WHAT IS A TAX QUALIFIED LONG-TERM CARE POLICY?
Special Rules for Certain Employees
Business and Investment Income
Sickness and Injury Benefits
Long-Term Care Insurance Contracts
In most cases, long-term care insurance contracts are treated as accident and health insurance contracts. Amounts you receive from them (other than policyholder dividends or premium refunds) are excludable in most cases from income as amounts received for personal injury or sickness. To claim an exclusion for payments made on a per diem or other periodic basis under a long-term care insurance contract, you must file Form 8853 with your return.
A long-term care insurance contract is an insurance contract that only provides coverage for qualified long-term care services. The contract must:
• Be guaranteed renewable;
• Not provide for a cash surrender value or other money that can be paid, assigned, pledged, or borrowed;
• Provide that refunds, other than refunds on the death of the insured or complete surrender or cancellation of the contract, and
dividends under the contract may be used only to reduce future premiums or increase future benefits; and
• In most cases, not pay or reimburse expenses incurred for services or items that would be reimbursed under Medicare, except where Medicare is a secondary payer or the contract makes per diem or other periodic payments without regard to expenses.
Qualified long-term care services. Qualified long-term care services are:
• Necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, rehabilitative services, and maintenance and personal care services; and
• Required by a chronically ill individual and provided pursuant to a plan of care prescribed by a licensed health care practitioner.
Congress passed legislation effective in 1997 that established the tax treatment of premiums paid for and the benefits paid/reimbursed by long-term care insurance policies that met certain federal standards. This legislation is called the Health Insurance Portability and Accountability Act or HIPAA. Long-term care policies that use the federal standards to cover benefits are labeled as “Federally Tax Qualified”. Some or all of the premiums for these federally tax qualified policies may be deductible as a medical expense (over 7 or 10% of income & a maximum schedule for individuals) Medical expenses also include amounts paid for qualified long-term care services and limited amounts paid for any qualified long-term care insurance contract. Publication 502 on your federal and California income tax returns (depending on your age and the amount of annual premium).
Policies sold as federally tax qualified long-term care insurance use a standard of eligibility for benefits that may be stricter than the standards established in California for non-qualified policies. It may be easier to qualify for benefits from non-tax qualified policies that use the standards established by California. insurance.ca.gov *
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complementary Long Term Care Proposal
Copied from Publication 502 Page 11
You can include in medical expenses amounts paid for qualified long-term care services and premiums paid for qualified long-term care insurance contracts.
Qualified Long-Term Care Services
Qualified long-term care services are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, rehabilitative services, and maintenance and personal care services (defined later) that are:
1. Required by a chronically ill individual, and
2. Provided pursuant to a plan of care prescribed by a licensed health care practitioner.
Chronically ill individual.
An individual is chronically ill if, within the previous 12 months, a licensed health care practitioner has certified that the individual meets either of the following descriptions.
1. He or she is unable to perform at least two activities of daily living without substantial assistance from another individual for at least 90 days, due to a loss of functional capacity. Activities of daily living are eating, toileting, transferring, bathing, dressing, and continence.
2. He or she requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.
Maintenance and personal care services.
Maintenance or personal care services is care which has as its primary purpose the providing of a chronically ill individual with needed assistance with his or her disabilities (including protection from threats to health and safety due to severe cognitive impairment).
Qualified Long-Term Care Insurance Contracts
A qualified long-term care insurance contract is an insurance contract that provides only coverage of qualified long-term care services.
The contract must:
1. Be guaranteed renewable,
2. Not provide for a cash surrender value or other money that can be paid, assigned, pledged, or borrowed,
3. Provide that refunds, other than refunds on the death of the insured or complete surrender or cancellation of the contract, and dividends under the contract must be used only to reduce future premiums or increase future benefits, and
4. Generally not pay or reimburse expenses incurred for services or items that would be reimbursed under Medicare, except where Medicare is a secondary payer, or the contract makes per diem or other periodic payments without regard to expenses.
The amount of qualified long-term care premiums you can include is limited. You can include the following as medical expenses on Schedule A (Form 1040).
1. Qualified long-term care premiums up to the following amounts.
a. Age 40 or under – $410.
b. Age 41 to 50 – $770.
c. Age 51 to 60 – $1,530.
d. Age 61 to 70 – $4,090.
e. Age 71 or over – $5,110.
2. Unreimbursed expenses for qualified long-term care services.
Note. The limit on premiums is for each person.
Also, if you are an eligible retired public safety officer, you can’t include premiums for long-term care insurance if you elected to pay these premiums with tax-free distributions from a qualified retirement plan made directly to the insurance provider and these distributions would otherwise have been included in your income.
Resources & Links
Taking Care of Tomorrow Pages 29-31, 37-40
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complementary Long Term Care Proposal
TAILORING LTC Long Term Care BENEFITS TO YOUR OWN NEEDS
1. Seven percent of my annual income is approximately $_______________. (This is the maximum amount of annual income experts advise spending on a premium.)
2. The cash value of my non-housing assets* is $____________. (This is the amount you would otherwise have to spend for long-term care.)
3. My non-housing assets would last _____________ years if I needed care today. (This is the approximate number of years of coverage you might consider buying.)
4. I can afford to pay $____________ a day towards the cost of my own care. The difference between the amount I can afford and the cost of care today is $_________. (This is the approximate amount of daily benefit you will need.)
5. I can afford to pay a total of $____________ for the first days of care in a nursing home. Therefore, I will need a waiting period no longer than:
30 days $__________ 60 days $__________ 90 days $____________.
(To determine the amount you would pay, multiply the daily nursing home cost times the number of days in the waiting period.) Copied from Taking Care of Tomorrow *
CA Dept of Aging – Long Term Care
Taking Care of Tomorrow
Understanding Long-Term Care
Planning for Long-Term Care
Paying for Long-Term Care
Long-Term Care Insurance.
California Partnership for Long-Term Care
California Public Employees’ Retirement System (CalPERS)
Federal Long Term Care Insurance Program
Reference and Data Chart Citations.
Glossary of Terms
Suggestions for Further Reading