1996 Tax Legislation

-- Tax Benefits Of Long - Term Care Insurance

Schexnayder Building, Belle Terre Blvd, Laplace

The recently passed Health Insurance Act of 1996 has put long-term care insurance and expenses in the forefront of issues that should be considered as the result of the new tax laws passed this summer. Beginning in 1997, long-term health insurance premiums will be deductible up to certain limits just like any other medical expense and, similarly, benefits received under these policies will be tax-free. Employers should decide whether to set up such plans for their employees; and both self-employed and retired individuals should weigh whether long-term care policies make sense for them. This letter reviews some of the considerations.

The basics. Amounts received under a long-term care insurance contract will be excluded from income (on per diem contracts the exclusion is limited to $175 per day). Employees generally will not realize income on premiums picked up by their employers for long-term care coverage and any premium payments picked up by the taxpayer will be considered a medical expense. In addition, the new law allows long-term care costs that are paid out-of-pocket to qualify as an itemized medical expense deduction. Amounts paid for eligible long-term care premiums (or excludable if picked up by an employer) are deductible medical expenses only up to the amount of specified annual limitations: $200 for those age 40 or less, $375 for ages 41 through 50, $750 for ages 51 through 60, $2,000 for ages 61 through 70, and $2,500 for those over 70.

What's covered. Qualified long-term care services include not only the usual medical treatment but also maintenance and personal care services that are required by a chronically ill individual and provided pursuant to a plan of care prescribed by a licensed health care practitioner. For someone with severe Alzheimer's disease this care includes assistance to keep the individual out of danger. Qualified long-term care, for purposes of exclusion from income or deduction, however, does not include help for household maintenance tasks that the individual can no longer perform.

Qualifying contracts. Long-term contracts must satisfy certain provisions of the Long-Term Care Insurance Model Act and model regulations issued by the National Association of Insurance Commissioners (as adopted January 1993). Other consumer protections in the form of issuer requirements are also made a prerequisite for qualifying a contract to be considered a qualified long-term insurance contract. The exclusion is generally applicable to contracts issued after December 31, 1996. A grandfather rule provides that contracts issued earlier but which meet the long-term care insurance requirements of the state the contract is situated when issued will be treated as qualifying. In order to allow individuals with existing non-qualifying policies to qualify, no gain or loss will be recognized if the contract is exchanged for a qualified long-term care insurance contract after August 21, 1996, and before January 1, 1998.

Accelerated death benefits. Under a separate provision, a taxpayer who is terminally or chronically ill may elect to receive accelerated death benefits tax-free. For chronically ill individuals, this exclusion is limited to the same amounts excluded under the long-term care provisions (that is, $175 per day or actual costs). Benefits received from this type of insurance rider and a long-term care policy must be aggregated in determining whether the $175 per day limit has been surpassed.
Whether or not to buy. The decision to purchase or forgo long-term care insurance is one which cannot be made without balancing tax, financial and estate planning considerations. The changes in the tax laws have made long-term care less expensive because of the exclusions and deductions now available. Even within the confines of a long-term care policy that qualifies under the tax law, however, there exist a variety of different policies to choose from. We can review with you how these tax-favored options tie into your financial and estate plans.

If you'd like to investigate whether a long-term care policy under the new tax law makes sense for you, please do not hesitate to give us a call.

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