Tax Qualified LTC Insurance vs. Non Tax Qualified LTC Insurance
There is a lot of debate, and even more confusion, regarding tax qualified and non tax qualified long term care insurance policies. Two important questions which you need to resolve include which of the two is better for you, and secondly, if you select a tax qualified LTC policy, under what situations do you qualify for a tax deduction?
Tax qualified LTC policy: Valid situations when you are allowed tax deductions include your being certified by the appropriate physician as having a chronic illness for 90 days or longer, at least two of your five ‘activities of daily living’ being non-functioning and that the cognitive disorder is of a serious nature requiring supervised care.
Deduction claims require medical expenses to be itemized and these medical expenses are deductible only if they exceed 7.5% of your gross adjusted income. In the event of a refund of the premiums due to death or policy cancellation, the refund will be treated as taxable income.
Non tax qualified LTC policy: First, premiums paid are not eligible for tax deductions. However, a non tax qualified LTC policy carries a lot of benefits, on the medical side, which are not available in a tax qualified LTC policy. It does not require a 90 day certification from a physician and benefits are also paid out for periods less than 90 days, with medical necessity as a trigger. There is no requirement to be bracketed under non-functioning ‘activities of daily living’. There are no ceilings or upper limits on benefits claimed. Itemization of expenses on the tax return is not required. Also, benefits received on or after the 1st of January, 1997 are not taxed even if they exceed the cost of care or cover expenses which do fall under services related to long term care.
Thus, if one knew the amount of long term care you might possibly need in future, and the nature of this care, it might be easier to decide whether you need a tax qualified LTC policy or a non tax qualified LTC policy. If your care needs are substantial and the nature of the illness is a recurring and unpredictable nature and duration, which gets triggered often, and is likely to subside faster, you might prefer a non tax qualified LTC policy. However, if your care needs tend to steady and predictable over an extended period, it might be more beneficial to purchase the tax qualified LTC policy. How do you predict what kind of long term care you are going to need? That means selecting one of these policies is essentially a flip of the coin. While most finance and healthcare advisors are unanimous that LTC policies are a necessity now, this is still a developing product in the insurance sector, and there are high chances of a full re-write of the taxation laws governing long term care financing.
Please note that long term care insurance, the benefits offered and the eligibility requirements are a complex issue, and future legislation is likely to be able to make it simpler and bring more clarity to all LTC related financial issues, including taxation and triggers. At present, you are advised to consult your financial planner and a healthcare manager, and discuss your exact situation and possible future long term care requirements.