Qualified Long-Term Care Insurance Contracts

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 1 [TD 8792] RIN 1545-AV56

TITLE: Qualified Long-Term Care Insurance Contracts

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final Income Tax Regulations
relating to consumer protection with respect to qualified long-term
care insurance contracts and relating to events that will result in
the loss of grandfathered status for long-term care insurance
contracts issued prior to January 1, 1997. Changes to the applicable
law were made by the Health Insurance Portability and Accountability
Act of 1996. The regulations affect issuers of long-term care
insurance contracts and individuals entitled to receive payments
under these contracts. The regulations are necessary to provide
these taxpayers with guidance needed to comply with these changes.

DATES: Effective date. These regulations are effective December 10,
1998.

Applicability date. Section 1.7702B-1 (concerning consumer
protection provisions) of the regulations applies with respect to
contracts issued after December 10, 1999. Section 1.7702B-2
(concerning special rules for pre-1997 contracts) of the regulations
is applicable January 1, 1999.

FOR FURTHER INFORMATION CONTACT: Katherine A. Hossofsky, (202)
622-3477 (not a toll free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments to the Income Tax Regulations (26
CFR part 1) to provide rules relating to consumer protection with
respect to qualified long-term care insurance contracts and relating
to events that will result in the loss of grandfathered status for
long-term care insurance contracts issued prior to January 1, 1997.

A notice of proposed rulemaking (REG-109333-97) under section 7702B
of the Code was published in the Federal Register on January 2, 1998
(63 FR 35). Written comments were received from the public, and a
public hearing was held on May 13, 1998.

After consideration of all the comments, the regulations proposed by
REG-109333-97 are adopted as revised by this Treasury decision.

Explanation of Statutory Provisions

The Health Insurance Portability and Accountability Act of 1996
(Public Law 104-191, 110 Stat. 1936, 2054 and 2063)(HIPAA) added
section 7702B to the Internal Revenue Code of 1986 (the Code).
Section 7702B establishes the tax treatment for qualified long-term
care insurance contracts. Section 7702B(a)(1) and (3) of the Code
provide that a qualified long-term care insurance contract is
treated as an accident and health insurance contract and that any
employer plan providing coverage under a qualified long-term care
insurance contract is treated as an accident or health plan with
respect to that coverage.

Section 7702B(a)(2) of the Code provides that amounts (other than
policyholder dividends and premium refunds) received under a
qualified long-term care insurance contract are generally excludable
from gross income as amounts received for personal injuries and
sickness.

Section 213(d)(1)(D) of the Code was amended by section 322 of HIPAA
to provide that eligible long-term care insurance premiums, as
defined in section 213(d)(10) of the Code, are medical care
expenses.

Under section 7702B(b)(1)(F) of the Code, a qualified long-term care
insurance contract must meet the consumer protection provisions of
section 7702B(g) of the Code. In addition, section 4980C of the Code
imposes an excise tax on issuers of qualified long-term care
insurance contracts that do not provide further consumer
protections.

Section 7702B of the Code applies to contracts issued after December
31, 1996. Section 321(f)(2) of HIPAA treats a contract issued before
January 1, 1997, as a qualified long-term care insurance contract
under section 7702B(b) of the Code, and services provided or
reimbursed under such a contract as qualified long-term care
services under section 7702B(c) of the Code, provided the contract
met the long-term care insurance requirements of the State in which
the contract was sitused at the time the contract was issued.
Section 321(f)(2) of HIPAA also provides that in the case of an
individual covered on December 31, 1996, by a State long-term care
plan under section 7702B(f) of the Code, the terms of the plan on
that date are treated as a contract meeting the long-term care
insurance requirements of that State.

Section 321(f)(4) of HIPAA provides that for purposes of applying
sections 101(f), 7702, and 7702A of the Code, neither the issuance
of a rider that is treated as a qualified long-term care insurance
contract nor the addition of any provision required to conform any
other long-term care rider to the requirements applicable to a
qualified long-term care insurance contract is treated as a
modification or material change of the contract.

