Tax Incentives for Long Term Care Insurance

HIPAA and Tax-Qualified Long-Term Care Insurance Policies

The Health Insurance Portability and Accountability Act (HIPAA) is legislation that was passed by Congress and signed into law in August 1996. The long-term care provisions became effective January 1, 1997. This new law established tax-qualified long-term care insurance and clarified the tax treatment for long-term care insurance premiums, benefits, and out-of-pocket custodial care expenses.

LTC policies issued prior to January 1, 1997, were grandfathered to receive the new tax-qualified benefits as well. As long as policyholders did not materially change these policies, they can deduct an eligible portion of the cost of the policy’s premium and receive benefits tax-free.

Policy changes that can be made but which are not categorized as material changes include:

  • Exercising a future purchase option
  • Premium mode changes
  • Class-wide premium increases or decreases
  • Benefit reductions requested by the insured
  • Continuation or conversion of group coverage
  • Addition of a benefit without a premium change
  • Reduction in premium when a spouse is insured at a later date and the first spouse then receives his or her marital discount

 Tax Incentives for Purchasing Long-Term Care Insurance

With the intent of reducing the growth of Medicare and Medicaid spending, both federal and state governments are supporting the purchase of long-term care insurance as a part of a plan for health care reform and cost containment. Benefits paid under a HIPAA tax-qualified policy can be excluded from taxable income as long as they do not exceed $ 280 per day (2009) or the actual reimbursed costs, if greater. This amount goes up each year.

In addition, premiums paid for a tax-qualified policy may be deductible in some cases. You should work with your client’s tax advisor to determine the availability of a premium deduction. Generally, the deduction is very limited for individuals, but may be significant for business owners.

For individuals, age appropriate, eligible tax-qualified insurance premiums are a deductible medical expense. But to realize the deduction a taxpayer must itemize their deduction on their tax returns Schedule A. In addition:

  • Only a limited amount can be included (the age-based eligible premium noted in the following table); and
  • The premium, along with other out-of-pocket, unreimbursed medical expenses, must exceed 7.5 percent of adjusted gross income.

It is important for you to note that many seniors do not itemize on their tax returns because they have a higher standard deduction, and many do not have large mortgage interest payments that justify itemizing. The IRS says only about 4.5 percent of all taxpayers realize any medical expense deduction on their returns. The following table illustrates the amount of premium payments eligible for deductions under 2009 Internal Revenue Code SS702B & 213(d).

Age Attained Before The

Close Of Taxable Year

Eligible Tax

Deductible Premiums

40 or below

$   320


$   600





71 and above



Some states have approved deductibility or a tax credit for some or all of long-term care insurance premiums. IN 2008 these states included Alabama, Arkansas, California, Colorado, District of Columbia, Hawaii, Idaho, Indiana, Iowa, Kansas, Kentucky, Main, Maryland, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Utah, Virginia, West Virginia, and Wisconsin.

The information above is reprinted from Working with Seniors: Health, Financial and Social Issues with permission from Society of Certified Senior Advisors® . Copyright © 2009. All rights reserved.