Long-Term Care Insurance

April 13, 2006

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Long-term health care contracts are relatively new arrangements designed to provide insurance that will meet your health care needs should you become chronically ill or disabled after reaching a specified age, such as 50. As is apparent from their name, long-term care policies greatly expand the time period over which benefits will be paid out, when compared to standard accident and health policies. Another advantage is that, unlike Medicare coverage, long-term care contracts will cover the cost of custodial care, as well as skilled nursing care. These two advantages often make long-term care contracts a preferred way of pre-funding nursing home care for the elderly.

If certain specified requirements are met, recent legislation has made it clear that long-term care insurance contracts issued after December 31, 1996 will generally receive the same income tax treatment as accident and health policies. That means that amounts received under a long-term care insurance contract are excluded as amounts received for personal injuries and sickness. This exclusion is capped at $250 per day on per diem contracts for 2006 ($260 per day in 2007; this amount may be periodically adjusted for inflation). It also means that company-paid premiums for long-term care can be excludible from income tax for the employee. If you purchase the policy as an individual rather than through your company, the premiums count as deductible medical expenses.

Employer-provided long-term care insurance premiums are not excludable from an employee's income if provided through a cafeteria or other flexible spending arrangement. Premiums paid on long-term care contracts by self-employed persons qualify for a full deduction for health insurance expenses.