Tax Treatment of Long-Term Care Insurance

The tax treatment of LTC insurance varies based on whether the policy is "tax-qualified" under IRC Section 7702B. Understanding these distinctions is important for both the exam and advising clients.

Tax-Qualified vs. Non-Tax-Qualified Policies

Tax-Qualified LTC Policies

A tax-qualified (TQ) LTC policy must meet specific federal requirements under the Health Insurance Portability and Accountability Act (HIPAA) and IRC Section 7702B:

Non-Tax-Qualified LTC Policies

Non-TQ policies may have more flexible benefit triggers (e.g., medical necessity, 1 ADL) but do not receive the same favorable tax treatment.

Important: Most LTC policies sold today are tax-qualified because of the clear tax benefits and consumer protections.

Premium Deductibility

Individual Tax Deduction

For tax-qualified LTC policies, premiums are treated as a medical expense and may be deductible if:

• The taxpayer itemizes deductions
• Total medical expenses exceed 7.5% of Adjusted Gross Income (AGI)
• The deductible amount is limited by age-based caps

2025 Age-Based Premium Deduction Limits

Exam Tip: These limits apply per person. A married couple where both spouses are over 70 could deduct up to $12,040 in LTC premiums combined.

HSA Payment Option

Individuals with Health Savings Accounts (HSAs) can use HSA funds to pay LTC insurance premiums:

• Tax-free withdrawals for LTC premiums up to age-based limits
• Does not require itemizing deductions
• 2025 HSA contribution limits: $4,300 (individual) / $8,550 (family)

Self-Employed Individuals

Self-employed individuals may deduct TQ LTC premiums (within age-based limits) as a self-employed health insurance deduction:

• Taken as an adjustment to income (above-the-line)
• Does NOT require itemizing
• Does NOT require exceeding 7.5% AGI threshold

Business Deductions

Key Point: C corporations receive the most favorable treatment—100% of premiums are deductible with no age-based limits.

Taxation of Benefits

Tax-Qualified Policy Benefits

Benefits from TQ LTC policies are generally tax-free when paid:

• On a reimbursement basis (actual expenses), OR
• On a per diem/indemnity basis up to the daily limit

2025 Per Diem Limit

The IRS sets an annual per diem limit for tax-free indemnity benefits:

• 2025 Limit: $420 per day ($153,300 annually)
• Benefits exceeding this limit AND exceeding actual expenses may be taxable

Per Diem Taxation Example

Non-Tax-Qualified Policy Benefits

The tax treatment of non-TQ policy benefits is uncertain:

• IRS has not issued definitive guidance
• Benefits may be treated as taxable income
• Conservative approach: assume taxable

Tax Treatment of Hybrid Products

Life Insurance with LTC Rider

Annuity with LTC Rider (1035 Exchange)

• Under IRC Section 1035, existing annuities can be exchanged for annuity/LTC combinations tax-free
• LTC benefits paid from such contracts are tax-free
• Annuity portion follows normal annuity tax rules

Summary: Key Tax Points for the Exam

1. TQ premiums are deductible as medical expenses (within age-based limits)
2. TQ benefits are tax-free (reimbursement) or up to per diem limit (indemnity)
3. 2025 per diem limit is $420/day
4. C corporations can deduct 100% of premiums with no age limits
5. HSAs can pay TQ premiums tax-free up to age-based limits
6. Non-TQ policies have uncertain tax treatment