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Tax Treatment of Qualified Long Term Care Insurance A Continuing Education Course for Agents & Brokers. Long Term Care Insurance products underwritten and issued by Berkshire Life Insurance Company of America, Pittsfield, MA, a wholly owned stock subsidiary of

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Tax Treatment of

Qualified Long Term

Care Insurance

A Continuing Education Course for Agents & Brokers

Long Term Care Insurance products underwritten and issued by

Berkshire Life Insurance Company of America, Pittsfield, MA,

a wholly owned stock subsidiary of

The Guardian Life Insurance Company of America, New York, NY.


today s agenda
Today’s Agenda
  • Overview of Long Term Care
  • HIPAA 1996 & Long Term Care Insurance
  • Defining tax qualified LTCI
  • Tax treatment of LTCI for individuals
  • Tax treatment of LTCI for business owners
  • Health Savings Accounts & LTCI
  • State tax treatment of LTCI
what is long term care
What Is Long Term Care?
  • Skilled, custodial or maintenance care
    • assistance with activities of daily living (ADLs)
  • Wide range of services for those with…
    • Chronic illness
    • Permanent disability
    • Cognitive impairment
where is ltc provided
Where is LTC Provided?


Home Health Care

Adult Day Care

Assisted Living


Nursing Home

Source: The Wide Circle of Caregiving. Kaiser Family Foundation. et al, June, 2002

who needs long term care
Who Needs Long Term Care?
  • 35 million people in the U. S. areover age 65
    • 6 million need long term care*
  • 77 million Baby Boomers will begin turning 65 in 2011

*Long Term Care Planning: A Dollar and Sense Guide. United Seniors Health Council,January 2002

"Study: Baby boomers could \'strengthen community life,\'" Janet Kornblum, USA Today, June 14, 2004

who needs long term care1
Who Needs Long Term Care?
  • Longer life expectancy = greater probability of need for care
  • People over age 85…
    • the fastest growing segment of our population
    • 50%+ will need nursing care*

Source: A Profile of Older Americans, Administration on Aging, 2002

long term care is a family issue
Long Term Care is a Family Issue
  • Care-giving: difficult decisions &economic consequences
  • Geographically dispersed families
  • Baby Boomers:
    • The “sandwich” generation
  • Two income families (the caregiver works)
formal adjustments to work schedule due to caregiving
Formal Adjustments to Work Schedule Due to Caregiving

Use Sick Days/

Vacation Time



Leave of


Full- to


Quit Job

Retired Early

Source: The MetLife Juggling Act Study Balancing Caregiving with Work and the Cost Involved. November 1999

annual average cost of care
Annual Average Cost of Care*
  • Home care - $24,700
    • Based on hourly rate of $19.00 at 5 hrs/visitand 5 visits/wk
  • Nursing home - $77,745
    • Based on private room rate of $213.00

*Metlife Mature Market Institute Market Survey of Nursing Home and Home Care Costs, September 2007

the cost of care
The Cost of Care
  • Annual Nursing Home costs increasing faster than overall inflation.

Based on the previous example:

Source: Health Spending Projections Through 2013, Office of the Actuary, Centersfor Medicare and Medicaid Services, February 2004

who pays for long term care
Who Pays for Long Term Care?

Total Long-Term Care


Nursing Home














$150.8 billion

$110.8 billion

█ Medicaid█ Medicare █ Out of Pocket █ Private Insurance

█ Other Private█ Other Public

Source: CMS, National health Accounts, 2005

medicare and private health insurance are not the answer
Medicare and Private Health Insurance are Not the Answer
  • Medicare only pays for “skilled” care
    • designed to get you better
    • most long term care is non-skilled care
  • Examples of non-skilled care:
    • oxygen therapy or respiratory therapy for emphysema patients
    • catheter maintenance
    • colostomy drain
    • help with bathing, dressing or other ADLs

Source: Shelton Marketing Services, Inc. 2003

medicaid should be the last option considered
Medicaid Should be the Last Option Considered
  • Medicaid pays for what you do not want: nursing home care
  • Medicaid is welfare: stringent income and asset requirements to qualify
  • Limits your choices

