Making a Wiser Choice

In recent years, both the federal government and the states have taken steps to make it easier for individuals to purchase private long-term care insurance.  The federal government passed the Health Insurance Portability and Accountability Act in l996which allows individuals to apply long-term care insurance premiums and out-of-pocket expenses toward the 7.5 percent base for medical expense deductions in their taxes.  To get the deduction, the policy must be tax-qualified. This law also says that benefits received from qualified long-term care policies are not taxable.

In addition, all states have adopted legislation and/or regulations.  For further information, contact your state insurance department to find out what, if any, regulations exist. 

It is important for women to plan early so that the high cost of long-term care does not threaten their financial security.  Private long-term care insurance can provide peace of mind to women who can afford to buy it.  But as is the case when purchasing any insurance policy, women should scrutinize the policies before making a decision.

Tax implications of long term care

Most long term care policies sold today are tax-qualified, which means your premiums for long term care insurance, as well as your out-of-pocket expenses for long term care, can be applied toward meeting the 7.5 percent floor for medical expense deductions contained in the federal tax code.

There are limits, based on your age, for the total amount of premiums paid for long term care insurance that can be applied toward the 7.5 percent floor. You should check with your tax adviser to see whether you are eligible to take this deduction.

Employers are able to deduct as a business expense both the cost of setting up a group long term care insurance plan for their employees and any contributions they may make toward paying their employees' premium costs. Employer contributions are excluded from their employees' taxable income.

Although not as popular, there are non-tax qualified long term care policies. These individual policies typically offer more generous benefits and use less restrictive guidelines to trigger them. However, unless there are changes to the federal tax code, benefits from this kind of policy may be considered taxable income.