There are a lot of good reasons to buy long-term care insurance. Uncle Sam adds to the list with tax benefits, but there are a few strings attached. The policy has to have certain features that make it tax-qualified.
Contact an independent insurance agent. Learn how to protect yourself and your retirement plan from the cost of long-term care.
What Is a Tax-Qualified Long-Term Care Policy?
Long-term care policies that meet the standards of the Internal Revenue Code are eligible for tax benefits. The policy has to pay benefits if you:
- Cannot perform 2 of the six activities of daily living
- Have a cognitive impairment
The policy must be guaranteed renewable, and offer inflation protection and a non-forfeiture option. The policy cannot have any cash value. It can only pay benefits for long-term care services.
| Term | Definition |
|---|---|
| Daily Benefit | Cash benefit per day. Usually paid monthly. |
| Benefit Period | How long benefits are paid. Usually 2 yrs., 5 yrs., or lifetime. |
| Waiting Period | When benefits begin after eligibility. Usually 30, 60, 90, or 180 days. |
| Activities of Daily Living | Used to determine eligibility for claims. Eating, dressing, bathing, toileting, transferring, and continence. |
| Cognitive Disorders | Diseases that affect memory, learning, perception, and problem-solving. Dementia and Alzheimer's are examples. |
| Indemnity Long-Term Care Policy | Benefit is not limited to the actual cost of care. |
| Reimbursement Long-Term Care Policy | Benefit is limited to the actual cost of care. |
| Non-Forfeiture Option | Value of policy if cancelled. |
| Guaranteed Renewable | Insurance company cannot cancel the coverage if the premium is paid. They may raise premiums under certain conditions. |
| Skilled Care | Nursing and therapy care provided by medical professionals. |
| Custodial Care | Non-medical care assisting with activities of daily living. |
Tax-Qualified Vs Non-Tax-Qualified Long-Term Care Insurance
Long-term care policies that have cash value or pay other benefits are not tax-qualified. These policies are called hybrids, because they are life insurance policies that pay long-term care benefits.
Are Long-Term Care Premiums Tax-Deductible?
If your traditional long-term care policy meets the requirements to be tax-qualified, the premiums may be tax-deductible. The long-term care tax deduction is calculated as part of the deduction for medical expenses. For 2019 you can deduct medical expenses that re more than 10% of adjusted gross income.
The IRS limits how much of your long-term care policies can be included in medical expenses.
| Age | Maximum Deduction |
|---|---|
| 40 or less | $420 |
| More than 40 but not more than 50 | $790 |
| More than 50 but not more than 60 | $1,580 |
| More than 60 but not more than 70 | $4,220 |
| More than 70 | $5,270 |
Traditional vs. Hybrid Tax Deductions
Only Traditional long-term care policies are tax-qualified. Hybrids are not tax-qualified because they have cash value.
Can a Business Deduct Long-Term Care Premiums?
Self-employed business owners can deduct 100% of long-term care premiums up to the age limits. Partnerships and corporations can deduct 100% of long-term care premiums. There is no age limit.
Are Long-Term Care Insurance Benefits Taxable?
The benefits are tax-free up to $370 per day or the actual cos,t whichever is greater. Benefits paid by traditional and hybrid policies are usually tax-free.
Benefits paid by indemnity policies may be taxable if the payments exceed the limits.
Why Go It Alone?
Long-term care insurance is an important part of smart retirement planning. There is a lot to know about the coverage. Contact your independent insurance agent. They can simplify the process for you.
