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Long-term Care and Tax Benefits

Qualified vs. non-qualified policies

The terms qualified and non-qualified simply refer to tax treatment and do not imply that one type is more valuable than the other. The federal government qualifies a policy for certain tax benefits if there are specific consumer protection features and benefit restrictions in the policy.

With a qualified policy you are allowed to deduct part of your insurance premiums and long-term care expenses that have not been reimbursed, from your income that is, if you itemize deductions rather than taking the standard deduction and if your medical expenses exceed 7.5% of your gross income. Also, benefits received from a qualified private long-term care policy are not taxable under most conditions.

With a non-qualified policy you cannot deduct premiums, and benefits you receive may or may not count as income. The U.S. Treasury Department has not yet ruled on this issue. However, non-qualified policies may offer different, less restrictive benefit requirements, such as:

  • A different combination of benefit triggers.

  • "Medical necessity" and other measures of disability can be offered as benefit triggers.

  • Policies may not require that the qualifying disability be expected to last for at least 90 days.

  • Policies may not require "substantial supervision" to trigger benefits for cognitive impairments.

Both qualified and non-qualified policies sold in Minnesota must contain the following consumer protections:

  • All policies that cover nursing home care must cover all levels of care, including custodial care.

  • Must cover Alzheimer's disease.

  • Cannot require prior hospitalization to receive nursing home benefits.

  • Protects individuals from being singled out for rate increases.

  • All policies are "guaranteed renewable" which means the insurance company can only cancel your policy if you fail to pay your premium.

Before deciding whether to buy a qualified or non-qualified policy, you may want to consult a tax specialist.

A note to employers

With the federal law changes, long-term care insurance provided by an employer is treated as any other health plan. Premiums paid by an employer for an employee (or spouse or dependents) are excluded from employment taxes and are 100% deductible by the employer. Also, benefit amounts received are excluded from income. In addition to providing tax advantages, long-term care insurance is also a way for companies to mitigate some of the cost to companies resulting from lost productivity due to eldercare responsibilities.

The $100 Minnesota tax credit

Minnesota provides a $100 tax credit for people purchasing a long-term care insurance policy (either qualified or non-qualified) with at least $100,000 of coverage and inflation protection. This tax credit is limited to one per person, per year.