Choosing Between Tax-qualified And Non-tax Qualified Policies

By Author: Katie Carpenter
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A lot of Americans have turned to long term care insurance to prepare for the exorbitant costs of LTC services. Recognizing the importance of LTC insurance in our healthcare and retirement system, the government has incentivized its purchase in the form of tax incentives. Tax incentives are given to owners of policies that meet the provisions set forth by the Internal Revenue Code 213(d).

A lot of insurance consumers consider these incentives as a way to cushion the impact of LTC insurance premiums. However, are tax qualified policies right for everyone? What follows are important information that will help you understand whether a tax-qualified or non-tax qualified policy is right for you.

Tax Qualified Policies

1. Owners of tax-qualified policies may be eligible for federal tax deduction. Premiums paid must be itemized as medical expense. Medical expenses exceeding 7.5% of the total adjusted income are tax deductible up to a certain limit. Below is the 2012 Federal Tax Deduction Limit.

Age Maximum Tax Deductible Premium
40 below $340
41 to 50 $640
51 to 60 $1,240
61 to ...
... 70 $3,390
71 and above $4,240

Aside from the federal tax deduction, they may also qualify for some state tax incentives. In the state of Virginia, tax credits equal to 15% of the total insurance premiums paid in a year are granted to owners of tax qualified policies.

2. To trigger benefits, the insured must be unable to perform 2 out of 6 activities of daily living namely bathing, eating, dressing, transferring, continence and toileting.

3. A health professional must certify that the policy owner will need long term care for at least 90 days.

4. Benefits are not payable if the services received are covered by Medicare.

Non-tax Qualified Policies

1. Beginning January 1, 1997, benefits received from a non-tax qualified policy will not be taxed.

2. The 90-day certification from a health care professional is not required.

3. Benefit triggers are more liberal. Benefits can be received as a result of “medical necessity,” even when the person can still perform basic ADLs.

4. Policy owners who only need less than 90 days care can still qualify for benefit.

Depending on your situation, a tax qualified policy or non-tax qualified policy can be right for you. Learn more about your long term care options before making a decision. Go to http://www.completelongtermcare.com/news/ for more information.