlying policies that must be considered when determining the best solution for clients.
  • Residual Death Benefit Availability – With an LTC rider, the full death benefit can be paid with the possibility of the availability of a residual death benefit exceeding the original death benefit. With an Accelerated Death Benefit for Chronic Illness rider, no residual death benefit exceeding original death benefit is paid out.
  • Maximum Amount of Available Benefit – Insurers have varying guidelines as to the maximum amount of benefit that is available to the client. This is either determined as a maximum monthly benefit, as a percentage of the total death benefit or as a specific dollar amount, e.g., $1 million. Clients should purchase the rider that will provide them with sufficient benefits at the time of need.
  • Maximum Face Amount per Policy – Some insurers have limits on the maximum amount of death benefit they will permit with a policy that includes an LTC or Accelerated Benefit for Chronic Illness rider. For example, an insured may stipulate that the maximum face amount on the base life insurance policy with the rider is $1 million, and the insured would have to purchase a separate policy if they require a death benefit greater than that amount. The separate policy will not have the rider.
  • Claims Processing – Insurers have varying methodology in regard to the claims process associated with these riders. Once it is necessary to make a claim, the first step is to reach out to the insurer and notify them that the insured would like to start receiving the rider benefits. It is important that the insured or anyone assisting them in the claims process completes all necessary paperwork and any other requirements, as dictated by the insurer, in a timely and orderly manner so that the rider benefits can be received as soon as the elimination period is met.
All of the differences and details should be considered and carefully evaluated when advisors and clients are determining whether or not an LTC or Accelerated Death Benefit for Chronic Illness rider is the best LTC solution for a particular situation. Additionally, the varying guidelines may make one rider more suitable than another based on a client’s LTC planning needs and expectations. Every aspect of these riders and of all other LTC solutions, such as a stand-alone LTC policy or a life/LTC combination policy, needs to be examined and understood before entering into acontract. Summary Long-term care planning should be a key topic of discussion when working with clients to plan for their retirement and estate planning needs. Although there is no “one size fits all” LTC solution, there are a lot of different options clients can choose from and customize to address their circumstances, preferences and planning goals. To determine what the best LTC solution is for each individual client, it is extremely important that agents and advisors thoroughly understand all of today’s various LTC options and the intricacies associated with each.   Copyright © 2013 NFP. All rights reserved.    
Thomas Joseph
Other articles by: Thomas Joseph
Categories: Fleming Financial Services, Fleming Financial, General Information, Tax Strategies, Long-term Care
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