The short answer is that it depends. Technically, yes, premiums paid into a qualified traditional stand-alone long-term care insurance policy are deemed tax-deductible. However, that can depend on several factors. The premium payments for Long-Term Care Insurance are tax-deductible to the extent that they, along with any other unreimbursed medical expenses, exceed a certain percentage of the insured’s adjustable gross income. For an individual paying premiums, the total expenses would need to be greater than 7.5% of your adjusted gross income. If that sounds like a high percentage, you are correct. For the average person, annually, the Long-Term Care insurance premiums and medical expenses will not exceed the required amount of 7.5% of income. Therefore, the premiums would not be deductible for that individual.
If your unreimbursed medical expenses as an individual do exceed 7.5% of your adjusted gross income, then they are deductible. However, there is a deductibility limit for the premium. Refer to the tax guide for specific tax information for 2021. The policy also must be classified as a qualified plan. All current stand-alone Long-Term Care policies sold today are filed as qualified plans. Most older contracts have been grandfathered to qualified status if purchased before January 1, 1997.
When Long-Term Care insurance was first introduced to the market, consumers could choose between a qualified or non-qualified plan. So, what constitutes a qualified plan? It is a policy that adheres to regulations established by the National Association of Insurance Commissioners. The policy must offer inflation protection and non-forfeiture protection. You can choose not to select these options, but they must be offered in a tax-qualified plan. In addition, the policy must also offer both activities of daily living impairment and cognitive impairment as a benefit trigger to start receiving proceeds from the policy.
As you can see, many factors are considered to determine if your Long-Term Care premiums are tax-deductible. The best approach is to consult with your tax advisor or tax attorney to determine if, as an individual, you can deduct your long-term care insurance premiums. Agents selling Long-Term Care coverage are not allowed to provide our clients with individual tax-specific information as we are not tax professionals. However, we can guide you to the correct place to ensure you are taking advantage of any additional tax deductions regarding premium payments.
Is Long-Term Care tax-deductible for C Corporations?
Any premiums paid by your business for employees and active owners are tax-deductible. In other words, if you offer long-term care insurance coverage as a benefit to any or all of your employees, the premiums are fully tax-deductible. That’s right, 100% deductible. For example, consider a company with 20 employees and the company is paying premiums for ten (executives or owners), all of the premiums are deductible as an ordinary business expense. It also includes any spouses or other legal tax dependents for which the company pays premiums. Find an experienced agent who can assist with this coverage if you own your own business and file as a C-Corp. You will first want to discuss this opportunity with your company’s tax attorney/advisor to determine the best course of action.
Is Long-Term Care tax-deductible for S Corporations?
When determining tax liabilities, the tax code looks to the individual’s ownership rights in the company first. If you own 2% or more of the S-Corp, you are considered an owner. If you own less than 2%, you are deemed an employee, and then the premiums are not deductible. Refer to the tax guide for specific tax information for 2021 to determine if and how much of any long-term care insurance premiums are deductible that your company is currently paying. Tax professionals will be your best resource for any tax advice and deductibility information on any Long-Term Care premium payments.
Long-Term Care claims handled from a tax standpoint?
Once you have qualified for a claim and are receiving benefits, that money may be tax-free. Tax-free status is determined depending on the payout method and benefit amount of your policy. There is a per diem limit, and anything over that limit may be taxable. Most policies sold today fall within the per diem benefit per day limit. So again, more often than not, your Long-Term Care benefits will be tax-free. You will want to continue to work with your tax professional.
Possible tax deductibility is fantastic news for consumers and one of the driving forces and benefits of purchasing this type of insurance coverage. It can protect you should you need assistance in normal daily activities in your home or a long-term care facility. You will be paying pennies on the dollar for your cost of care versus self-insuring, and you will be transferring the risk to the insurance company. And after all, is that not what insurance is all about?
Shara Sutton, CLTC
ssutton@emgbrokerage.com
Director of Sales and Marketing
EMG Insurance Brokerage
Direct 713.507.1042
