Chapter 3 — LTCI Premiums & Taxation

The types of benefits offered by the insurer and the various choices that purchasers of LTCI make have a direct impact on the cost of a policy. The following elements have the greatest impact on premium:

• The larger the daily or monthly benefit amount, the higher the premium (generally a direct proportional relationship).
• The larger the lifetime maximum benefit (or longer the benefit period), the higher the premium.
• The longer the elimination period, the lower the premium.
• Comprehensive policies cost more than those covering only facility care or only home care. The higher the home care benefit percentage, the higher the premium.
• An automatic inflation protection option increases the premium; a simple rate option is cheaper than a compound rate.
• An optional non-forfeiture provision adds to the premium.

As a general rule, any policy provision that increases the likelihood or amount of benefits the insurer will pay contributes to a higher premium. The premium of a disability or indemnity policy is usually higher than that of a comparable reimbursement policy.

Age has a substantial impact on premium. The older a person is when she applies, the higher her premium. The premium is designed to remain the same over the life of the policy — it is not automatically increased as the insured ages. However, for guaranteed renewable policies the insurer may seek state approval for a rate increase for an entire class.

The longer one waits to buy, the more expensive coverage becomes — and the greater the chance of developing an impairment that makes it impossible to purchase coverage at all. It is generally in a person’s best interest to purchase LTCI sooner rather than later.

Sample premiums for equivalent coverage at age 85, with 5% compound automatic inflation protection. Actual premiums vary by company.

All insurers conduct underwriting of applicants for individual LTCI policies. Most commonly the insurer has the applicant answer questions about current physical condition and health history. In some cases the insurer may request a physician report, telephone interview, or in-person assessment.

Many insurers use health information only in deciding whether to accept or decline an applicant. Others place accepted applicants into risk classes: standard (the majority), preferred (healthiest, receiving discounts of 10–15%), and nonstandard/substandard (higher risk but still insurable, may receive limited coverage options or a surcharge). Conditions that make the near-term need for care very probable are considered uninsurable.

Employer-sponsored LTCI is a growing segment of the market. There are two approaches:

• Group insurance — the employer owns a group policy providing coverage to employees who enroll.
• Worksite marketing of individual insurance — the employer sponsors individual policy sales; each employee owns their own policy.

Levels of group underwriting range from guaranteed issue (no individual underwriting, all applicants accepted — used for large groups with minimum participation requirements) to modified guaranteed issue (a few basic questions) to simplified underwriting (more extensive questionnaire) to full underwriting (similar to individual). As a general rule, the smaller the employee group, the more rigorous the underwriting.

Group discounts normally apply to premiums under employer-sponsored group policies and may also extend to members of non-employee groups such as service clubs, alumni associations, or bank customers.

Spousal discounts of 20–40% are offered by many insurers when both spouses purchase an LTCI policy, based on the assumption that married people can care for each other and are less likely to file claims. There is considerable variation by company and state. Some insurers also extend spousal discounts to same-sex couples and other committed couples not legally married.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) resolved longstanding uncertainty about the tax treatment of long-term care insurance by establishing a class of federally tax-qualified (TQ) policies with specific tax advantages. TQ policies now make up the very large majority of LTCI policies sold.

• Tax-qualified (TQ) policies — benefits are generally tax-free, and premiums may be partially deductible. These are the industry standard.
• Nonqualified (NQ) policies — do not meet HIPAA requirements; whether benefits are taxable remains unresolved and premiums are not tax-deductible.
• Grandfathered policies — those in force before January 1, 1997, deemed tax-qualified even if they don’t meet all HIPAA requirements.

To be federally tax-qualified, a policy must:

• Clearly indicate on the cover page that it is intended to be a qualified LTCI contract under IRC Section 7702B(b).
• Include a 30-day free look (right to return) provision.
• Pay benefits only for qualified long-term care services — defined as necessary diagnostic, preventative, therapeutic, and maintenance or personal care services required by a chronically ill individual and provided pursuant to a plan of care prescribed by a licensed healthcare practitioner.
• Use the HIPAA-standardized benefit triggers and 90-day certification requirement.
• Be either guaranteed renewable or noncancellable; offer inflation protection and a non-forfeiture option; and include a third-party notification of lapse provision.
• Recertify an insured’s impairment every 12 months.

Benefits paid by TQ reimbursement LTCI policies are not considered income for federal income tax purposes — they are entirely tax-free.

Benefits paid by TQ indemnity or disability policies (called “per diem” policies) may be taxed if they exceed $430 per day in 2026 (adjusted annually for inflation). However, if the insured can furnish proof that qualified long-term care expenses exceeded this limit, benefit payments up to the actual amount of expenses may still be excluded from taxable income.

Premiums paid by an individual on a TQ LTCI policy may be partially tax-deductible. A taxpayer may include premiums up to a maximum age-based amount in itemized deductions on Schedule A. If LTCI premiums (up to the allowed maximum) plus other deductible medical expenses exceed 7.5 percent of the taxpayer’s adjusted gross income (AGI), the amount in excess is deductible from taxable income.

For self-employed individuals, the same age-based maximums apply, but premiums up to the allowed maximum may be excluded from taxable income directly — without needing to exceed the 7.5% AGI threshold. A growing number of states also offer credits or deductions on state income taxes for LTCI premiums.

Employers paying premiums for TQ LTCI coverage on behalf of employees may generally deduct their payments as ordinary and reasonable business expenses. Employees do not have to include employer-paid premium payments as taxable income. The tax treatment for employees paying their own premiums under employer-sponsored coverage is the same as for individual policies.

An exception applies for self-employed owners (those who are both an owner and an employee of the same business, such as a partner in a law firm): they may not exclude employer-paid LTCI premiums from taxable income, but can take a deduction for a portion under self-employment rules.