“ LTC Insurance for Owners and Executives ” ( JofA , Mar.05, page 53) speaks about the advantages of using a C-corporation as a funding vehicle for long-term-care insurance. The article is quite useful. However, one issue needs to be clarified.
The article talks about the “return or refund of premium” rider that many LTC insurance policies offer. It states: “When the policy contains a ‘refund of premium’ feature, the insured’s beneficiary can receive all premiums paid into the policy as a tax-free benefit at the death of the insured (IRC section 7702B(b)(2)(c)). This can be especially attractive for stockholder/employees as the premiums were originally deductible, fully or partially, by the company.”
Clarification is needed because how the premium refund is characterized makes a big difference.
IRC section 7702B(b)(2)(C) is part of a list of requirements an LTC insurance contract must meet to be classified “qualified” under HIPAA. It says any “premium refunds and dividends paid under the contract are to be applied as a reduction in future premiums or to increase future benefits.” Clear enough.
The next paragraph talks about exceptions to this rule for a refund made on the death of the insured or upon a complete surrender or cancellation of the contract that cannot exceed the aggregate premiums paid. No decrease in premiums or increase in future benefits is possible as a contract no longer exists.
The last part of the section says: “Any refund given upon cancellation or complete surrender of the policy will be includable in income to the extent that any deduction or exclusion was allowable with respect to the premiums.”
The bottom line is that if a return of premium is activated at the death of the insured, the refund may be subject to income tax. At times there is a desire to characterize these refunds as being the same as life insurance, but they aren’t.
The open discussion of business tax issues surrounding LTC insurance is a valuable endeavor, as this is a relatively new subject on most professionals’ radar screens. The limited pay option (10 pay) just happens to be one of the best ideas in the marketplace today, but may not be available forever. The more clarity and definition that is brought forward benefits all.
Professionals with a fiduciary responsibility to their clients would be well served to increase their client value propositions by discussing “insured LTC plans” and “limited pay options” while the opportunity still presents itself.
Jeff Reilly, LUTCF
East Longmeadow, Mass.
Author’s reply: Unfortunately, an article is not a textbook and, therefore, cannot address every possible detail, provision and interpretation in the limited space allotted. Fortunately, there are many sources of useful information about long-term care and long-term-care insurance available to CPAs and others, so a practitioner who wants to immerse himself in greater detail can do so.
Paul Devore, CLU, CFP