Are Long-Term Insurance Premiums Deductible?

Long-term care insurance is a type of insurance that provides for benefits in the event that you need nursing home care. Long-term insurance is unlike other forms of personal insurance in that you may deduct insurance premiums. Make sure you know how much you may deduct because the IRS is very strict on deductions for these types of premiums.

Features

Long-term insurance provides benefits for you if you ever need long-term care. Long-term care generally refers to assisted living services provided by a nursing home. These services may become rather expensive, which is why long-term insurance is purchased, so that these services do not have to be paid for out of pocket. To deduct the premiums from your taxes, the policy must have been issued after 1997 and be a qualified policy. Qualified policies offer inflation protection as well as non-forfeiture protection (a refund of premiums upon cancellation of the policy).

Significance

The significance of deducting premiums from your taxes is that you are incentivized to purchased long-term insurance. In this way, the insurance is given special tax benefits similar to how the IRS allows tax deductible contributions to retirement plans.

Benefit

The benefits of deducting premiums from your taxes is that it makes paying for long-term care insurance easier since it effectively lowers the tax you pay in the year you make the premium payment. Tax deductibility increases with age so that your taxes decrease as you become older.

Disadvantage

The disadvantage to deducting premiums from long-term insurance is that before you can deduct premiums, the premiums must exceed 7.5 percent of your adjusted gross income. If your premiums are low, you may not be able to deduct anything. Also, the deductible amount varies with age. Those under 40 can only deduct up to $330 per year, while those over 70 may deduct $4,110.

Considerations

Before purchasing long-term insurance, consider whether you need the insurance. The tax deduction you receive may help you offset some of the cost, but unless you need the insurance, the tax deduction is meaningless. Also consider whether your long-term care policy covers only nursing home care, or whether it covers private care in your home. Insurance without inflation protection may be offered at a lower price. Even if you aren't able to get a tax deduction from these non-inflation protected policies, the cost of the insurance may be cheaper overall.

References

• Elder Law Answers: IRS Issues Long-Term Care Premium Deductibility Limits for 2010
• "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007
• "Life & Health Insurance, License Exam Manual, 6th Edition"; Dearborn Financial; 2004