Long Term Care Insurance and Taxes
Tax-Qualified Long Term Care Insurance Policies
Long-term care insurance policies that offer tax benefits are called "Tax-Qualified Policies." People who are making their initial purchase decision regarding long term care insurance are likely to have a choice between tax-qualified policies and non-tax-qualified policies. Other people might be thinking about switching to a tax-qualified policy from a non-tax-qualified policy.
For tax purposes, "tax-qualified" long term care insurance
policies generally are treated in the same way as accident and health insurance policies. By law, a portion of the premiums paid for a tax-qualified policy are deductible and the benefits received from a tax-qualified policy (up to certain limits, if itemized) are not taxed as income. (The IRS has NOT determined that the benefits paid out by a non-tax-qualified policy ARE taxable as income. This question is unresolved, and at present the benefits of non-tax-qualified policies are not being taxed.)
A tax-qualified long term care insurance policy might have the benefit of favorable tax treatment. However, non-tax-qualified
policies have other benefits that might outweigh the tax benefits. Whether this is so will depend on individual circumstances.
Every individual has different circumstances and different needs. In addition, every individual has a different
perspective on how much
tax savings is worthwhile and what long term care coverage is best for them. Thus, a tax break alone might not be sufficient reason to purchase a tax-qualified policy. Your choices are your own; only you can decide whether a tax-qualified or a non-tax-qualified policy is best for you, based on your own individual needs, preferences, financial status and family situation.
You may already might have a tax-qualified policy. Many
long term care insurance policies were issued before the new law explicitly allowing tax-qualified policies. Those preexisting policies were "grandfathered" under the new law. That is, policies issued before the new law went into effect are considered tax-qualified unless a major change is made in the policy by the policyholder and company. Therefore,
if you have a policy issued on or before December 31, 1996 and you have not made any major changes in the policy, it already is a tax-qualified. Consult with
your insurance agent if you have questions about the tax status your policy.
Tax deductions only apply to people who file long forms so tax deductions can be paid.
If you usually itemize your federal tax return, then it might be worth your while to consider a tax-qualified policy. You will not get a deduction if you do not file an itemized return.
Benefits are not taxable on tax-qulified policies, but non tax-qualified policies may be taxed in the future.
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