Explanation of Provisions

The final regulations provide guidance concerning ! the consumer
protection requirements that apply to qualified long-term care
insurance contracts under sections 7702B(g), 7702B(b)(1)(F), and
4980C of the Code; and ! the grandfather provisions of section
321(f)(2) of HIPAA under which pre-1997 contracts are treated as
qualified long-term care insurance contracts if certain conditions
are met.

The standards in the final regulations are based on safe harbors
that were originally set forth in Notice 97-31 (1997-1 C.B. 417),
and in the regulations proposed in REG-109333-97.

Notice 97-31

Notice 97-31 was issued to provide interim standards for taxpayers
to use in interpreting the new long-term care provisions and to
facilitate operation of the insurance market by avoiding the need to
amend contracts. For example, Notice 97-31 includes interim guidance
on the determination of whether an individual is a chronically ill
individual, including safe harbor definitions of the terms
substantial assistance, hands-on assistance, standby assistance,
severe cognitive impairment, and substantial supervision. The
standards contained in Notice 97-31 include interim guidance on both
the consumer protection provisions and the scope of the statutory
grandfather provisions that apply to long-term care insurance
contracts issued before 1997.

Consumer Protection Requirements

Under sections 7702B(b)(1)(F), 7702B(g), and 4980C of the Code,
qualified long-term care insurance contracts and issuers of those
contracts are required to satisfy certain provisions of the Long-
Term Care Insurance Model Act (Model Act) and Long-Term Care
Insurance Model Regulation (Model Regulation) promulgated by the
National Association of Insurance Commissioners (NAIC) for long-term
care insurance as of January 1993. The requirements relate to
guaranteed renewability, unintentional lapse, disclosure,
prohibitions against post-claims underwriting, inflation protection,
and prohibitions against pre-existing conditions exclusions and
probationary periods. Section 4980C imposes an excise tax on an
issuer of a qualified long-term care insurance contract if, after
1996, the issuer fails to satisfy certain requirements, including
requirements relating to application forms, reporting, marketing,
appropriateness of recommended purchase, standard format outline of
coverage, delivery of a shopper's guide, right to return, outline of
coverage, and incontestability. Most of these requirements are based
on the NAIC Model Act and Regulation.

The final regulations reflect the standards that were set forth in
Notice 97-31 and in the regulations proposed in REG-109333-97. For
example, the consumer protection requirements will be considered
satisfied if a contract complies with State law in a State that has
adopted the related NAIC model or a more stringent version of the
model.

Commentators generally approved of the consumer protection
provisions of the proposed regulations. Some commentators suggested
that the provisions should be applied on a prospective basis, such
as for long-term care insurance contracts issued more than one year
after publication of the final regulations.

Consistent with this suggestion, the final regulations apply to
contracts issued after December 10, 1999.

Commentators suggested that if any State has adopted a Model Act or
Model Regulation requirement, such State's interpretation of that
requirement should be considered probative but not controlling of
the meaning of the analogous requirements for purposes of applying
sections 7702B(g) and 4980C of the Code to a contract sitused in
another State. This suggestion was not adopted. If a particular
State has adopted a Model Act or Model Regulation requirement, that
State's interpretation should apply to determine whether the
contract meets that State's requirement.

If a State has not adopted a particular requirement, the
determination of what interpretation should apply for purposes of
section 7702B(g) and 4980C of the Code is more appropriately made on
a case-by-case basis.

Pre-1997 Long-Term Care Insurance Contracts

Section 321(f)(2) of HIPAA provides that a contract issued before
January 1, 1997, is treated as a qualified long-term care insurance
contract if the contract met the "long-term care insurance
requirements of the State" in which the contract was sitused at the
time it was issued. Under the final regulations, the date on which a
long-term care insurance contract other than a group long-term care
insurance contract is issued is generally the date assigned to the
contract by the insurance company. In no event is the issue date
earlier than the date on which the policyholder submitted a signed
application for coverage to the insurance company. In addition, if
the period between the date of application and the date on which the
long-term care insurance contract actually becomes effective is
substantially longer than under the insurance company's usual
business practice, then the These standards are different from those
that apply for 1 purposes of determining the grandfathered status of
other types of insurance contracts under the Code (including
sections 7702, 7702A, 101(f), and 264). Those other provisions limit
the tax issue date is generally the date the contract becomes
effective.

