Look at Taxes When Choosing Long-Term Care

By Associated Press

"There are advantages and disadvantages to each that buyers should know about, though I think people usually are better off buying a tax-qualified policy," says Sam Van Why, an academic associate at the College for Financial Planning.

The tax issues involve two areas: deduction of premiums paid to buy a long term care policy and the benefits you receive if you use the policy to pay for a stay in a nursing home, other long term care facility, or at-home care. Premiums you pay for a long term care policy are tax deductible if they meet one of two standards: The premiums are for a policy you bought before Jan. 1, 1997, or, in the case of a policy bought after that date, it meets the federal criteria for a tax-qualified policy.

The amount of premiums you can deduct depends on your age and is indexed for inflation. For tax year 1999, the deductible amounts are up slightly in some cases from 1998. At age 40 or less, you can deduct $210; from age 41 to 50, $400; from age 51 to 60, $790; age 61 to 70, $2,120; age 71 and older, $2,660. However, you can claim a premium deduction only if your total qualified medical expenses for the year exceed 7.5 percent of your adjusted gross income.

Van Why says a far more important tax issue concerns the ability to exclude long term care benefits as taxable income. "In light of the fact that a policy might pay out benefits of tens of thousands of dollars in a year, keeping all or most of those benefits from being treated as taxable income is significant," Van Why says.

There is a limit as to how much in benefits from a qualified long term care policy a taxpayer can exclude from income. For 1999, the maximum amount is $190 a day, or $69,350 a year. Any benefits that exceed that amount would be subject to income tax, Van Why says.

Life insurance policies that provide long term care benefits as a rider also can be treated under the same tax rules as a qualified long term care policy. Benefits paid out from a policy whose premiums have been paid for by an employer also are not taxable as long as the policy was not chosen under a "cafeteria" plan.

In the case of cognitive impairment, such as Alzheimer's, the impairment must be considered "severe" and require "substantial supervision."

The policy must offer a nonforfeiture option. This option allows you to receive limited benefits in the event you are unable to pay the current premiums. For example, the policy might not pay out benefits for as long as you originally contracted, or the daily benefits might be smaller. The policy cannot pay for Medicare deductibles or co-insurance.

Nonqualified long term care policies generally are less restrictive than qualified policies, Van Why says. For example, a policy might not have a 90-day requirement for ADLs, the cognitive impairment is not described as "severe," or it may pay for deductibles for a certain number of days. However, Van Why cautions that the benefits of these less restrictive nonqualified policies must be weighed against the very substantial benefits of not having your benefits taxed. He also emphasizes that tax breaks have not officially been ruled out for nonqualified plans. The Treasury Department simply has not issued tax guidelines for nonqualified plans.

However, most financial advisers are operating on the basis that until the tax issues are clarified, one should assume that premiums for these policies won't be deductible and that the benefits will be taxable.

For more information on long term care policies, Van Why recommends "A Shopper's Guide to long term Care Insurance," published by the National Association of Insurance Commissioners, which can be reached at (816) 842-3600.

You can also ask your state insurance commissioner or agency on aging for guides that compare long term care policies offered by companies within your state.