Long Term Care Consultant Group

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Peter B. Daenzer, CLU, CPCU
Chairman, LTC Consultant Group, Inc.
77-564 Country Club Dr., Suite #116
Palm Desert, CA 92211
(877) 501-4890, (760) 772-8235, FAX (760) 772-8236, E-mail

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Tax Benefits

New Tax Changes Affecting Long-Term Care Insurance Premiums and Benefits

The White House Congress passed a law in 1996 called the Health Insurance Portability and Accountability Act. Beginning with the 1997 tax year, this law may let you deduct all or part of the premium for a Long-Term Care (LTC) insurance policy. Your LTC premium can be added to your other deductible medical expenses. To claim a tax deduction, all of your medical expenses must be more than 7.5% of your adjusted gross income. Please remember that many people do not exceed the 7.5% level of medical expenses on a regular basis.

In addition, not all Long Term Care contracts are tax qualified. Policies must meet certain federal standards before you can deduct the premium. These policies are called "tax qualified" or "qualified Long Term Care insurance contracts." Benefits you receive from a qualified LTC policy are generally not taxable income. Benefits received from a policy that is not a qualified LTC policy may not be taxable income. The Health and Insurance Portability and Accountability Act changes the Internal Revenue Code. The U.S. Department of the Treasury is responsible for developing regulations giving directions as to how the law should be applied. These regulations have not yet been completed. It is important to understand that uncertainty exists. Companies will use their own interpretation of some policy provisions (such as when benefits are triggered) until the Department of the Treasury issues regulations.

Recent Developments:
LTC Incentives Added Onto Reagan Legislation
The Ronald Reagan Alzheimer's Breakthrough Act of 2004 that was introduced earlier this week offers added hope that the Grassley-Graham LTC tax incentives (S. 1335) will become law. The incentives - the above-the-line LTCi deduction and the long-term caregiver tax credit - were added onto the Reagan legislation, which calls for substantial increases in research funding for Alzheimer's Disease and boosts the nation's investment in caregiver support through respite care, family counseling and tax credits.
The Reagan legislation, including the adition of the Grassley-Graham LTC incentives, has attracted a significant group of bipartisan co-sponsors and could eventually find its way into law.

Here are some answers to questions you may have:

How will I know if the premium for my Long Term Care insurance policy qualifies for a tax deduction?
1) LTC policies issued before January 1, 1997 are automatically qualified.
2) LTC policies issued on or after January 1, 1997 must be qualified (meet federal standards) before you can deduct the premium. These standards are discussed below.

The maximum amount you can add to your other deductible medical expenses in 2006 is based on your age at the end of each tax year.

Age Limit on Deduction

40 years old or less $280

41 to 50 years old $530

51 to 60 years old $1,060

61 to 70 years old $2,830

71 years old or older $3,530

See your personal tax advisor for information on how these changes could affect you.

When does a qualified policy pay benefits?
Policies issued after January 1, 1997 must use new eligibility standards. You must be certified "chronically ill" by a licenced health care professional and have a plan of care. You must be recertified chronically ill annually. In a qualified LTC policy, you are considered chronically ill if you meet one of the following two standards:

1) You are expected to be unable, without substantial help from another person, to do at least two of five (or six) Activities of Daily Living (ADLs) for at least 90 days. ADLs are bathing, dressing, toileting, transferring, eating and continence. A state may decide to allow companies to choose which five ADLs to include, or it can require companies to use all six. Check with your state insurance department to find out what your state requires.
-OR-
2) You must need substantial supervision to protect your health and safety because you have a cognitive impairment.

Policies issued before January 1, 1997 are not affected by these new requirements.

Can a life insurance policy be a qualified Long Term Care insurance policy?
Qualified LTC policies also include Life insurance policies which provide LTC benefits through a rider or as a part of the policy. You must be considered chronically ill under the standards discussed above to get LTC benefits from a Life insurance policy.

What are some of the consumer protection standards that must be included in qualified policies issued after January 1, 1997?
Most of the standards that must be included in new qualified policies are already required by states. These requirements include guaranteed renewability, and the option to add inflation protection and nonforfeiture benefits. Check with your state insurance department or senior counseling program for more information.

You may be able to exchange any non-qualified LTC insurance purchased after January 1, 1997 for a qualified LTC policy, and vice versa, dependent upon federal action or a ruling from the IRS. Also, employer-paid LTC insurance benefits may be tax free to employees -- even when the employer deducts the premium. See Group Discounts.

The Omnibus Appropriations Conference Agreement, recently signed by the president, includes a provision to accelerate the phase in of the 100% deduction for qualified long term care insurance premiums, purchased by self employed individuals. Under this new provision self employed individuals are permitted to deduct 70% in 2002, & 100% thereafter for coverage on themselves, their individual spouses, and their dependents. A sole proprietorship can deduct 100% of these LTC premiums currently for their employees. Corporations, Partnerships, Sub Chapter S corporations, Limited Liability Companies, and Non Profit Organizations can now deduct 100% of these LTC premiums for their employees under curent law. Unlike the individual, there are no limits on these business tax dedutions.

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