For purposes of applying the grandfather rule of section 321(f)(2)
of HIPAA to a group long-term care insurance contract, the issue
date of the contract is the date the group contract was issued. As a
result, coverage for an individual who joins a grandfathered group
long-term care insurance contract on or after January 1, 1997, is
accorded the same treatment under section 321(f)(2) as is accorded
coverage for those who joined the group before that date.

Notice 97-31 and the proposed regulations use the term material
change to identify those changes to pre-1997 long-term care
insurance contracts that are treated as the issuance of a new
contract and, therefore, result in the loss of grandfathered status
under section 7702B. The use of the term material may have caused
some confusion in light of the bright line standards that the
regulations are generally intended to provide. For this reason, the
final regulations do not use the term material in this context. No
substantive change is intended by this modification.

The final regulations generally adopt the standards set forth in the
proposed regulations for purposes of determining whether a change to
a pre-1997 long-term care insurance contract is considered the
issuance of a new contract. For example, the benefits associated
with the purchase of insurance products that, unlike pre-1997 long-
term care insurance contracts, have a substantial investment
orientation.

final regulations provide that the exercise of any right provided to
a policyholder or the addition of any right that is required by
State law to be provided to the policyholder will not be treated as
the issuance of a new contract. Thus, as illustrated in an example
in the regulations, the exercise of a right set forth in a pre-1997
contract, without underwriting, does not result in the loss of
grandfathered status.

The final regulations also provide that the following practices will
not be treated as the issuance of a new contract for purposes of the
grandfathering provision of section 321(f)(2) of HIPAA: (1) a change
in the mode of premium payment, such as a change from paying
premiums monthly to quarterly; (2) a classwide increase or decrease
in premiums for contracts that have been issued on a guaranteed
renewable basis; (3) a reduction in premiums due to the purchase of
a long-term care insurance policy by a member of the policyholder's
family; (4) a reduction in coverage (with correspondingly lower
premiums) made at the request of a policyholder; (5) a reduction in
premiums that occurs because the policyholder becomes entitled to a
discount under the issuer's pre-1997 premium rate structure (such as
when a policyholder becomes a member of a group entitled to a group
discount, or changes from smoker to nonsmoker status); (6) the
addition, without an increase in premiums, of alternative forms of
benefits that may be selected by the policyholder; (7) the addition
of a rider to increase benefits under a pre-1997 contract if the
rider would constitute a qualified long-term care insurance contract
if it were a separate contract; (8) the deletion of a rider or
provision of a contract (called an HHS (Health and Human Services)
rider) that prohibited coordination of benefits with Medicare; (9)
the effectuation of a continuation or conversion of coverage right
under a group contract following an individual's ineligibility for
continued coverage under the group contract; and (10) the
substitution of one insurer for another in an assumption reinsurance
transaction. These exceptions are generally similar to those listed
in the proposed regulations. In response to comments, however, the
exceptions have been broadened to permit certain premium reductions
and to clarify that a change in insurer pursuant to an assumption
reinsurance transaction is not treated as the issuance of a new
contract (assuming that the contract would not otherwise be treated
as newly issued, such as by reason of a change in the amount or
timing of benefits or premiums).

Some commentators suggested that the regulations include a
parenthetical to the effect that some changes in the amount or
timing of items (such as de minimis changes in premiums) are not
treated as the issuance of a new contract, even if no specific
exception applies under the regulation. An important purpose of
these regulations is to provide certainty as to the qualification of
pre-1997 long-term care insurance contracts, and the exceptions
enumerated in the proposed regulations provide broad relief from
treatment as the issuance of a new contract resulting in the loss of
grandfathered status. Accordingly, the final regulations do not
contain this additional parenthetical.