* Refer to your state’s Medicaid rules

medicaid limitations
Medicaid Limitations*
  • Generally below $2,500 in assets
  • Spousal monthly income allowance $1603
  • Look Back Period
    • 5 years
  • Unlimited penalty period

* Refer to your state’s Medicaid rules

is medicaid planning the solution
Is Medicaid “Planning”the Solution?
  • Converts countable assets into inaccessible assets by giving themaway or placing them in trust.
  • It’s a guessing game
    • impossible to judge the correct timing
    • who do you plan for?
  • If not done right, assets are still subject to mandated estate recovery upon death
ltc growing consumer awareness
LTC: Growing Consumer Awareness
  • 71% of Americans claim to be aware of the problem*
  • 50% of Americans age 45 or older have discussed the possible need for long term care with their adult children*
  • American workers rank the importance for LTCI equal to that of group life insurance**

* American Council of Life Insurers, 2003

** Insurance Employee Benefit Survey. Prudential Financial, 2003

national association of insurance commissioners
National Association ofInsurance Commissioners
  • NAIC Model Regulations, 1993
    • Must provide at least 12 months of coverage
    • Must be reimbursement or indemnity contracts
    • Must cover treatment provided in settings other than hospitals
health insurance portability and accountability act of 1996 hipaa
Health Insurance Portability and Accountability Act of 1996 (HIPAA)
  • Federal law that defined tax qualified LTCI
  • Qualified LTCI policies receive favorable tax treatment
  • Any LTCI policy issued prior to January 1, 1997 is grandfathered
tax qualified ltci policy definitions
Tax Qualified LTCI:Policy Definitions
  • May only provide coverage for qualified long-term care services
    • Qualified long-term care services are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating and rehabilitative services and maintenance, or personal care services required by a Chronically ill individual.
    • Qualified services must be provided following a Plan of Care prescribed by a licensed health care practitioner
tax qualified ltci policy definitions1
Tax Qualified LTCI:Policy Definitions
  • Chronically Ill
    • Requires substantial assistance with at least two of six activities of daily living (ADLs)
      • ADLs: dressing, eating, bathing, toileting, transferring and continence
    • Expected to require assistance for more than 90 days


  • Substantial Supervision due to a Severe Cognitive Impairment
    • Severe Cognitive Impairment is a deterioration or loss in intellectual capacity
    • Substantial Supervision means you require continual supervision by another person
      • May include cueing by verbal prompting, gesture, or other demonstrations
tax qualified ltci other requirements
Tax Qualified LTCI:Other Requirements
  • Must be guaranteed renewable
  • May not, in general, duplicate Medicare
  • Must meet NAIC regulations
  • Must have no cash surrender value
  • Must apply all refunds or dividends as a reduction of future premiums or an increase to future benefits, except upon death or total policy surrender
tax treatment of qualified ltci
Tax Treatment of Qualified LTCI
  • Qualified LTCI is treated as accident and health insurance1
  • Premiums can be deductible2
  • Benefits received are not generally taxable income3
  • Un-reimbursed cost of qualified LTC services are deductible as medical expenses

1- IRC Sec. 7702B(a)(3)

2- IRC Sec. 213(d)(1)(D), 213(a)

3- IRC Sec. 105(b), 7702B(a)(2), 7702B(d), 213(d)(1)

tax qualified ltci benefits
Tax Qualified LTCI Benefits
  • 100% of the proceeds on a reimbursement policy are tax free
tax qualified ltci benefits1
Tax Qualified LTCI Benefits
  • With indemnity policies the greater of the first $270 or actual cost of care is tax free

The information provided here is not intended as tax or legal advice.

taxation of premiums individuals
Taxation of Premiums: Individuals
  • For income tax purposes, qualified LTCI premiums qualify as a medical care expense.
  • Deduction is subject to age-based eligible premium limitations, which are adjusted annually.
    • IRC Sec. 213(d)(1)
eligible ltci premium
Eligible LTCI Premium

2008 Eligible Premium Amounts

taxation of premiums individuals1
Taxation of Premiums: Individuals
  • Only eligible premium is deductible
    • Must itemize deduction on schedule A line 1
    • Added to other unreimbursed medical expenses
    • Amount that exceeds 7.5% of Adjusted Gross Income (AGI) is deductible
employer paid ltci
Employer-Paid LTCI
  • Employer may deduct 100% of premiums paid on behalf of W-2 employees and spouses1
    • Age based eligible premium limits do not apply
  • C-Corp. may deduct 100% of premiums for:
    • Owner-employees, spouses, tax dependents, and retirees

