Taxes and Long-Term Care Insurance

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The HIPAA (Health Insurance Portability and Accountability Act) created two types of policies, a tax-qualified long-term care insurance policy, and a non tax-qualified policy. The qualified policy offers the policy holder the advantage of being able to deduct the premiums in part or totally. The premiums may be added to other deductible medical expenses, and then deducted from the amount which is more than 7.5 percent of the adjusted gross income on the federal income tax return.

The amount which can be claimed depends on the age of the taxpayer. It is important to check with a personal tax advisor to see how much you can deduct. (1)

Limits on the Deductibility of Long-Term Care Insurance Premiums, 2007

Age	Maximum Deduction
40 or younger	$290
41-50	$550
51-60	$1,100
61-70	$2,950
71 and older	$3,680

Source: IRS Issued Revenue Procedure

Five hundred thousand long-term care policies were sold between 1991 and 1996. By 1996, when the HIPAA was passed for special federal tax purposes to LTC policyholders, there were over 5 million policies sold. If this trend continues, and there are no changes in the tax status of insurance, by 2005 there should be 9.5 million policies sold. Tax deductions will bring a net decrease in LTC insurance premiums, which will encourage growth in sales. (2)

The goal of the tax-qualified plan was to make premiums less expensive for a policyholder, have the benefits received tax-free, and increase the amount of coverage. It was the government’s intention to stress the importance of long-term care insurance to the public.

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Source:
1. National Association of Insurance Commissioners, 1999
2. Health Insurance Association of America. Tax Deductibility of Long-Term Care Insurance Premiums. 2000, March.