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11.17 Qualified Long-Term Care Insurance

Favorable tax treatment is available for certain Long-Term Care (LTC) insurance contracts that meet specific eligibility standards. To qualify, the policy must meet all of the following requirements:

  • Provide only Long-Term Care coverage: The contract must be limited exclusively to Long-Term Care benefits and must not include other types of insurance protection.
  • Exclude Medicare-covered expenses: The policy must not pay for any services or expenses that are eligible for reimbursement under Medicare.
  • Be guaranteed renewable: The insurer must renew the policy as long as premiums are paid, and coverage cannot be canceled due to changes in the insured’s health.
  • Not accumulate cash value: The policy must not build cash value and cannot be borrowed against, assigned as collateral, or surrendered for cash. (However, a policy may include a nonforfeiture option, which allows the insured to convert the policy to a reduced paid-up status or receive a return of premiums paid in excess of benefits received.)
  • Apply refunds or dividends appropriately: Any refunds or dividends must be used to either reduce future premiums or increase policy benefits.
  • Comply with the NAIC Model Act: The policy must meet the standards established by the NAIC Model Act, which defines qualified Long-Term Care services as those that are diagnostic, preventive, therapeutic, curative, treatment-related, or rehabilitative in nature, required for a chronically ill or injured individual, and provided by a licensed caregiver.
  • Meet functional or cognitive impairment criteria: The insured must be expected to be unable to care for themselves for at least 90 days due to the loss of at least two Activities of Daily Living (ADLs) and require substantial assistance from another person. The NAIC recognizes six ADLs; to qualify for favorable tax treatment, the policy must include coverage for at least five of these six activities.