Some commentators identified additional circumstances under which
expansion of coverage under a group long-term care insurance
contract should not be treated as the issuance of a new contract.
For example, some requested that the addition of a spouse, dependent
children, or others should not be treated as the issuance of a new
contract. Other commentators suggested that no loss of
grandfathering should result from the expansion of coverage under a
group contract by reason of a corporate merger or acquisition, or
the extension of coverage to collectively bargained employees, or
the addition of former employees. The final regulations clarify that
such expansion is not treated as the issuance of a new contract,
provided that the addition is without underwriting and is pursuant
to the terms of the contract and the plan under which the contract
was issued as in effect on December 31, 1996. Thus, the addition of
a business's assets and related employees by a company with a
pre-1997 group contract is not treated as the issuance of a new
contract if, as of December 31, 1996, the contract and the plan
under which it was issued provided that new employees automatically
are eligible to participate in the group contract. If, however, a
new subsidiary is acquired by the company and the company's pre-1997
group contract or plan requires that a subsidiary be designated by
the company in order for its employees to be eligible to
participate, As was indicated in the preamble to the proposed
regulations, certain of the consumer protection requirements would
not apply to such a rider. Specifically, sections 7702B(g)(2)(A)(i)
(III), 7702B(g)(2)(A)(i)(V), 7702B(g)(2)(A)(i)(VII) (other than
section 9B of the NAIC Model regulation), 7702B(g)(2)(A)(i)(X),
7702B(g)(3), 7702B(g)(4), 4980C(c)(1)(A)(I), and 4980C(c)(2) of the
Internal Revenue Code would apply only the first time a contract is
purchased, and would not apply to the purchase of a rider.

then the designation of the new subsidiary would be a change in the
terms of the contract or in the plan relating to eligibility.

Although the final regulations were not modified to accommodate
further expansion, a new qualified long-term care insurance contract
could be entered into to expand coverage under these circumstances.
Alternatively, the final regulations permit coverage under the
pre-1997 contract to be expanded by a rider to the pre-1997 contract
if the rider would constitute a qualified long-term care insurance
contract if it were issued as a separate contract.

Finally, it was suggested that the grandfather provisions of the
final regulations should be effective immediately. The final
regulations with respect to contracts issued before 1997 are
effective January 1, 1999.

Standards before the Effective Date of the Final Regulations The
consumer protection provisions in the final regulations apply with
respect to contracts issued after December 10, 1999.

Taxpayers may continue to rely on Notice 97-31 with respect to
contracts issued on or before that date. In addition, a contract
issued on or before December 10, 1999. will not be treated as
failing to satisfy the consumer protection requirements of section
7702B(g) or 4980C of the Code if the contract satisfies the
requirements of the final regulations. Taxpayers may not rely on
Notice 97-31 with respect to contracts issued after December 10,
1999.

The final regulations are effective January 1, 1999, with respect to
pre-1997 long-term care insurance contracts.

Taxpayers may continue to rely on Notice 97-31 for the purpose of
determining whether a change made before January 1, 1999, to a
pre-1997 contract is treated as the issuance of a new contract.

In addition, a change made before that date to a pre-1997 contract
will not be treated as the issuance of a new contract if the change
is not treated as the issuance of a new contract under the final
regulations. Taxpayers may not rely on Notice 97-31 with respect to
changes made on or after January 1, 1999.

Special Analyses

It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It has also been determined
that section 553(b) of the Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regulations, and because the
regulations do not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C.

chapter 6) does not apply. Pursuant to section 7805(f) of the
Internal Revenue Code, the notice of proposed rulemaking preceding
these regulations was submitted to the Chief Counsel for Advocacy of
the Small Business Administration for comment on its impact on small
business.

Drafting Information

The principal author of these regulations is Katherine A.

Hossofsky, Office of Assistant Chief Counsel (Financial Institutions
& Products). However, other personnel from the IRS and Treasury
Department participated in their development.

