Tax Breaks for Long Term Care Insurance
Tax Qualified or Non Tax-Qualified? That is the Question.
January 1, 1997 marked a historic turning point in the way our society supports long term care. As the result of the Kennedy / Kasselbaum welfare and health care reform legislation signed into law in August 1996, premiums paid for "tax-qualified" long term care insurance receive tax-favored status.
Tax-favored status is granted to all existing long term care insurance policies issued before Jan. 1, 1997, if they complied with state standards. Most policies bought before December 31, 1996 have been "grandfathered in" and are considered tax-qualified.
Tax favored status is granted to all TQ long term care insurance policies issued after Jan. 1, 1997 that meet federal standards outlined in the law.
Uncle Sam Tells Americans to: Wake Up, Get Smart & Prepare for Your Future
Tax-favored status for long term care insurance is an indicator that the government recognizes its inability to cover the costs of long term care through entitlement programs such as Medicare and Medicaid. It also points to the conclusion that in the future, good, old-fashioned, personal responsibility will play a much greater role in the funding of long term care.
The Advantages of Tax Qualified Policies:
As the name suggests, the benefits revolve around tax issues:
- For your federal tax purposes, tax-qualified Long Term Care (TQ) long term care insurance is treated like accident and health insurance. TQ long term care insurance premiums are considered to be a medical expense and qualify as an itemized deduction up to a defined limit, based on the age of the policyholder and inflation. The younger you are, the less you can deduct.
- No benefits you receive will be taxed. This is a huge benefit, as you will read below.
- Non-reimbursed long term care services are also considered a medical expense and can be claimed as itemized deductions to the extent they exceed 7.5 percent of adjusted gross annual income. See your tax advisory.
The Disadvantages Tax Qualified Policies:
Tax Qualified (TQ) policies do not have a Medical Necessity trigger, therefore you must:
- Need care for at least 90 days
- Be unable to perform at least 2 out of a list of 6 Activities of Daily Living (7 in California), without substantial supervision. Activities of Daily Living (ADLs) are usually bathing, transferring, eating, dressing, continence or toileting. Substantial supervision may require "hands on" assistance or, if the policy wording is more lenient, it could simply require "standby" supervision, which means that someone watches you and helps you, if the need arises. (People usually need assistance with Bathing before any other ADL.)
- Need substantial assistance due to a severe cognitive impairment.
- Have a Licensed Health Care Professional provide a Plan of Care.
Non-Tax Qualified (NTQ) Long Term Care policies were the only policies available before 1997. They are still sold but, like Tax-qualified polices, NTQs have their pros and cons.
The Advantage of Non-Tax Qualified:
- Non-Tax Qualified long term care insurance policies can include a "Medical Necessity" trigger, although some LTCi carriers are eliminating it. The Medical Necessity trigger will start your benefits if your doctor, or a doctor approved by your LTC insurance carrier, states that you need long term care. This can be helpful if you cannot do certain things for yourself, like a administering a daily injection or changing your catheter, but you are able to perform all other ADLs.
- Does not require 90 days of care in order for Non-taxable LTCi policy benefits to kick in. This means that NTQs can be used for short term care. For example, after a minor stroke, heart attack or accident.
- NTQs allow one more ADL as a trigger - Ambulating. Ambulation is walking and people usually need help with walking before Transferring.
- In the case of Cognitive impairment, NTQ poilcies may not require the same "substantial" supervision in order to trigger benefits.
The Disadvantages of Non-Tax Qualified:
- Many Long Term Care insurance carriers are no longer selling NTQs, probably because NTQ's are falling out of favor, even though they have less restrictive wording. Due to the higher risk, some of the Long Term Care insurance companies who still offer NTQs are tightening up their policy wording, making it more difficult to receive benefits.
- Due to higher risk for the LTCi company, Non-Tax Qualified policies are usually more expensive.
- NTQs may require a person to need assistance with 3 ADLs, instead of the 2 that TQs require.
- NTQ policies benefits may be taxed in the future! * If you receive LTCi benefits you are issued a 1099 - LTC at the end of the year. This includes Tax Qualified and Non-Tax Qualified policies. However, Tax Qualified policies are exempt. Per diem benefits received on a TQ policy are tax free up to $250 for any period durring 2006. Per diem benefits above $250 will be taxed as income, unless you can provide proof that your actual long-term care expenses were also above $250.
Check out the instructions for companies that provide LTCi benefits at: www.irs.gov/instructions/i1099ltc/ar02.html#d0e111
Is this a hint from the IRS?
Don't be misled. Some websites say that Non-Tax Qualified benefits are not taxable. This is mis-information! While NTQ benefits are not being taxed at the moment, things can change. The IRS has not yet made a decision about, nor ruling on, whether benefits received from a NTQ policy are, or will be, taxable income. The IRS has not said that NTQ policies are tax-deductible, either.
What if you deducted your NTQ premiums or didn't claim your benefits as income then, sometime in the future, the IRS ruled that NTQ benefits are taxable? What if they made that ruling retroactive? Oh my.
Tax Qualified policies' LTCi benefits are non-taxable.
Non-Tax Qualified LTCi policies' benefits may be considered taxable in the future.
Here's some advice from a Former Senior Health Insurance Benefits Assistance Program Field Officer for the State of Oregon (funded by the Health Care Financing Administration). This program is operated under the supervision of Oregon Insurance Consumer Advocacy:
"An important point in the evaluation of tax-qualified Long Term Care vs. non tax-qualified Long Term Care LTC policies under the Health Insurance Portability & Accountability Act of 1996 is that: The benefits paid by non tax-qualified Long Term Care policies may be taxable. The law is not yet clear on this point, but those who purchase non tax-qualified Long Term Care LTC policies may be in for quite a surprise. This means that today's daily benefit of $100 may become $36,500 in taxable annual income! In 20 years at 5% annual inflation, that could mean $96,725 of annual income that may be taxable.
Some might argue that long term care expenses would be tax deductible, but under our current tax law only non-reimbursed medical expenses are deductible. Imagine, non-deductible long term care expenses and taxable insurance benefits. (AARP should be screaming about this one.) Also imagine what your tax burden would be if your income increased by today's level of benefit.
As a safe haven, a wise LTC insurance shopper should only consider a tax-qualified Long Term Care insurance plan."
List of Long Term Care insurance companies - Who Sells What?
Though many of the major Long Term Care insurance carriers no longer sell Non-tax Qualified policies, you can still buy one if your heart is set on it. I called each of these companies and spoke with one of their representatives on August 14th, 2007. Who offers what? Here's the results:
|Tax Qualified (TQ) Only||Non-Tax & Tax Qualified|
|Berkshire Life||Loyal American|
|Combined Insurance of America||MetLife|
|Continental General||Mutual of Omaha|
|Cuna Mutual||National States Insurance Co.|
|Equitable Life||Penn Treaty|
|John Hancock||Provident Life & Accident (UNUM)|
|New York Life|
|Northwestern Long Term Care|
|The State Life Insurance Co.|
* Policy contracts vary due to state law. Non-Tax Qualified policies may not be available in every state.