The Insurance Buying Guide: Tax Considerations

The federal Health Insurance Portability & Accountability Act of 1996 established that the premiums paid for individual LTC insurance are tax deductible as a medical expense -- to the extent that your total unreimbursed medical expenses exceed 7.5 percent of your adjusted gross income.

This "advantage" sounds better than it really is. Many purchasers of LTC insurance are age 65 or older. Since only about half of the individuals over age 65 pay income tax and even fewer itemize their deductions, the tax benefit is of limited application. For a person who has a substantial income, the 7.5 percent figure can render this deductibility meaningless. Also, the tax deduction is subject to age-related limits, ranging from $200 per year for taxpayers under age 40 up to $2,500 per year for taxpayers age 71 and older (these limits are subject to annual indexing).

LTC benefits are considered reimbursements for medical expenses already incurred, and are therefore received tax-free up to a per-day maximum of $175 per day (to be adjusted for inflation after 1997).

When group long-term care insurance premiums are paid by the employer, the premiums are tax-deductible for the employer and benefits are received tax-free up to specified limits.