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Q&A: Uncle Sam and LTCI
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October 12, 2000: 9:04 a.m. ET
Tips on tax liabilities for life insurance and long-term care policies
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NEW YORK (CNNfn) - Income tax is not payable on the death proceeds from life insurance, but often is required if the policy is cashed before death. And keep in mind that long-term health insurance should contain benefits that will pay for care wherever a person is likely to need it; at home, in adult day care, in assisted living, or in a nursing home.
Navigating the ins and outs of your insurance policy can be tricky business. As such, homeowners and drivers frequently fail to realize they're underinsured, or overinsured, as the case may be, until it's too late.
Here's your chance to find out the facts from a group of industry experts at the Consumer Federation of America (CFA). Questions related to senior health insurance, including Medicare and long-term care policies, are fielded by Bonnie Burns, director of consumer education for California Health Advocates, the state's insurance counseling program. Check back each week to read the latest Q&A on our Insurance page.
Send CNNfn your insurance questions at insurance@cnnfn.com. Don't forget to include your name and home town. And keep in mind, not all questions can be answered.
Question: Are proceeds from life insurance always non-taxable? - Marvin
Answer: An American Council on Life Insurance booklet says: " . . . no income tax is payable on proceeds payable to beneficiaries." You should read the word "death" in this prior to "proceeds." Surrender of a policy before death frequently creates taxable income. Also, depending on the policy owner, life insurance can be part of one's estate and create or add to estate tax liabilities. - CFA
Question: I live overseas but will return to the U.S., of which I'm a citizen, for retirement in a couple of years. This will be two years before I turn 65, and thus I will need to buy health insurance until Medicare clicks in. While I have a policy at present, it is not transferable to the U.S. My medical history is a little weak (one heart bypass, two hip replacements) but I seem to be in good health now. Where do I start in trying to get a health insurance policy - both for me, my wife and two under-21 children - once I return? - John, in Switzerland
 Answer: You may want to work for two years to get group coverage. Otherwise, it will depend on where you live. Coverage will be expensive and will likely have pre-existing condition limitations for your history of heart and hip problems. Some states have good plans for "uninsurable" people if you have trouble obtaining coverage. There are agents who specialize in hard cases that may be able to find complete coverage for you, but it may be pricey. - CFA
Question: I live in D.C. but own and rent 2 condos in Florida and one in Wisconsin. How can I get owner's liability insurance for all three? - James
Answer: If you want to do it all on one policy, you will need to talk to a commercial insurance broker to see if it is possible. Multi-state risks can be written that way, usually. Certainly you can cover all of these properties with separate policies. - CFA
Question: Why after 20 years of driving with no accidents and the same insurance company am I still paying auto insurance? I am in effect paying for the other person's mistakes, there should a limit on how much an insurance company can take from an individual. I personally have paid for at least two if not three brand new cars through insurance premiums. Has there been legislation to control how much insurance companies can "take" from you? Feeling raped by insurance. - Russell
Answer: Insurance is there to protect you if you need it. You received protection for all these years. Something could have gone wrong. Count yourself fortunate that you did not have to use insurance -- it is not fun to have an accident even if you are fully covered. Most insurance companies offer a discount for good driving. You are surely getting the lowest price based on your excellent driving record. But you are right about one thing: It is too bad that companies don't adopt the European system that builds the credit over decades. You would have a 75 percent discount if you lived in Europe. Here in America, most companies only use a 3-year record for a discount and the discount rarely is more that 10 percent to 20 percent - CFA
Question: Can you please outline the wisdom of purchasing long-term care insurance? My parents are 67 and 65 and fairly healthy. They are considering buying long-term care insurance that would pay $36,000 annually. Premiums are $100 per month for each, or $2,400 per year. Is this a good deal? - Unnamed
Answer: The decision to purchase long-term care insurance should be part of a financial planning strategy involving the use and disposition of assets over a lifetime by both spouses. In general, men and women have different risks of needing care. Women are more likely to live longer and get their care in institutions because they have no live-in caregiver. They are also more likely to experience a reduction of their income when their spouse dies and need to cut expenses. - Bonnie Burns
Any long-term care policy should contain benefits that will pay for care wherever a person is likely to need it; at home, in adult day care, in assisted living, or in a nursing home. The total amount of benefits should be available to pay for care in any of these settings. While people want to be taken care of at home, some cannot. The policy should include at a minimum, inflation protection at 5 percent compounded annually.
Costs have been doubling about every ten years and buying a policy without inflation protection is similar to losing 5 percent of the daily benefit each year. The elimination period should be equal to the amount you can afford to pay. Today a 90-day elimination period will cost approximately $12,000 out of pocket before a policy will begin to pay for care. Medicare is unlikely to cover little if any of those 90 days of care.
 The daily benefit should be equal to the amount of the daily cost that cannot be covered by income or assets. The total number of years a policy will pay should have some relationship to the amount of assets a person would otherwise have to spend. Its important to note that few people can afford lifetime coverage. While the cost of the premium will determine the total amount of benefits you can buy based on your age, it should not dictate the daily benefit you need, the elimination period you can afford or whether you include inflation protection.
The company selling the policy should have a minimum of ten years of experience selling this type of insurance and should not have had any rate increases during that time. The state you live in sets the standards for this type of insurance and you should check with your state insurance department to become familiar with those standards. You should check with several rating agencies to confirm the financial stability and claims paying ability of the company.
You can also check with your state insurance counseling program listed in the back of the "Guide to Health Insurance for People on Medicare." The American Association for Retired Persons (AARP) and United Seniors Health Cooperative, both in Washington D.C., also publish helpful consumer information on this type of insurance. Compare policies from several different companies, talk to several agents, and check with your accountant or tax attorney or an elder law attorney before you buy a policy. Do not buy the cheapest policy with similar benefits unless you can afford to pay higher premiums later.
If you are eligible for any group coverage be sure to compare those benefits with a policy you can buy as an individual on the open market. You cannot get too much information before you buy. - Bonnie Burns, California Health Advocates 
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