Tax-Qualified (TQ) Policies

On January 1, 1997, as a result of the implementation of the Kennedy / Kassebaum welfare and health care reform legislation, long term care insurance policies became eligible for preferred tax status. This was to encourage individuals to purchase long-term care insurance policies that would pay for their care, and not rely on Medicaid.

The tax-qualified (TQ) status of long-term care policies enables owners of these policies to deduct the premiums paid on their tax returns, subject to certain limits. The premiums for long-term care policies are considered to be a medical expense and can be deducted as such, based on the policy owner’s age and income levels. Younger policy owners can deduct a smaller percentage of the premium, and older policy owners can deduct a larger percentage.

The benefits received from a tax-qualified long-term care policy are not taxable.

The law is unclear on the tax status of benefits from non-tax-qualified plans, but they at least have the potential for the benefits to be taxed in the future. The benefits of tax-qualified policies cannot be taxed. Consider that a daily benefit of $250 results in $91,250 of annual “income” and the advantage of non-taxable benefits becomes readily apparent.

Tax-qualified policies have strict requirements for receiving benefits. The insured must require care for at least 90 days. He or she must either (1) be unable to perform two of the six activities of daily living (bathing, dressing, eating, toileting, continence and transferring); or (2) need substantial assistance due to a severe cognitive impairment (i.e., Alzheimer’s disease or dementia). A Plan of Care from a Licensed Health Care Professional is also required.