What makes a long-term care policy tax qualified?

Your long-term care policy may come with tax advantages if it meets three key requirements.  Getty Images

It can be exciting to think about your golden years. Having the option to trade the daily grind for the ability to do whatever you want with your time is freeing. However, it's important to be financially prepared when that time comes. If you're not, your golden years may not be so golden. 

One of the most important financial factors to consider before you retire is how you'll cover an increased cost of health care. After all, most people who are 65 or older will need some form of long-term care in their remaining years. Unfortunately, that comes with a price tag that's often tens of thousands dollars per year (or higher). 

Long-term care insurance can help cover this cost. Moreover, if you choose a tax qualified policy, you'll enjoy tax advantages. But what makes a long-term care policy tax qualified? That's what we will explain below.

Get long-term care insurance today to make sure you have access to care when you need it

What makes a long-term care policy tax qualified?

As mentioned above, tax qualified long-term care insurance policies come with tax advantages. In particular: 

  • Your benefits: If your long-term care insurance policy is tax qualified, your benefits aren't considered taxable income. 
  • Your premiums: You may also be able to deduct the premiums you pay as medical expenses on your annual tax return. However, that's only the case if your total qualified medical expenses are no more than 10% of your adjusted gross income.   

With these benefits in mind, it makes sense to look for a long-term care insurance policy that's tax qualified. The requirements for a tax-qualified long-term care policy include: 

Chronic illness

The policy must only offer benefits if you're diagnosed with a chronic condition. So, when you have a tax qualified long-term care insurance policy, it may not pay for your post-surgical care. But it will probably cover the cost of care if you're diagnosed with a chronic illness like dementia. 

Tax-qualified long-term care policies "must use activities of daily living (ADLs) and/or cognitive impairment as the basis of claim," explains Larry Nisenson, Chief Growth Officer at Assured Allies, a firm that helps consumers age successfully. "The six activities of daily living are bathing, dressing, toileting, transferring, continence, and eating and most policies say a policyholder must need assistance with at least 2 of the ADLs or have severe cognitive impairment" to be eligible for benefits.

Compare your long-term care insurance options now

Prescribed plan of care

Your insurance policy must require a prescribed plan of care for coverage to kick in as well. That means a licensed healthcare professional must certify that you are eligible for benefits and prescribe a plan of care that's inclusive of your qualified long-term care benefits. 

Guaranteed renewability 

This requirement is a form of consumer protection, ensuring that you have access to coverage as long as you pay your premiums. However, it's important to keep in mind that guaranteed renewability doesn't guarantee a fixed price for your entire life. Long-term care insurance policy premiums may increase over time. 

Why you should buy a long-term care insurance policy now

There are several reasons why you shouldn't wait to purchase a long-term care insurance policy. Some of the most pressing reasons to buy your policy now include: 

  • Prices are likely to rise with time: Long-term care insurance prices are based on the risk the insurer accepts as part of the policy. As you age, the risk that you'll need long-term care services typically increases - leading to higher insurance premiums. 
  • There's a high likelihood that you'll need long-term care: Nearly 70% of people turning 65 years old will need some form of long-term care later in life. Since the average American lives to be nearly 80 years old, there's a high likelihood that you'll need care at some point. 
  • Long-term care is expensive: According to the Genworth Cost of Care Survey, long-term care typically costs between tens of thousands of dollars and over a hundred thousand dollars per year, depending on multiple factors.    
  • Long-term care insurance may exceed your expectations: You may be under the misconception that long-term care insurance only offers benefits if you move into a nursing home or that you'll lose money if you don't use your benefits. However, there are several options available - many of which help you age at home and come with a death benefit that kicks in if you die before you use your long-term care benefits.  

Find out how affordable long-term care insurance can be today

The bottom line

Long-term care insurance is a valuable tool that can help you make sure you're financially secure in your golden years, even if you develop a condition that requires round the clock care. Purchase a policy today to make sure you have access to the care you need, when you need it

View CBS News In
CBS News App Open
Chrome Safari Continue
Be the first to know
Get browser notifications for breaking news, live events, and exclusive reporting.