List of Subjects in 26 CFR Part 1 Income taxes, Reporting and
recordkeeping requirements.

Adoption of Amendments to the Regulations Accordingly, 26 CFR part 1
is amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in
part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Sections 1.7702B-1 and 1.7702B-2 are added to read as
follows:

�1.7702B-1 Consumer protection provisions.

(a) In general. Under sections 7702B(b)(1)(F), 7702B(g), and 4980C,
qualified long-term care insurance contracts and issuers of those
contracts are required to satisfy certain provisions of the Long-
Term Care Insurance Model Act (Model Act) and Long-Term Care
Insurance Model Regulation (Model Regulation) promulgated by the
National Association of Insurance Commissioners (NAIC), as adopted
as of January 1993. The requirements for qualified long-term care
insurance contracts under section 7702B(b)(1)(F) and (g) relate to
guaranteed renewal or noncancellability, prohibitions on limitations
and exclusions, extension of benefits, continuation or conversion of
coverage, discontinuance and replacement of policies, unintentional
lapse, disclosure, prohibitions against post-claims underwriting,
minimum standards, inflation protection, prohibitions against pre-
existing conditions exclusions and probationary periods, and prior
hospitalization. The requirements for qualified long-term care
insurance contracts under section 4980C relate to application forms
and replacement coverage, reporting requirements, filing
requirements for marketing, standards for marketing, appropriateness
of recommended purchase, standard format outline of coverage,
delivery of a shopper's guide, right to return, outline of coverage,
certificates under group plans, policy summary, monthly reports on
accelerated death benefits, and incontestability period.

(b) Coordination with State requirements--(1) Contracts issued in a
State that imposes more stringent requirements. If a State imposes a
requirement that is more stringent than the analogous requirement
imposed by section 7702B(g) or 4980C, then, under section 4980C(f),
compliance with the more stringent requirement of State law is
considered compliance with the parallel requirement of section
7702B(g) or 4980C. The principles of paragraph (b)(3) of this
section apply to any case in which a State imposes a requirement
that is more stringent than the analogous requirement imposed by
section 7702B(g) or 4980C (as described in this paragraph (b)(1)),
but in which there has been a failure to comply with that State
requirement.

(2) Contracts issued in a State that has adopted the model
provisions. If a State imposes a requirement that is the same as the
parallel requirement imposed by section 7702B(g) or 4980C,
compliance with that requirement of State law is considered
compliance with the parallel requirement of section 7702B(g) or
4980C, and failure to comply with that requirement of State law is
considered failure to comply with the parallel requirement of
section 7702B(g) or 4980C.

(3) Contracts issued in a State that has not adopted the model
provisions or more stringent requirements. If a State has not
adopted the Model Act, the Model Regulation, or a requirement that
is the same as or more stringent than the analogous requirement
imposed by section 7702B(g) or 4980C, then the language, caption,
format, and content requirements imposed by sections 7702B(g) and
4980C with respect to contracts, applications, outlines of coverage,
policy summaries, and notices will be considered satisfied for a
contract subject to the law of that State if the language, caption,
format, and content are substantially similar to those required
under the parallel provision of the Model Act or Model Regulation.
Only nonsubstantive deviations are permitted in order for language,
caption, format, and content to be considered substantially similar
to the requirements of the Model Act or Model Regulation.

(c) Effective date. This section applies with respect to contracts
issued after December 10, 1999.

�1.7702B-2 Special rules for pre-1997 long-term care insurance
contracts.

(a) Scope. The definitions and special provisions of this section
apply solely for purposes of determining whether an insurance
contract (other than a qualified long-term care insurance contract
described in section 7702B(b) and any regulations issued thereunder)
is treated as a qualified long-term care insurance contract for
purposes of the Internal Revenue Code under section 321(f)(2) of the
Health Insurance Portability and Accountability Act of 1996 (Public
Law 104-191).

