Congress passed a new law in 1996 called the Health Insurance Portability and Accountability
Act. Starting in 1997 tax year, this law may let you deduct all or part of the premium
for a long-term care (LTC) insurance policy. Your LTC premium can be added to your
other deductible medical expenses. To claim a tax deduction, all of your medical
expenses must be more than 7.5% of your adjusted gross income.
Not all long-term care contracts are Tax qualified. Policies must meet certain federal
standards before you can deduct the premium. These policies are called "tax qualified
long term care insurance contracts". Benefits you receive from a qualified LTC policy
are generally not taxable as income. Benefits received from a policy that is not
a qualified LTC policy may be taxable income.
The Health Insurance Portability and Accountability Act made changes to the Internal
Revenue Code. The Department of Treasury is responsible for developing regulations
giving direction as to how the law should be applied. These regulations have not
yet been completed. It is important to understand that uncertainty exists. Companies
will use their own interpretation of some policy provisions (such as when benefits
are triggered) until the Department of the Treasury issues regulations.
Q. How will I know if the premium for my long-term care insurance policy qualifies
for a tax deduction?
- LTC policies issued before January 1, 1997 are automatically qualified.
- LTC policies issued on or after January 1, 1997 must be qualified (meet federal
standards) before you can deduct the premium. These standards are discussed below.
The maximum amount you can add to your other deductible medical expenses is based
on your age at the end of each tax year.
See your Personal tax advisor for
information on how these changes could affect you.
Q. How does a qualified policy
A. Policies issued after January 1, 1997 must use new eligibility standards. You
must be certified by a licensed health care professional to be "chronically ill"
and have a plan of care. You must be recertified annually that you are still chronically
ill. In a qualified LTC policy, you are considered chronically ill if you meet one
of the following two standards:
- You are expected to be unable, without substantial help from another person, to
do at least two of five (or six) Activities of Daily Living (ADLs) for at least
90 days. ADLs are bathing, dressing, toileting, transferring, eating and continence.
A state may decide to allow companies to choose which five ADLs to include, or can
require companies to use all six. Check with your State Insurance Department to
find out what your state requires. (See page 16 of the Shopper’s Guide to Long-Term
Care Insurance for more information on how the need for care is measured.)
- You must need substantial supervision to protect your health and safety because
you have a cognitive impairment. (See page 17 of the Shopper’s Guide to Long-Term
Care Insurance for more information on loss of cognitive ability.)
Policies issued before January 1, 1997 are not affected by these new requirements.
Q. Can a life insurance policy be a qualified long-term care insurance policy?
A. Qualified LTC policies also include life insurance policies which provide LTC
benefits through a rider or as part of the policy. You must be considered chronically
ill under the standards discussed above to get LTC benefits from a life insurance
policy. (See page 12 of the Shopper’s Guide to Long-Term Care Insurance for more
information on how life insurance provides long-term care benefits.)
Q. What are some of the consumer protection standards that must be included in qualified
policies issued after January 1, 1997?
A. Most of the standards that must be included in new qualified policies are already
required by states. Some requirements are guaranteed renewable and the option to
add inflation protection and nonforfeiture benefits. (Check page 18 of the Shopper’s
Guide to Long-Term Care Insurance for more information.) Check with your State Insurance
Department or Senior Counseling program for more information.
Insurance companies must be licensed in your state to sell long-term care insurance.
If you decide to buy a policy, be sure the company and the agent, if one is involved,
is licensed in your state. If you are not sure, contact your state insurance department.
Each State offers free insurance counseling on long-term care insurance. See page
31 in the Shopper’s Guide to Long-Term Care for more information on how to contact
the program in your State.