Taxation Guide For Hybrid Long Term Care Insurance
December 12, 2024
In 1996, the Health Insurance Portability and Accountability Act (HIPAA) outlined the requirements for tax-qualified long term care policies under Internal Revenue Code 7702B.
HIPAA also defined a hybrid life-long term care contract as a 7702B policy.
Some of the benefits and payments for hybrid long term care policies are afforded the same tax treatment as stand-alone long term care insurance policies.
However, in order to be categorized as a tax-qualified long term care contract under HIPAA, there can be no cash value within the contract.
This absence of cash value requirement is important because qualified long term care insurance premiums are considered a medical expense under IRC 7702(B), and may be tax deductible to individuals and business entities.
For many years, hybrid long term care policies could not make available tax deductibility of LTC premiums to policyowners because the contracts did not separately identify the premiums associated with the long term care components, and the policies included cash value life insurance.
If there is a "charge" against cash value for the long term care benefits, the contract would not be tax-qualified long term care insurance under HIPPA.
This changed with the structure of a few hybrid long term care policies approximately 5 years ago.
Issuers removed the charges against cash value to access LTC benefits, and started to file the contracts with separately identifiable premiums for the life insurance component and for the long term care components. The long term care agreements do not have any cash value and the premiums collected for these agreements are paid directly to the insurance company and are never part of the cash value of the life insurance policy.
Thus, today should you purchase a hybrid LTC policy that is structured in this manner, you will be able to deduct your long term care insurance premiums according to current taxation guidelines.
Hybrid long term care policies will have the following contractual agreements and the attributable premium amounts identified in the contract:
Premium Components
- Specified Face Amount (base Life Insurance) Not Deductible
- Acceleration For Long Term Care Agreement - Deductible
- Extension of Long Term Care Agreement - Deductible
- Long Term Care Inflation Protection Agreement - Deductible
The availability and the amount of your tax deduction will depend upon many factors. Let's take a closer look at the tax treatment of long term care insurance premiums for individual owners and business owners.
Tax Treatment of Long Term Care Insurance Premiums for Individuals
If you are an individual owner, and you itemize your taxes, the long term care premiums may be included with your itemized medical expenses. Your medical expenses will need to exceed 7.5% of your adjusted gross income. Should you meet this 7.5% AGI threshold, you may deduct your premiums subject to age-based limitations in the taxable year of filing. The 2025 age based limits are the following amounts.
Attained Age Before The Close Of The Taxable Year
Limits
age 40 or less: $480
ages 41-50: $900
ages 51-60: $1800
ages 61-70: $4810
ages 71+: $6020
Individuals may also pay their hybrid long term care premiums from their HSA, subject to the age-based limitations above. If premiums are paid from your HSA, you may not deduct the premiums on your tax return.
Tax Treatment of Hybrid Long Term Care Insurance Premiums For Businesses
The tax treatment of long term care premiums for businesses will depend upon whether you are a C Corporation owner or a Pass-through entity (S Corporation, sole proprietor, LLC).
1) C Corporation owners
The C Corporation has the greatest tax deductibility of long term care insurance premiums. In general, all long term care premiums paid for C Corp owners, shareholders, employees, and their spouses and tax dependents are deductible, and no age-based eligible premium limits apply.
How it works:
C Corporation pays premium to the insurance company.
Premium insures life of the Owner, employee/spouse or dependent.
The premium associated to the life insurance is considered taxable income to the employee.
The premiums associated to the long term care agreements are tax free to the employee, and are 100% tax deductible by the C Corporation.
2) Pass-Through Entities
Pass-through business entities such as S Corporations, LLCs, Partnerships & Sole Proprietorships are subject to the same age-based limitations for LTC tax deductions as individual owners above, however pass-through entities do not have to meet the 7.5% AGI threshold that individuals are required to meet.
How It Works:
The life insurance and LTC insurance are deductions to the owner as compensation.
The life insurance and the LTC insurance premiums are included as income to the business owner.
The business owner receives an income tax deduction for self-employed health insurance, subject to age based limitation.
Tax Treatment Of The Life & Long Term Care Insurance Benefit Payments
1) Death Benefit
Death proceeds of a life insurance contract will be paid income tax free to the beneficiary.
2) Long Term Care Benefit
The 2025 per diem limit is $420.00 day. This per diem limit is typically adjusted annually for inflation.
Long term care insurance benefits received that do not exceed the per diem limit are excluded from income.
Long term care insurance benefits received that do exceed the per diem limit may be excluded from income if you have documented receipts for qualified long term care expenses for the amount in excess.
Hybrid Long Term Care Policies That Afford Tax Deductibility
As I mentioned above, a few years ago a few insurance companies, but not all, took steps with their filings to separately identify the long term care insurance premiums corresponding to the Acceleration of Benefit, Extension of Benefit and the Inflation Protection riders.
The 4 policies that you will want to consider to be able to receive tax deduction for your long term care premiums are:
Nationwide CareMatters Together
The primary policies that you will not want to buy if LTC tax deductions are important for you are Lincoln Moneyguard, New York Life Asset Flex, and Brighthouse SmartCare. These (3) hybrid long term care insurance policies do not separately identify your LTC premiums.
If you would like to further discuss your long term care insurance policy options, please do not hesitate to contact me at (800)891-5824. Or if easier for you, please use the link below to my online calendar to schedule a call with me.
Jack Lenenberg
