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)

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

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.

Case Studies: Tax-Qualified and Non-Tax-Qualified Long Term Care Insurance Policies

Case Study 1: The Advantage of a Tax-Qualified Policy

Mr. Anderson, a retiree, opted for a tax-qualified long term care insurance policy. When preparing his taxes, he discovered that he could deduct part of his premium from his taxable income. The tax deduction provided significant financial relief, making the tax-qualified policy an advantageous choice for him.

Case Study 2: Tax Implications of Non-Tax-Qualified Policy

Mrs. Roberts, a working professional, selected a non-tax-qualified long term care insurance policy. Upon receiving her benefits, she found that a portion was taxable as income, affecting her tax liability. The tax implication caught her off guard, prompting her to reconsider her policy choice for future planning.

Case Study 3: Requirements for Qualification

Mr. Lewis, in his late 70s, applied for a tax-qualified policy. To qualify, he needed to meet specific requirements, including being considered chronically ill and requiring licensed health care practitioner-prescribed care. Meeting these criteria enabled him to secure the tax benefits of a qualified policy.