Today’s blog post continues the series about buying long term care insurance as a strategy for planning ahead for long term care. My post of May 22, 2014 discussed whether to buy long term care insurance at all. My post of May 29, 2014 suggested looking for a stable, proven insurer. My post of June 5, 2014 described how to identify a proven, stable Long Term Care insurance company. My post of June 12, 2014 discussed the importance of protection against inflation. My post of June 19, 2014 suggested planning to use insurance to pay for four or five years of long term care. My post of June 22, 2014 suggested a daily rate to choose when purchasing long term care insurance. My post of July 10, 2014 advised to look carefully at the list of Activities of Daily Living that can trigger coverage from the long term care insurance policy. My post of July 17, 2014 described the differences between a “period of time” kind of coverage and a “pile of money” kind of coverage. My post of July 25, 2014 advised to make sure that the long term care insurance includes coverage for cognitive impairment. The introductory post in the series on planning ahead for long term care costs appeared on May 15, 2014.
Today’s post will discuss whether to buy a tax-qualified long term care insurance policy or a non-tax-qualified long term care insurance policy.
A tax-qualified policy has, as the label implies, certain tax advantages over non-tax-qualified policies. Premiums, or a portion of the premiums, for a tax-qualified policy can be deducted from the taxes of the policy holder if the taxpayer’s medical expenses (including the deductible amount of the long term care insurance premium) exceed the threshold amount for tax-deductibility. (Tax deductibility of health care costs may be different now that the Affordable Care Act has gone into effect.) The amount of premium that can be counted toward medical expenses goes up with age.
For the self-employed, however, the premiums for a long term care policy may be deductible without regard to the type of policy. In fact, the premiums may be deductible for the self-employed and his or her spouse as well. (This is more a tax planning issue than a long term care insurance issue. Please consult your tax advisor for details and proper planning.)
Likewise, the benefits paid out from a tax-qualified policy are not countable as income. It is not clear, however, that the benefits from a non-tax-qualified policy are taxable. The law that created tax-qualified policies (HIPAA) states that tax-qualified policy benefits are not taxable as income, but the law is silent about non-tax-qualified policies.
Whether policy benefits are counted as income may not matter, however. If you buy long term care insurance to cover the “look back” period before qualifying for Medicaid, as suggested in my post of June 19, 2014, your giving assets to your friends and family (to protect those assets from long term care costs) should leave you with income (including the insurance proceeds) that is low enough not to worry about taxation (especially after deducting medical costs.)
There is a significant difference between the triggers for tax-qualified and non-tax-qualified policies. (The policy trigger is the event or combination of events that causes the policy to start paying benefits.)
Tax-qualified policies must pay when the policy holder cannot perform two or more Activities of Daily Living. Activities of Daily Living include going to the bathroom, bathing, getting in and out of bed or a chair, and other similar actions. (Activities of Daily Living are discussed in my post of July 10, 2014.) Tax-qualified policies must also pay if the policy holder has a cognitive impairment (such as dementia) that endangers the policy holder or others. (Cognitive impairment coverage is discussed in my post of July 25, 2014.)
Non-tax-qualified policies may start paying benefits when the policy holder is unable to perform only one Activity of Daily Living or has a cognitive impairment that endangers the policy holder or others. In addition, the Activities of Daily Living list for a non-tax-qualified policy may include walking, which is not generally included on tax-qualified policies. In fact, some non-tax-qualified policies are triggered when the policy holder’s doctor determines that long-term care is needed (and do not set out any limits on how the doctor makes such a determination.)
(Note: As mentioned in my post of July 10, 2014, make sure that bathing is one of the listed Activities of Daily Living.)
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