Long-term Care Insurance and Taxes: FAQ

Many people are shocked at how much it costs to provide long-term care for a family member. Here are the latest cost figures from the National Center for Assisted Living.

With those high costs, any way to find savings is critical. Beyond a qualified LTC insurance plan, tax savings also offer the opportunity to reduce the total cost. Whether you are already using LTC services or are considering them, here are some helpful considerations for qualified LTC plans that are offered by an insurance company licensed in your state and includes certain federal tax benefits.

How Does It Work?

Benefits paid under an LTC policy are often stated as daily maximums, typically ranging from $50 to $500. You choose the benefit level, and you’re reimbursed up to the amount chosen. An LTC policy with a monthly benefit reimburses you for a specified amount per month, regardless of how many days you receive care or the cost for those days.

Also, you can buy, at higher premiums, an LTC policy with or without automatic annual inflation adjustments to your benefit maximums. The annual inflation adjustment rate is usually 3% to 5% and that rate can be compounded annually or not.

Benefit payments commence after the policy waiting period has been satisfied. A 90-day waiting period is typical. You may be able to choose benefit periods ranging from two years to lifetime coverage, but most policies have benefit periods of two, three or five years.

When Should I Sign Up for LTC Insurance?

Just like regular health insurance, the premiums are based on your age and health factors when you enroll.

Your overall health must be reasonably good when you apply for coverage. Otherwise, you won’t be accepted regardless of your age. After you obtain coverage, it will remain in force — regardless of changes in health and advancing age — as long as you pay the premiums.

Important: While the LTC insurance company can’t raise your premiums due to changes in your age or health, it can raise premiums for broad classes of policyholders when a company’s financial results go south. For that reason, it’s important to check the overall reputation and premium-raising history of any insurance company you’re considering for LTC coverage.

Are LTC Insurance Benefits Tax-Free?

The general rule is that benefit payments received under a qualified LTC policy are federal-income-tax-free. Qualified policies must be guaranteed renewable, and they can’t have any cash value. Most LTC policies sold these days are qualified policies, but don’t sign up without first double checking.

Some qualified policies pay a designated daily benefit, regardless of actual costs. For 2023, benefits under such per-diem policies are automatically tax-free up to $420 per day. When benefit payments exceed the cap, they’re still tax-free if actual costs for qualified LTC services equal or exceed the payments.

For example, Betty’s LTC policy pays $500 per day regardless of actual expenses. If her actual expenses are $500 or more, she’ll have no taxable income from the payout. But if actual expenses are only $300 per day, she would have taxable income of $80 per day ($500 minus the $420 tax-free cap).

Important: Daily benefit payments are automatically tax-free if the insured person is terminally ill.

If you collect LTC insurance benefits during the year, the total amount will be reported to you on Form 1099-LTC, “Long-Term Care and Accelerated Death Benefits,” which you should receive early in the following year. The IRS will also receive a copy.

Can I Deduct LTC Insurance Premiums?

A qualified LTC policy is considered health insurance for federal income tax purposes. So, the premiums are treated as medical expenses for itemized medical expense deduction purposes. However, if your premiums exceed the annual age-based caps listed below, you can only count the capped amount as a medical expense.

Take your qualified LTC insurance premium amount (limited to the age-based cap if applicable) and add it with your other medical expenses (health and dental insurance premiums, insurance co-payments, out-of-pocket prescription costs and all your other unreimbursed medical outlays). If the resulting total exceeds 7.5% of your adjusted gross income (AGI), you can write off the excess as an itemized medical expense deduction. This assumes that you have enough other types of deductions to itemize, rather than take the standard deduction.

AGI includes all taxable income items and is reduced by certain write-offs such as deductible IRA contributions and alimony payments required by a pre-2019 divorce agreement.

Don’t forget to count premiums paid for coverage on your spouse and any other dependent relative. For this purpose, a dependent relative is someone for whom you pay over half the cost of support during the year.

Important: If you’re self-employed, you can generally deduct premiums for qualified LTC insurance whether you itemize or not. However, the age-based deduction cap applies.

As you get older, LTC insurance can provide much-needed peace of mind that you won’t become a financial burden on your family. LTC insurance premiums and benefits can also be eligible for favorable tax treatment. Contact us if you have additional questions about LTC insurance and its tax implications.