Tax Advantages of Long-Term Care Insurance



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

Before explaining the tax advantages of long-term care insurance, it's important to understand the difference between policies that have been granted guaranteed tax status and those that have not

Prior to 1997, the lack of standardization in LTC insurance policies made them difficult for consumers to understand. This changed when legislation was passed that year to produce standardized LTC Insurance policies that were also tax-qualified .


Tax-Qualified (TQ) Policies

The creation of TQ policies legitimized LTC insurance. Our legislators sent clear messages that:

                            1. Our government cannot afford to finance long-term care                                                                                                                         
                            2. LTC insurance will play a major role in financing long-term care 


The advantages of TQ policies include the following:

• Written with easier to understand language

• Contain standardized consumer protections in every policy

• Offer a standardized set of criteria for determining eligibility for benefits

• Clearly establish that the benefits collected on TQ policies are guaranteed tax-free

• Under certain conditions, premiums are tax deductible


Non-Tax-Qualified (NTQ) Policies


It is possible to purchase LTC Insurance that is non-tax-qualified. There has been an ongoing debate about the differences between NTQ and TQ policies.

Some people mistakenly believe that NTQ policies are less restrictive at the time of claim. But, NTQ policies may contain nebulous language that allows an insurance company too much discretion in determining eligibility for benefits.

Due to their lack of standardization and tax qualifications, we recommend that you only consider purchasing a TQ LTC insurance policy . In fact, most reputable insurance companies offer only TQ policies

If you purchased a long-term care insurance policy prior to 1997, your policy was grandfathered into tax-qualifed status. This will remain true as long as don't make any material changes to your policy -an example would be applying to increase the benefits of your existing policy.


CAUTION: Never replace or request a modification to an LTC insurance policy you purchased in the past without consulting an LTC Planning and Insurance expert.


Federal Tax Advantages Take the Form of a Tax Deduction


Your filing status will determine the rules for your federal income tax deduction.

Individuals (Non-self-employed) Use form 1040 Schedule A

Long-term care insurance premiums may be deducted as a medical expense, but only if you itemize on form 1040 Schedule A

Your total amount of medical expenses added to the allowable amount of your LTC insurance premium (See Maximum Allowable Premium Deducation chart below) must exceed 7.5% of your adjusted gross income. The amount in excess of 7.5% can then be deducted from your adjusted gross income.

Maximum Allowable Premium Deduction


Maximum Allowable Premium Deduction Chart

Self-Employed Individuals, S-Corporations, and LLCs

These entities can deduct LTC insurance premiums for policies purchased for owners and others, including employees relatives.

The deduction is taken as a health insurance premium expense, so the premium is deductible regardless of whether or not you itemize deductions. However, the tax deductions are still limited to the Maximum Allowable Premium Deduction (See chart above) Premiums are subject to self-employment tax.

C-Corporations

C-Corporations enjoy the most favorable tax break.

C-Corporations can pay all or a portion of LTC insurance premiums for employees. Employers who pay the premium for their employees are allowed to choose which employees receive the benefit: there is no requirement to purchase coverage for every employee.

They are able to deduct the full amount of the company's portion of the premium as a reasonable business expense. If the employee pays part or all of the premium, the employee is subject to the rules for "non-self-employed individuals" for their portion of the premium paid.


No Section 125 "Cafeteria Plan" Status


Unfortunately, long-term care insurance DOES NOT qualify as a benefit under Section 125, "Cafeteria Plan" status. The result is that LTC insurance cannot be purchased with pre-tax dollars under an employer-provided benefits plan.

This is a significant shortfall to offering LTC insurance as an employee benefit and explains why more employers do not offer coverage.


Using HSAs and MSAs to Pay LTC Insurance Premiums

LTC insurance premiums CANNOT be paid with funds in an IRA or 401K plan, but they CAN be paid with funds in a Health Savings Account (HSA) or Medical Savings Account (MSA).


State Tax Incentives For Owning LTC Insurance


Many state governments are beginning to offer tax incentives to owners of LTC insurance. And unlike the federal government, some states DO offer a tax credit which will directly reduce the amount of tax you owe.

Consult with your tax professional or LTC Planning and Insurance expert for the current tax advantages offered in your state.






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