Tax-Qualified and Non-Tax-Qualified Long Term Care Insurance Policies

Long term care insurance policies are either "tax-qualified" or "non-tax-qualified," and there are important differences between the two. These differences are defined by federal legislation – the Health Insurance Portability and Accountability Act (HIPAA).

A federally tax-qualified long term care insurance policy, often referred to as a qualified policy, offers certain federal income tax advantages to the purchaser. If you have a qualified long term care policy, and you itemize deductions, you may be able to deduct part, or all, of the premium. It works this way: you add your total policy premium to your other deductible medical expenses, and if the total for the year is greater than 7.5% of your adjusted gross income, you may be able to deduct the excess amount on your federal income tax return. The maximum amount that you can claim as a deduction depends on your age, as shown in the following table for calendar year 2008 (Publication 553)

YOUR AGE YOU CAN CLAIM

40 years old or younger 41--50 51--60 61—70 71 or older

MAX AMT

$310 $580 $1,150 $3.080 $3,850

As you can see, the potential deductible amount for premium paid becomes rather significant at older ages.

In addition to premium deductibility, you need to know whether benefits received under the policy are taxable. Generally speaking, benefits paid by a qualified long term care insurance policy are not taxable as income to the recipient, but benefits from a long term care insurance policy that is not qualified may be taxable as income. The government has yet to clarify this area of the law.

Among other requirements, a qualified plan must cover only qualified long term care services (although a life insurance policy that provides long term care insurance may be an exception). Qualified services are those generally given by long term care providers, must be required for chronically ill individuals, and must be given according to a plan of care prescribed by a licensed health care practitioner. You are considered chronically ill (expected to last at least 90 days) if you are unable to perform at least two activities of daily living (bathing, continence, dressing, eating, toileting and getting into and out of a bed or chair). You also may be considered chronically ill if you need supervision to protect your health and safety because of cognitive impairment.