1- PL 104-491, IRC Sec. 7702B(a)(3)

employer paid ltci1
Employer-Paid LTCI
  • Premium excluded from employee’s income1
  • Benefit is generally tax free to employee2

1- IRC Sec. 106(a), 7702B(a)(3)

2- IRC Sec. 105(b), 7702B(a)(2), 7702B(d), 213(d)(1)

employer paid ltci2
Employer-Paid LTCI
  • Employer designates or “carves-out” specific classes of employees that will be covered with LTCI.1

1- Treas. Regs. 1.105-5, 1.106-1

employer paid ltci3
Employer-Paid LTCI
  • May not be paid through:
    • Cafeteria plan1
    • Flexible spending account2
    • Salary reduction

1- IRC Sec. 125(f)

2- IRC Sec. 106(c)(1)

sole proprietorship
Sole Proprietorship
  • May deduct 100% of eligible premium for:
    • Owner
    • Spouse
    • Tax dependents i.e. parents & other relatives
  • May deduct 100% of actual premium for:
    • Non-owner employees
    • Their spouses
sole proprietorship eligible premium deduction
Sole ProprietorshipEligible Premium Deduction





  • Self-employed 55 year old owner with a49 year old spouse
sole proprietorship total premium deduction
Sole ProprietorshipTotal Premium Deduction





  • 55 year old owner employs his 49 year old wife
  • Wife is the owner of the joint policy
  • She and her owner/husband are the insureds
sole proprietorship paid up 10 pay deduction
Sole ProprietorshipPaid up (10 Pay) Deduction





  • 55 year old owner employs his49 year old wife
  • Wife is the owner of the joint policy
  • She and her owner/husband are the insureds
partnerships s corporation shareholders
Partnerships & S-Corporation Shareholders*
  • Premiums are deductible by the firm1
  • Premiums represent income to these owners2
  • These owners may deduct the eligible premium3

1- IRC Sec. 162 (a)

2- IRC Sec. 707(c)

3- IRC Sec. 162(I), 213(D),213D(10)

* Greater than 2% shareholder

rules of attribution s corporations
Rules of Attribution:S-Corporations


  • Spouse of shareholder is a W-2 employee of the corporation
  • Corporation pays and deducts premium for both
  • Premium must be added to income of both shareholder and spouse
health savings accounts hsas
Health Savings Accounts (HSAs)
  • Tax exempt account established to pay qualified medical expenses
  • Individuals, under 65, covered by a high deductible health plan (HDHP)
  • Contributions are tax deductible
  • Distributions for qualified medical expenses are tax-free
health savings accounts hsas1
Health Savings Accounts (HSAs)
  • HSA Contribution Limits (2008)
    • the lesser of the annual deductible or $2,900 single / $5,800 family
    • “catch-up” for 55+ is $900 for 2008
  • HDHP Limitations
    • minimum deductible: $1,100 single / $2,200 family
    • maximum out-of-pocket: $5,600 single / $11,200 family
hsa s long term care insurance
HSA’s & Long Term Care Insurance
  • Distributions generally cannot be used to pay health insurance premiums
  • However, long-term care premiums are treated as qualified medical expenses
  • HSA’s offered under a cafeteria plan may be used to pay LTCI premiums
  • Tax deduction limited to the eligible premium
state tax treatment of ltci
State Tax Treatment of LTCI
  • More than half of states offer some form of tax incentive on an individual’s or employer’s state taxes.
  • Some states offered some form of above the line tax incentive (not subject to exceeding a % of AGI) without respect to income.
  • See the handout - Quick Reference Guide to State Tax Treatment of Long Term Care Insurance
  • Overview of Long Term Care
  • HIPAA 1996 & Long Term Care Insurance
  • Defining tax qualified LTCI
  • Tax treatment of LTCI for individuals
  • Tax treatment of LTCI for business owners
  • Health Savings Accounts & LTCI
  • State tax treatment of LTCI
Tax Treatment of QualifiedLong Term Care Insurance

A Continuing Education Course for Agents & Brokers