Long-term insurance and long-term care planning (individual and group)

Activities of daily living triggers, benefit periods and daily limits, inflation protection, tax-qualified policies, hybrid life and long-term care contracts, partnership programs, and Medicaid's role, with items asking which policy design or funding approach fits a client's age, wealth and family situation.

Tax-qualified long-term care insuranceMedicaid

Practice question for this objective

Free sampleRisk Management and Insurance Planningmedium

Priya, aged 61 and in good health, holds 400,000 dollars in a bank account she has earmarked for a possible long-term care need. She objects to paying premiums on a stand-alone policy that returns nothing if she never claims. Her planner proposes moving 150,000 dollars into a single-premium life insurance policy carrying a qualified long-term care rider, which accelerates the death benefit to reimburse qualified long-term care services, with any death benefit not used for care passing to her two children. Which statement best describes the tax treatment of this arrangement?

AAccelerated payments are taxable as ordinary income to the extent they exceed her basis in the contract, because accelerating the death benefit is treated as a partial surrender of the policy cash value.
BThe single premium is deductible as a medical expense in the year it is paid, subject to the age-based dollar limit that applies to tax-qualified long-term care premiums, and the care payments are then taxable.
CAccelerated payments for qualified long-term care services are excluded from her gross income under the rules for qualified long-term care insurance contracts, and any unused death benefit is paid to her children income tax free. Correct
DAccelerated payments are received tax free only if she is certified terminally ill with a life expectancy of under 24 months, so a chronic illness acceleration would be fully taxable to her.

A qualified long-term care rider on life insurance pays care benefits income tax free and leaves any unused death benefit tax free to beneficiaries. A hybrid contract solves the client's objection to a use-it-or-lose-it premium by putting one pool of money behind two outcomes. Where the rider meets the definition of a qualified long-term care insurance contract, amounts paid to reimburse qualified long-term care services for a chronically ill insured are excluded from gross income, and reimbursement of actual expenses is not subject to the per diem cap that applies to indemnity style contracts. The acceleration reduces the death benefit rather than surrendering cash value, so the gain-above-basis rule for withdrawals does not apply. Whatever death benefit remains is paid on death and keeps the life insurance income tax exclusion. The trade-off to disclose is the opportunity cost of the 150,000 dollars and the loss of the medical expense deduction that eligible stand-alone premiums can attract.

Why A is wrong: This is tempting because a partial surrender of a life policy is indeed taxed on gain above basis. It is wrong because an acceleration under a qualified long-term care rider is not a surrender; it is a benefit payment governed by the long-term care rules, so the gain-first surrender analysis does not apply.

Why B is wrong: This is tempting because eligible premiums on a stand-alone tax-qualified policy do count as a medical expense within an age-based annual limit. It is wrong here because a premium paid for a life insurance contract is not deductible, and the age-based limit cannot rescue it.

Why C is correct: Correct. The rider is treated as a qualified long-term care insurance contract, so amounts accelerated to reimburse qualified services for a chronically ill insured are excluded from income, and the remaining death benefit retains the ordinary income tax exclusion for life insurance proceeds paid on death.

Why D is wrong: This is tempting because the accelerated death benefit rules do give terminal illness its own favourable treatment. It is wrong because chronically ill insureds are covered by a separate exclusion, so a long-term care acceleration is not taxable simply because the insured is chronically rather than terminally ill.

See more CFP practice questions, answers explained.

Exam traps in Risk Management and Insurance Planning

Answers that look right on this material and are not. Each one is a distractor from a different question in the CFP bank for this domain.

No benefits are payable, because she can still perform all six activities of daily living without any hands-on assistance from another person.
Why it is wrong: This is tempting because the activities of daily living trigger is the one candidates memorise, and Margaret genuinely fails none of the six. It is wrong because a tax-qualified contract has two alternative triggers, and severe cognitive impairment does not require any loss of physical function at all.
Medicare Part A will continue to pay for the custodial nursing home care for as long as he needs it, because the qualifying inpatient hospital stay has already been met.
Why it is wrong: This is tempting because the qualifying inpatient stay was genuinely satisfied and Part A did pay for the rehabilitation. It is wrong because Part A covers skilled care for a limited number of days per benefit period and stops once care is purely custodial, which is exactly what Harold now needs.

Examworthy is not affiliated with or endorsed by CFP Board. Original, blueprint-aligned practice material only.