(b) Pre-1997 long-term care insurance contracts--(1) In general. A
pre-1997 long-term care insurance contract is treated as a qualified
long-term care insurance contract, regardless of whether the
contract satisfies section 7702B(b) and any regulations issued
thereunder.

(2) Pre-1997 long-term care insurance contract defined. A pre-1997
long-term care insurance contract is any insurance contract with an
issue date before January 1, 1997, that met the long-term care
insurance requirements of the State in which the contract was
sitused on the issue date. For this purpose, the long-term care
insurance requirements of the State are the State laws (including
statutory and administrative law) that are intended to regulate
insurance coverage that constitutes A long-term care insurance @ (as
defined in section 4 of the National Association of Insurance
Commissioners (NAIC) Long-Term Care Insurance Model Act, as in
effect on August 21, 1996), regardless of the terminology used by
the State in describing the insurance coverage.

(3) Issue date of a contract--(i) In general. Except as otherwise
provided in this paragraph (b)(3), the issue date of a contract is
the issue date assigned to the contract by the insurance company. In
no event is the issue date earlier than the date the policyholder
submitted a signed application for coverage to the insurance
company. If the period between the date the signed application is
submitted to the insurance company and the date coverage under the
contract actually becomes effective is substantially longer than
under the insurance company's usual business practice, then the
issue date is the later of the date coverage under the contract
becomes effective or the issue date assigned to the contract by the
insurance company. A policyholder's right to return a contract
within a free-look period following delivery for a full refund of
any premiums paid is not taken into account in determining the
contract's issue date.

(ii) Special rule for group contracts. The issue date of a group
contract (including any certificate issued thereunder) is the date
on which coverage under the group contract becomes effective.

(iii) Exchange of contract or certain changes in a contract treated
as a new issuance. For purposes of this paragraph (b)(3)--

(A) A contract issued in exchange for an existing contract after
December 31, 1996, is considered a contract issued after that date;

(B) Any change described in paragraph (b)(4) of this section is
treated as the issuance of a new contract with an issue date no
earlier than the date the change goes into effect; and

(C) If a change described in paragraph (b)(4) of this section occurs
with regard to one or more, but fewer than all, of the certificates
evidencing coverage under a group contract, then the insurance
coverage under the changed certificates is treated as coverage under
a newly issued group contract (and the insurance coverage provided
by any unchanged certificate continues to be treated as coverage
under the original group contract).

(4) Changes treated as the issuance of a new contract--(i) In
general. For purposes of paragraph (b)(3) of this section, except as
provided in paragraph (b)(4)(ii) of this section, the following
changes are treated as the issuance of a new contract--

(A) A change in the terms of a contract that alters the amount or
timing of an item payable by either the policyholder (or certificate
holder), the insured, or the insurance company;

(B) A substitution of the insured under an individual contract; or

(C) A change (other than an immaterial change) in the contractual
terms, or in the plan under which the contract was issued, relating
to eligibility for membership in the group covered under a group
contract.

(ii) Exceptions. For purposes of this paragraph (b)(4), the
following changes are not treated as the issuance of a new
contract--

(A) A policyholder's exercise of any right provided under the terms
of the contract as in effect on December 31, 1996, or a right
required by applicable State law to be provided to the policyholder;

(B) A change in the mode of premium payment (for example, a change
from monthly to quarterly premiums);

(C) In the case of a policy that is guaranteed renewable or
noncancellable, a classwide increase or decrease in premiU.S.
(D) A reduction in premiums due to the purchase of a long-term care
insurance contract by a family member of the policyholder;

(E) A reduction in coverage (with a corresponding reduction in
premiums) made at the request of a policyholder;

(F) A reduction in premiums as a result of extending to an
individual policyholder a discount applicable to similar categories
of individuals pursuant to a premium rate structure that was in
effect on December 31, 1996, for the issuer's pre-1997 long-term
care insurance contracts of the same type;

(G) The addition, without an increase in premiums, of alternative
forms of benefits that may be selected by the policyholder;

