Long-term care premium refund death benefit met contract rules

Plain-English summary

A life insurance company offered group long-term care coverage with a premium stabilization feature. The feature could use a calculated amount to offset future premiums or, when the insured died, pay the remaining amount to the insured's estate or beneficiary as a refund-of-premium death benefit. The death benefit was limited to a redacted percentage of owner-paid premiums, reduced by insurance claims, and could not include premiums paid from the stabilization amount. The IRS ruled that the benefit complied with section 7702B(b)(2)(C) because it was payable only at death and could not exceed aggregate premiums paid. The feature therefore was consistent with treating the contract as a qualified long-term care insurance contract.

Ruling snapshot

• Question: Was the refund-of-premium death benefit consistent with the qualified long-term care insurance contract requirements?
• Outcome: approved
• Key authorities: IRC §§ 7702B(b)(1), 7702B(b)(2)(C), 816(a)

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201930025                                              Third Party Communication: None
Release Date: 7/26/2019                                        Date of Communication: Not Applicable
Index Number: 7702B.02-00
                                                               Person To Contact:
------------------------                                       --------------------------------, ID No. ----------
--------------------------------------------------------       ------------------
------------------------------------------------------------   Telephone Number:
--------------                                                 ----------------------
------------------------------                                 Refer Reply To:
--------------------------------------                         CC:FIP:B04
                                                               PLR-130021-18
                                                               Date:
                                                               April 30, 2019




Taxpayer         = -----------------------------------------------------------------------------------------
Number A         = ----
Number B         = ----
Number C         = ------------------------------------------------------------------------------------------------
Number D         = ------------------------------------------------------------------------------------------------
Number E         = -----


Dear ------------------:

This letter is in response to the submission by your authorized representatives
requesting a ruling under § 7702B of the Internal Revenue Code concerning a refund of
premium paid as a death benefit to be offered as part of certain qualified long-term care
insurance contracts.

                                                     FACTS

Taxpayer is a life insurance company as defined by § 816(a) and is licensed to offer
long-term care insurance contracts.

Among the contracts offered by Taxpayer is a group long-term care contract (“Contract”)
and the certificates thereunder (“Certificates”), which evidence participation in the
Contract. The owner of a Certificate is the covered insured under the Contract. The
Certificates are intended as qualified long-term care insurance (“QLTCI”) contracts
under § 7702B.

A Certificate entitles the owner to insurance coverage of qualified long-term care
services within the meaning of § 7702B(c)(1). Coverage under a Certificate is subject to
daily benefit and benefit period limitations. All premiums for a Certificate are paid by the
Certificate owner; no portion of the premiums is contributed by an employer. The
Certificate is guaranteed renewable and premiums are subject to adjustment after
issuance on a class-wide basis. The Certificate includes a premium stabilization feature
(“PS Feature”) and a refund of premium death benefit (“ROP Death Benefit”).

Under the PS Feature, a premium stabilization amount (“PS Amount”) may be applied in
one or both of the following ways:

1. After the insured has attained age Number A, and the insured has been enrolled for
at least Number B years, the PS Amount if sufficient in amount may be applied to offset
Number C percent of the Certificate owner’s premium obligation for a specified period
(such as for the next Number D months) under the Certificate. This option automatically
applies unless the Certificate owner affirmatively opts out of this use of the PS Amount.

2. Upon the death of the insured, any remaining PS Amount will be paid to the
Certificate owner’s estate or beneficiary as an ROP Death Benefit. The ROP Death
Benefit cannot exceed Number E percent of the premiums that have been paid for the
Certificate less insurance benefit claims paid under the Certificate. Only premiums paid
by the owner can be refunded under the ROP Death Benefit. Premiums paid from the
PS Amount cannot be refunded under the ROP Death Benefit.

No benefit under the PS Feature is provided upon termination of a Certificate other than
a termination due to the death of the insured. If a contingent nonforfeiture benefit
becomes applicable under the Certificate, the PS Feature ceases to apply and no ROP
Death Benefit is provided on the death of the insured.

The PS Amount with respect to a Certificate is determined under a formula, which may
be adjusted from time to time, but the PS Amount, and resulting ROP Death Benefit,
can never exceed Number E percent of premiums paid. Apart from the ROP Death
Benefit, the PS Amount cannot be received in cash, nor can it be assigned or pledged
as collateral for a loan.

                                REQUESTED RULING

The ROP Death Benefit under the Certificate is consistent with the requirements of
§ 7702B(b)(2)(C) for the treatment of the Contract as a QLTCI contract within the
meaning of § 7702B(b).

                                          LAW

Section 7702B(b)(1) defines a QLTCI contract as any insurance contract that meets all
of the requirements listed in §§ 7702B(b)(1)(A) – (F).

Section 7702B(b)(1)(D) provides that a QLTCI contract cannot provide for a cash
surrender value or other money that can be paid, assigned, or pledged as collateral for
a loan, or borrowed, other than as provided in § 7702B(b)(1)(E) or § 7702B(b)(2)(C).

Section 7702B(b)(1)(E) provides that all refunds of premiums, and all policyholder
dividends or similar amounts, under such contract are to be applied as a reduction in
future premiums or to increase future benefits.

Section 7702B(b)(2)(C) provides that § 7702B(b)(1)(E) shall not apply to any refund on
the death of the insured, or on a complete surrender or cancellation of the contract,
which cannot exceed the aggregate premiums paid under the contract. Section
7702B(b)(2)(C) also provides that any refund on a complete surrender or cancellation of
the contract shall be includible in gross income to the extent that any deduction or
exclusion was allowable with respect to the premiums.

                                       ANALYSIS

While §§ 7702B(b)(1)(D) and (E) limit the noninsurance payments that can be made
from a QLTCI contract, § 7702B(b)(2)(C) allows a QLTCI contract to provide a refund on
the death of the insured that does not exceed the aggregate premiums paid for the
contract. The ROP Death Benefit is payable only upon the death of the insured and
thus satisfies the timing restriction imposed by § 7702B(b)(2)(C). Also, the amount of
the ROP Death Benefit cannot exceed Number E percent of the aggregate premiums
paid by the Certificate’s owner. Such a benefit is therefore consistent with the amount
restriction imposed by § 7702B(b)(2)(C). The ROP Death Benefit represents a refund
on the death of the insured that is consistent with the requirements of § 7702B(b)(2)(C).

                                         RULING

Based on the representations presented, the ROP Death Benefit under the Certificate is
consistent with the requirements of § 7702B(b)(2)(C) for the treatment of the Contract
as a QLTCI contract within the meaning of § 7702B(b).

The ruling contained in this letter is based on information and representations submitted
by Taxpayer and accompanied by a penalty of perjury statement executed by an
appropriate party. This office has not verified any of the material submitted in support of
the request for ruling and it is subject to verification on examination.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter, including, but not limited to, any Code section other than § 7702B(b)(2)(C),
whether Taxpayer qualifies as a life insurance company under §816(a) and whether the
Contract is a QLTCI under § 7702B.

This ruling is directed only to Taxpayer. Section 6110(k)(3) provides that it may not be
used or cited as precedent. A copy of this letter must be attached to any federal income
tax return to which it is relevant.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

                                       Sincerely,



                                       John E. Glover
                                       Senior Counsel
                                       Office of Associate Chief Counsel
                                       (Financial Institutions & Products)