There are two types of long-term care insurance: tax-qualified and non-tax qualified. Both are sold today, but tax-qualified LTC insurance is now commanding a major share of the LTC market.  This shift came about with the passage of the Health Insurance Portability and Accountability Act of 1996.

Some LTC Provisions of the Health Insurance Portability and Accountability Act of 1996 (HIPAA)

(PLEASE NOTE: This information is provided for informational purposes only and should not be construed as tax advice. Please consult your own tax advisor for advice regarding your particular circumstances.)

On August 21st, 1996, the President signed into law the Health Insurance Portability and Accountability Act of 1996 (HIPAA), which, in part, establishes consumer protection standards for tax qualified long-term care insurance policies, and provides tax clarification to make policies more affordable.  Purchasers of tax qualified LTC coverage will generally receive their benefits tax-free. They may also be able to deduct their premiums, subject to the 7.5 percent of adjusted gross income and a specific dollar limitation.

Of significance for LTC agents and consumers:

1. The new tax law treats tax qualified LTC insurance on the same basis as medical insurance: benefits are not taxed as income.

2. Premiums may be deducted on the same basis as other medical insurance premiums. The amount of LTC premium that may be deducted will be indexed for inflation and is limited by age. In 2009, the dollar limitation is as follows:

Attained Age Prior to the Close of the Taxable Year	Maximum Tax Deductible Premiums
40 or less 41 through 50 51 through 60 61 through 70 71 and above	$320 $600 $1,190 $3,180 $3,980

3. Employers that offer qualified LTC coverage may deduct premium costs as employee compensation:  employees receive the benefits tax free.

4. All tax-qualified long-term care policies must coordinate with Medicare.

5. LTC policies purchased before 1/1/97 which are state approved are grandfathered and considered qualified plans. Adding or increasing benefits to a pre-1997 issued policy may constitute a material change and affect the "grandfathered" tax qualified status of the policy.

While the tax benefits of this legislation may be helpful to some, the more important impact of it is the clear message it sends to all Americans that the government intends to continue to reduce its role in Medicare and Medicaid and promote personal responsibility through the purchase of private long-term care insurance.
 
QUESTIONS AND ANSWERS REGARDING TAX -QUALIFIED LONG-TERM CARE INSURANCE

What are the characteristics of a "Tax Qualified" Long-Term Care Insurance Policy?

The policy requires that a Licensed Health Care Practitioner must certify that the insured is a "Chronically Ill" Individual which means:
(a) He/she has been or will be unable to perform two Activities of Daily Living (i.e., bathing, continence, dressing, eating, toileting, transferring) for a period of at least 90 days, or;
(b) He/she has severe cognitive impairment - which means such impairment requires substantial supervision to protect the covered person from harm to self or others and from threats to health and safety.

What are the special issue requirements for a Tax Qualified LTC policy?

These requirements are now federal law.

Does the Act address transferring ones assets to qualify for Medicaid?

The Act imposes criminal penalties in Section 217 on those who make asset transfers for the purpose of qualifying for Medicaid benefits.

Next: Employer-sponsored LTC Policies