Financial Information: Understanding Long Term Care Insurance

Tax Initiatives and Consumer Protections

Since January 1, 1997, individuals have been able to include out-of-pocket expenses for long term care and long term care insurance premiums with their other itemized medical expenses

on their annual federal income tax returns. Long term care and other medical expenses are deductible, to the extent that they exceed the federal government’s 7.5 percent threshold of adjusted gross income. (Talk to your financial advisor to ensure that you are eligible for this deduction). The insurance benefits consumers receive, for the most part, will not be taxable as income. Note: All long term care policies issued before that date were grandfathered.

The amount of LTC insurance premium that may be treated as an annual medical expense for federal income tax purposes is limited according to the following table:

Age Limitation

40 or less $200
41 to 50 $375
51 to 60 $750
61 to 70 $2,000
71 and over $2,500

Benefits paid under a long term care insurance policy will not be treated as income for federal tax purposes - except that, for policies that pay a fixed sum per day of disability, amounts in excess of $175 per day will be considered income. The $175 daily limit will rise with inflation in future years. A number of states have also recognized the importance of long term care insurance by providing their own tax incentives.

Employer Deductions

Employers will have the option of deducting as a business expense the cost of establishing long term care insurance policies for employees, in addition to any contribution they make toward premiums.

Consumer Protections

Long term care policies sold after 1996 must meet the consumer protection standards in the law in order to qualify for favorable tax treatment. Some of these protections include:

• Early in the sales process, customers must receive a description of the policy’s benefits as well as an explanation of the limitations of the policy, referred to as the "outline of coverage."
• Companies selling policies are prohibited from sales practices that mislead and pressure cutomers.
• Insurance companies must offer each purchaser the option of adding inflation protection to their long term care insurance policy.

In general, policies may not limit coverage based on medical conditions, accidents or type of treatment. However, in some cases, policies are permitted to deny coverage for preexisting conditions or diseases, alcoholism, drug addiction or nervous disorders (except Alzheimer’s).

Note: A policy cannot exclude coverage for preexisting conditions for more than six months after the effective date of coverage.

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