Tax History of Long-Term Care Insurance
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Tax History of Long-Term Care Insurance
In 1996, the Health Insurance Portability and Accountability Act (HIPAA) provided that premiums for policies meeting its pro-consumer requirements could be partially deducted by some taxpayers, and benefits could be paid income tax-free. Most policies sold prior to January 1, 1997 are eligible for the same favorable treatment irrespective of HIPAA requirements because they were "grandfathered" by the law.
Things To Know
- Tax-qualified policies cannot have "medical necessity."
"Non-tax-qualified" policies
Many insurers redesigned policies issued from that point on to be "tax-qualified" by offering the features and benefits called for in black and white by the HIPAA statute. We refer to long-term care (LTC) insurance products that do not meet HIPAA’s requirements and limitations on benefits as "non-tax-qualified" policies.
But the law was largely silent on them, leaving everyone to speculate about what position the Internal Revenue Service would take on tax questions involving these policies. In view of that uncertainty, many insurance companies opted to stay away from non-tax-qualified products. As a result, a large majority of the LTC insurance contracts issued today are written to be tax-qualified.
The main difference
Long-term care policies that are not tax-qualified very often include "medical necessity" on the list of benefit triggers. Tax-qualified policies cannot have "medical necessity." That is the most significant difference between the two tax classifications.
"Medical necessity" provides potentially easier access to benefits than tax-qualified policies allow, according to HIPAA. So why didn’t the tax law expressly extend its blessing to LTC policies with this advantageous feature?
Perhaps Congress believed that encouraging insurance with such open-ended access to benefits might ultimately prove harmful to the industry. The eventual cost of including a "medical necessity" benefit trigger cannot be anticipated with great accuracy until years of claims data are available. Perhaps, too, lawmakers wanted to stop short of a tax break for premier LTC insurance—especially if it might lead to rate increases and insurance company distress later.