tax treatment of ltC Insurance and
other saving or Insurance Plans
Long-
Term
Care
Insurance Roth IRA
Individual
Life
Insurance
Regular
IRA
401(k)
fixed
Annuity
insurance policy has paid on behalf of a
claimant from assets. Table 1 summarizes
the tax advantages of LTC policies and
compares them with the tax advantages
of other insurance and savings products.
Since the early 1990s, there have been
numerous other proposals in Congress
to make private LTC insurance more
palatable to the general population.
In December 2008, the Congressional
Budget Office laid out seven different
options for controlling federal spending on LTC services. Four of the seven
were designed to encourage more people
to purchase private LTC insurance. The
federal government also tried to address
LTC expenditures in Medicaid spending
by including the Community Living Assistance Services and Supports (CLASS)
Act as a part of health care reform in
2010. (In October 2011, the Obama administration dropped the CLASS Act as
unworkable.)
As Table 1 shows, LTC insurance policies have many tax advantages compared
with other insurance and savings policies. But because the lack of cash value
limits liquidity, LTC insurance policies
also have a significant disadvantage compared with other products.
Premium or
contribution
deductible
✔✔✔
employer
contribution
not treated as
income
✔✔
earnings
on savings/
reserves not
taxed
✔✔✔✔✔
Payouts or
benefits not
taxed
✔✔ ✔
sources: Internal revenue Code and georgetown university long-term care financing project
✔
facilitating Insurance and
Savings
For tax purposes, all life insurance contracts are viewed as having both a pure
insurance component and a savings
component. The interest earned on the
savings element (inside buildup) is tax
deferred only if it stays inside the life
insurance contract and is used to fund
future benefits rather than being distributed to the policyholder.
LTC insurance also combines pure
insurance and savings components. The
savings component in LTC insurance
is the reserves accumulated from pre-
mium payments. The pure insurance
component is the difference between
the face amount of the policy and the re-
serves. The biggest difference between
life insurance policies and LTC policies,
however, is the liquidity of the savings
component. The cash value of the savings
component in a life insurance policy will
be distributed to the policyholder upon
voluntary lapse of the policy. This is not
the case for LTC insurance.
