1. What is a qualified long-term care insurance contract?
A long-term care insurance policy issued after 1996 is a qualified long-term care insurance contract under IRC Section 7702B(b).
2. Can a life insurance policy or annuity contract be used to provide long-term care coverage?
Yes. A life insurance or annuity contract may provide long-term care insurance benefits. Any long-term care insurance coverage, qualified or otherwise, that is provided by a rider or as part of a life insurance or annuity contract will be treated as a separate contract for purposes of the treatment of long-term care benefits paid. As such, benefits paid for qualified long-term care services are generally tax-free (regardless of the treatment otherwise applicable to a withdrawal from the underlying life or annuity contract).
3. What are qualified long-term care services?
Qualified long-term care services are any necessary diagnostic, preventive, therapeutic, curing, treating, mitigating and rehabilitative services, and maintenance or personal care services, that are 1) required by a chronically ill individual and 2) provided under a plan of care set forth by a licensed health care practitioner. A licensed health care practitioner can be a physician, registered nurse or licensed social worker.
4. May a self-employed individual deduct premiums paid for qualified long-term care insurance?
Yes. The individual may deduct premiums paid for a qualified long-term care insurance contract (for oneself, one’s spouse and dependents). Because amounts paid for qualified long-term care insurance contracts fall within the definition of medical care, qualified long-term care insurance premiums are eligible for deduction from income by self-employed individuals.
The self-employed deduction is not subject to the “10% (7.5% for 2017-2020) of AGI” threshold which must be met by individual taxpayers; however, the maximum amount of premium which may be taken as an “above-the-line” deduction is limited by the age-based eligible premium table (indexed for inflation).
5. Are benefits received under a qualified long-term care insurance contract taxable income?
No, they are not. A qualified long-term care insurance contract is treated as an accident and health insurance contract. Thus, amounts (other than dividends or premium refunds) received under such a contract are treated as amounts received for personal injuries and sickness and are treated as reimbursement for expenses incurred for medical care. Since amounts received for personal injuries and sickness are generally not includable in gross income, benefits received under qualified long-term care insurance are generally not taxable.
6. Can an annuity contract or life insurance contract be exchanged for another contract containing a long-term care rider in a nontaxable exchange?
Yes. As a result of the Pension Protection Act of 2006 (PPA), which went into effect January 1, 2010, tax-qualified (TQ) long-term care insurance (LTCI) is now included in the scope of the Section 1035-exchange rules. This means that life, endowment, annuity and qualified LTCI may all be exchanged for qualified LTCI. In addition, the presence of a qualified LTCI rider on a life or annuity contract will not cause it to fail to qualify for such an exchange. In other words, a taxpayer can exchange an annuity without a long-term care insurance rider for an annuity with such a rider, and still qualify for non-recognition treatment.
7. How is a long-term care insurance policy taxed when it is not a qualified long-term care insurance contract?
Policies that do not meet the definition of a qualified long-term care insurance contract under IRC Section 7702B(b) generally are referred to as non-qualified (or non-tax-qualified, NTQ) long-term care policies. Only premiums paid for qualified LTC policies are eligible for a deduction, so if this is a significant benefit to one’s client, then a tax-qualified (TQ) policy is recommended. Having said that, TQ plans are virtually the only remaining choice today. NTQ sales represent, on average, less than one-half of 1% of all sales.
8. What is short-term care insurance?
Short-term care insurance is often a type of critical care insurance that functions much like long-term care insurance. Unlike long-term care insurance, however, short-term care insurance coverage remains in effect only for a relatively short period of time (typically 12 months or less). Taxpayers become eligible for short-term care insurance benefits when they need assistance performing two or more activities of daily living (ADLs). ADLs include the following activities: (1) eating, (2) toileting, (3) transferring in and out of bed, (4) bathing, (5) dressing and (6) continence. Short-term care insurance can also function much like a typical health insurance policy, although coverage will usually be limited to certain specified benefits.
9. When can short-term care insurance be beneficial to taxpayers?
Taxpayers who apply for short-term care insurance (STC) are generally not required to complete the comprehensive applications and medical history screening that is required to qualify for long-term care (LTC) insurance. In general, STC provides an attractive option for those who cannot afford, or are unable to qualify for, traditional long-term (LTCI) care insurance. Current statistics show that over 40% of LTC claims last less than one year: the most common reasons for these claims are short, recoverable illnesses, sudden terminal illnesses, and the single-use of non-caregiving benefits (such as equipment and training). For this reason, some clients may find STC a more suitable option.
STC can also be employed as a “gap” to fill the elimination period of someone’s existing LTC policy. They may have elected a longer elimination period at a time when circumstances were different, or when they didn’t have another choice.
10. Will short-term care insurance satisfy the ACA requirement that individuals purchase health insurance coverage or pay a penalty?
Editor’s Note: The 2017 tax reform legislation repealed the Affordable Care Act individual mandate that required individuals to purchase health insurance or pay a penalty for tax years beginning after December 31, 2018. The employer mandate and reporting requirements were not repealed.
No. According to the IRS, individual health insurance coverage does not include short-term, limited-duration insurance. Because short-term care insurance is, by its nature, short-term and limited in duration, such coverage will not satisfy insurance obligations under the Affordable Care Act (ACA).