Taxes, Benefits & Premiums
Two major tax questions arise with regard to long-term care insurance (LTCI):
- Are the premiums deductible?
- Are the benefits taxable?
The answer to both questions--it depends.
Deductibility of premiums
Qualified policies
You may be able to deduct all or part of LTCI premiums you pay for yourself, your spouse, or a dependent, but only if the policy meets the IRS criteria for a "qualified" policy. If you bought the policy before January 1, 1997, and it met the requirements of the state in which it was issued, it is automatically considered a qualified policy. Otherwise, the policy must meet the following qualifications:
- It must provide coverage for only "qualified long-term care services." This term is defined as necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, as well as maintenance or personal care services that are required by a "chronically ill individual," pursuant to a plan of care prescribed by a licensed health-care practitioner.
Note: You are considered "chronically ill" if a licensed health-care practitioner has certified that you meet either of these conditions: (1) you are unable (without substantial help) to perform at least two of the activities of daily living (ADLs)--bathing, dressing, toileting, transferring (from bed to chair), eating, and continence--for at least 90 days, or (2) you need substantial supervision to protect your health and safety because of a severe mental impairment (such as Alzheimer's disease). - It must be guaranteed renewable, meaning that you will be able to renew your coverage as needed without undergoing additional medical exams.
- It must not have a cash surrender value or any provision that allows you to cash in, pledge, assign, or borrow against the policy, or receive anything more than a refund of premiums on cancellation of the contract.
- It must provide that any refunds and dividends (other than refunds upon termination of the policy) can be used only to reduce future premiums or increase future benefits.
- It must not pay or reimburse expenses that are reimbursable under Medicare, unless Medicare is a secondary payer, or the contract makes per diem payments regardless of expense.
- It must meet certain consumer protection requirements set out in the Internal Revenue Code.
Taxation of benefits
Benefits received from a nonqualified LTCI policy may be subject to income tax. However, a certain portion of the benefits received from a qualified LTCI policy can be excluded from your taxable income. Currently, unreimbursed LTCI benefits of up to $190 per day are considered as reimbursement for expenses actually incurred for medical care, and as such are excluded from taxable income. (This figure is indexed annually for inflation.) Benefits that exceed this amount are excludable only to the extent of your actual costs for long-term care services. Otherwise, the excess benefits are considered taxable income.
Note: The information in this discussion pertains specifically to individual LTCI policies. The rules for employer-sponsored coverage and coverage purchased by self-employed individuals may be different.
Please Note: The information contained in this Web site is provided solely as a source of general information and resource. It is a not a statement of contract and coverage may not apply in all areas or circumstances. For a complete description of coverages, always read the insurance policy, including all endorsements.