While universal life policies with qualified long-term care (QLTC) riders had been providing clients with a viable protection alternative to stand-alone traditional long-term care insurance for more than 20 years, there was no annuity counterpart prior to the enactment of the PPA.
The addition of the QLTC rider allows the life insurance contract to be accessed for living benefits by paying down the face amount when the insured qualifies for LTC benefits.
The PPA modified the rules that govern tax-free exchanges of life insurance and annuity contracts into updated contracts that include the QLTC rider or into traditional stand-alone LTCI.
Monthly QLTC rider fees on these types of policies are taken from cash values, and these internal policy distributions are viewed as distributions from the policy.
However, the provisions of the PPA change the tax treatment of such distributions that are used to pay rider fees for QLTC riders, and such distributions are no longer treated as distributions of income.
* A life insurance policy without a long-term care rider can be exchanged for a life insurance policy with a QLTC insurance rider.
Current tax law provides that qualified LTC (QLTC) insurance riders to life contracts will receive favorable tax treatment in several ways.
Second, QLTC benefit payments will be exempt from income tax (except for certain indemnity design contracts where the per diem payment exceeds the daily maximum, which in 2009 is $280 per day and then only the excess of per diem payment over the maximum is taxable).
QLTC riders can be added to single premium contracts, and it doesn't matter what kind of underlying life insurance chassis (variable, indexed, fixed) is used.
Combination life/QLTC contracts generally provide that a given percentage of the face amount or death benefit will be available on a monthly basis to cover QLTC expenses.
Of course, if the insured should die before the death benefit is fully paid out to cover QLTC costs, the remaining death benefit is payable to heirs.
Many insurers address this by providing QLTC coverage that commences when the base policy has been fully paid out.