You may be asked to choose between a “tax-qualified” long-term care insurance policy and one that is “non-tax-qualified.” There are important differences between the two types of policies. These differences were created by the Health Insurance Portability and Accountability Act (HIPAA). A federally tax-qualified long-term care insurance policy, or a qualified policy, offers certain federal income tax advantages. If you have a qualified long-term care policy and you itemize your deductions, you may be able to deduct part or all of the premium you pay for the policy. You may be able
to add the premium to your other deductible medical expenses. You may then be able to deduct the amount that is more than 7.5% of your adjusted gross income on your federal income tax return. The amount depends on your age, as shown in the following table.
Regardless of which policy you choose, make sure that you understand how the benefits and triggers will work and that they are acceptable to you. For example, benefits paid by a qualified long term care insurance policy are generally not taxable as income. Benefits from a long term care insurance policy that is not qualified may be taxable as income.
If you bought a long term care insurance policy before January 1, 1997, that policy is probably qualified. HIPAA allowed these policies to be “grandfathered,” or considered qualified, even though they may not meet all of the standards that new policies must meet to be qualified. The tax advantages are the same whether the policy was sold before or after 1997. You should carefully examine the advantages and disadvantages of trading a grandfathered policy for a new policy. In most cases, it will be to your advantage to keep your old policy.
Long term care insurance policies that are sold on or after January 1, 1997, as tax-qualified must meet certain federal standards. To be qualified, policies must be labeled as tax-qualified, be guaranteed renewable, include a number of consumer
protection provisions, cover only qualified long-term care services, and generally can provide only limited cash surrender values. (See Benefit Triggers, page 19.)
Qualified long-term care services are those generally given by long-term care providers. These services must be required by 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 if you are expected to be unable to do at least two activities of daily living without substantial assistance from another person for at least 90 days. Another way you may be considered to be chronically ill is if you need substantial supervision to protect your health and safety because you have a cognitive impairment. A policy issued to you before January 1, 1997, doesn’t have to define chronically ill this way. (See Benefit Triggers, page 19.)
Tax-Qualified Policies 2009 figures.18 These amounts will increase annually based on the Medical Consumer Price Index.
YOUR AGE MAXIMUM AMOUNT THAT YOU CAN CLAIM
- 40 years old or younger $320
- More than 40 but not more than 50: $600
- More than 50 but not more than 60: $1,190
- More than 60 but not more than 70: $3,180
- More than 70: $3,980
Some life insurance policies with long-term care benefits may be tax-qualified. You may be able to deduct the premium you pay for the long-term care benefits that a life insurance policy provides. However, be sure to check with your personal tax advisor to learn how much of the premium can be deducted as a medical expense. The long-term care benefits paid from a tax-qualified life insurance policy with long-term care benefits are generally not taxable as income. Tax-qualified life insurance policies with long-term care benefits must meet the same federal standards as other tax-qualified policies, including the requirement that you must be chronically ill to receive benefits.