Long-Term Care Insurance & Taxes

Understanding the Tax Benefits of Long-Term Care Insurance

(Everything you need to know, and more)

Long term care insurance tax deductions

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. 

Terms
Daily BenefitCash benefit per day. Usually paid monthly
Benefit PeriodHow long benefits are paid. Usually 2 yrs, 5 yrs or lifetime.
Waiting PeriodWhen benefits begin after eligibility. Usually 30, 60, 90 or 180 days.
Activities of Daily LivingUsed to determine eligibility for claims. Eating, dressing, bathing, toileting, transferring, continence.
Cognitive DisordersDiseases that affect memory, learning, perception and problem-solving. Dementia and Alzheimer's are cognitive disorders.
Indemnity Long-Term
Care Policy
Benefit is not limited to actual cost of care.
Reimbursement Long-Term Care PolicyBenefit is limited to actual cost of care.
Non-Forfeiture OptionValue of policy if cancelled.
Guaranteed RenewableInsurance company cannot cancel the coverage if the premium is paid. They can raise the premium under certain conditions.
Skilled CareSkilled care is nursing and therapy care provided by medical professionals.
Custodial CareNon-medical care assisting 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. 

AgeMaximum 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. 

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