(H) The addition of a rider (including any similarly identifiable
amendment) to a pre-1997 long-term care insurance contract in any
case in which the rider, if issued as a separate contract of
insurance, would itself be a qualified long-term care insurance
contract under section 7702B and any regulations issued thereunder
(including the consumer protection provisions in section 7702B(g) to
the extent applicable to the addition of a rider);

(I) The deletion of a rider or provision of a contract that
prohibited coordination of benefits with Medicare (often referred to
as an HHS (Health and Human Services) rider);

(J) The effectuation of a continuation or conversion of coverage
right that is provided under a pre-1997 group contract and that, in
accordance with the terms of the contract as in effect on December
31, 1996, provides for coverage under an individual contract
following an individual's ineligibility for continued coverage under
the group contract; and

(K) The substitution of one insurer for another insurer in an
assumption reinsurance transaction.

s. The following examples illustrate the principles of this
paragraph (b):

Example 1. (i) On December 3, 1996, A, an individual, submits a
signed application to an insurance company to purchase a nursing
home contract that meets the long-term care insurance requirements
of the State in which the contract is sitused. The insurance company
decides on December 20, 1996, that it will issue the contract, and
assigns December 20, 1996, as the issue date for the contract. Under
the terms of the contract, A's insurance coverage becomes effective
on January 1, 1997. The company delivers the contract to A on
January 3, 1997. A has the right to return the contract within 15
days following delivery for a refund of all premiums paid.

(ii) Under paragraph (b)(3)(i) of this section, the issue date of
the contract is December 20, 1996. Thus, the contract is a pre-1997
long-term care insurance contract that is treated as a qualified
long-term care insurance contract.

Example 2. (i) The facts are the same as in Example 1, except that
the insurance coverage under the contract does not become effective
until March 1, 1997. Under the insurance company's usual business
practice, the period between the date of the application and the
date the contract becomes effective is 30 days or less.

(ii) Under paragraph (b)(3)(i) of this section, the issue date of
the contract is March 1, 1997. Thus, the contract is not a pre-1997
long-term care insurance contract, and, accordingly, the contract
must meet the requirements of section 7702B(b) and any regulations
issued thereunder to be a qualified long-term care insurance
contract.

Example 3. (i) B, an individual, is the policyholder under a long-
term care insurance contract purchased in 1995. On June 15, 2000,
the insurance coverage and premiums under the contract are increased
by agreement between B and the insurance company.

(ii) Under paragraph (b)(4)(i)(A) of this section, a change in the
terms of a contract that alters the amount or timing of an item
payable by the policyholder or the insurance company is treated as
the issuance of a new contract. Thus, B's coverage is treated as
coverage under a contract issued on June 15, 2000, and, accordingly,
the contract must meet the requirements of section 7702B(b) and any
regulations issued thereunder in order to be a qualified long-term
care insurance contract.

Example 4. (i) C, an individual, is the policyholder under a long-
term care insurance contract purchased in 1994. At that time and
through December 31, 1996, the contract met the long-term care
insurance requirements of the State in which the contract was
sitused. In 1996, the policy was amended to add a provision
requiring the policyholder to be offered the right to increase
dollar limits for inflation every three years (without the
policyholder being required to pass a physical or satisfy any other
underwriting requirements). During 2002, C elects to.increase the
amount of insurance coverage (with a resulting premium increase)
pursuant to the inflation provision.

(ii) Under paragraph (b)(4)(ii)(A) of this section, an increase in
the amount of insurance coverage at the election of the policyholder
(without the insurance company's consent and without underwriting or
other limitations on the policyholder's rights) pursuant to a
pre-1997 inflation provision is not treated as the issuance of a new
contract. Thus, C's contract continues to be a pre-1997 long-term
care insurance contract that is treated as a qualified long-term
care insurance contract.

(c) Effective date. This section is effective January 1, 1999.

David A. Mader,
Acting Deputy Commissioner of Internal Revenue
Approved: November 24, 1998
Donald C. Lubick,
Assistant Secretary of the Treasury

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