LTC Myth Busters

Myth Busters myth ADVANCED MARKETS Exploring five common misconceptions about Long-Term Care (LTC) and Chronic Illness riders MYTH 1: Reimbursement LTC riders cannot be owned in trust Reimbursement riders may be used in trusts, including irrevocable trusts, so long as the payment of the accelerated death benefit is to the owner of the contract (i.e., the Trustee), maintaining the integrity of the trust. John Hancock’s reimbursement rider pays any acceleration of death benefit for long-term care needs to the owner of the contract, unless otherwise instructed. However, where appropriate (such as when the insured is a primary beneficiary of a trust) a Trustee could elect for payments to go directly to a care provider, adding additional flexibility and ease of use. Regardless of the type of LTC rider, careful consideration should always be given as to the suitability and tax considerations of owning a policy with an LTC rider in trust — especially an Irrevocable Life Insurance Trust (ILIT). Please call Advanced Markets if you would like to talk about a specific case where life insurance with an LTC rider is being considered in a Trust. MYTH 2: Premiums paid on a policy with an LTC rider are tax deductible The tax code specifically denies any deductions for long-term care premiums when such payments are made as a charge against cash value of a life insurance or annuity contract. Many LTC riders, including John Hancock’s rider, charge the LTC rider fee against the cash surrender value of the life insurance contract, making deductions impermissible. It is important to know how the premium associated with a hybrid policy or policy with an LTC rider is charged in order to determine if a deduction may be available. MYTH 3: LTC riders and Chronic Illness riders are one and the same A Chronic Illness rider is similar to an LTC rider in that it allows for the acceleration of a death benefit for a chronically ill insured. However, unlike LTC riders, Chronic Illness riders do not meet the requirements of IRC 7702B, which governs the treatment of “qualified long-term care insurance.” Consequently, Chronic Illness riders are subject to different rules and regulations than are applicable than LTC riders and cannot be marketed as long-term care insurance or as providing long-term care benefits. In addition, Chronic Illness riders may require a physician to certify that the insured’s condition is expected to remain for the rest of the insured’s life. This “permanency” condition is not permitted on LTC riders, which means someone can receive benefits for a recoverable condition, such a hip fracture or a stroke. Taxation of the accelerated death benefit from a Chronic Illness rider and an LTC rider are generally the same. See Myth 4 for exception to this rule. LIFE-5586ML 11/17 Page 1 of 2. Not valid without both pages. MYTH 4: Business-owned policies with an LTC or Chronic Illness rider receive the same tax advantages as individually-owned policies In most cases, amounts received from an LTC or Chronic Illness rider for qualified expenses should be received income-tax free. However, Section 101(g)(5) of the Tax Code provides that accelerated death benefit amounts received by a taxpayer other than the insured do not receive the same tax-free treatment when such taxpayer has an insurable interest in the insured “by reason of the insured being a director, officer, or employee of the taxpayer or by reason of the insured being financially interested in any trade or business carried on by the taxpayer.” For example, if a business owns a policy with a Chronic Illness rider insuring the life of an employee, director, or shareholder, an acceleration of death benefit from the insurance contract for LTC expenses paid to the business should not be received income-tax free under 101(g). However, for those riders that are qualified under 7702B, like John Hancock’s rider, other code provisions may apply to keep these distributions from the policy to the business free of tax. Clients should seek the advice of tax counsel before implementing a business- owned arrangement. MYTH 5: Medicaid or Medicare will pay for your clients long-term care needs Medicaid and Medicare are government-sponsored programs designed to cover health care costs, but they vary greatly. Medicare primarily provides health insurance for individuals aged 65 and older or with certain disabilities. Medicare pays for skilled and rehabilitative services if certain conditions are met, for a limited period of time (e.g., up to 100 days). Medicare does not pay for long-term care, which is typically custodial care. Medicaid covers health care, as well as long-term custodial care, for individuals who meet strict eligibility requirements. Generally, only those with a few thousand dollars of assets and whose income meets low thresholds will qualify for Medicaid. In addition, Medicaid typically pays for care provided in a skilled nursing facility, as home care is limited under the program. Clients should consult legal counsel regarding their state-specific Medicaid laws. For more information, please contact your local John Hancock Salesperson or call the Advanced Markets Group at 888-266-7498, option 3. Note to producers: John Hancock requires all LTC Certification courses be approved by ClearCert in order to be accepted as valid training to solicit and sell the LTC rider (www. ClearCert.com). Not applicable in CA, CT, DC, IN, HI, MS, NM and NY. For Agent Use Only. This material may not be used with the public. This material should be regarded as educational information and is not intended to provide specific health care advice. Individuals should consult with legal or other advisors as appropriate. The Medicare website (www.medicare.gov) contains additional information and publications. This material does not constitute tax, legal, investment or accounting advice and is not intended for use by a taxpayer for the purposes of avoiding any IRS penalty. Comments on taxation are based on tax law current as of the time we produced the material. All information and materials provided by John Hancock are to support the marketing and sale of our products and services, and are not intended to be impartial advice or recommendations. John Hancock and its representatives will receive compensation from such sales or services. Anyone interested in these transactions or topics may want to seek advice based on his or her particular circumstances from independent advisors. Insurance policies and/or associated riders and features may not be available in all states. John Hancock’s Long-Term Care (LTC) rider is an accelerated death benefit rider and may not be considered long-term care insurance in some states. There are additional costs associated with this rider. The Maximum Monthly Benefit Amount is $50,000. When the death benefit is accelerated for long-term care expenses it is reduced dollar for dollar, and the cash value is reduced proportionately. Please go to www.jhsalesnet.com to verify state availability. Insurance products are issued by: John Hancock Life Insurance Company (U.S.A.), Boston, MA 02210 (not licensed in New York) and John Hancock Life Insurance Company of New York, Valhalla, NY 10595. © 2017 John Hancock. All rights reserved. MLINY110717040 Approved ML 20-002611 Expiration 9/1/2021 Page 2 of 2. Not valid without both pages..

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