By Shawn Britt
As tax season approaches every year, one of the questions most often asked is whether the cost of a long-term care (LTC) rider on life insurance is tax deductible.
Much of the confusion centers on the fact that stand-alone (traditional) LTC policies enjoy a level of tax deductibility as a medical expense under Internal Revenue Code §213. Legislation has been passed providing guidance for most instances, but a few questions are still left unanswered.
LTC Riders On Life Insurance
As of Jan. 1, 2010, the Pension Protection Act of 2006 has declared that an IRC §213 tax deduction for medical expenses is not allowed for the cost of a LTC rider if the charge for the LTC rider is deducted from the cash value of the life insurance policy. Since most life insurance policies take LTC rider charges as a deduction from cash value, taxpayers owning these types of policies generally will not be eligible for an IRC §213 tax deduction.
This type of policy design exists on most
- LTC riders on life insurance.
- LTC riders on annuities.
- Linked benefit LTC policies.
Whole Life Policies With LTC Riders
While not specified as allowable in the Pension Protection Act of 2006, many whole life companies take the position that the cost of the LTC rider is eligible for an IRC §213 tax deduction once the floor of an individual’s adjusted gross income is met. For tax years 2017 and 2018, the floor that must be met out of pocket will be 7 ½ percent. As of 2019, the floor will return to 10 percent.
The reasoning behind this assumption lies in the fact that LTC rider charges on whole life policies are taken before premium dollars are placed in the cash value account. The tax code is unclear regarding this position; thus, owners of such policies should consult their tax advisor for guidance before taking such a deduction.
Life insurance premiums are clearly not deductible, so even if one decides to take a deduction, the deduction should be for only the costs of the LTC rider.
Linked Benefit Policies
Some advisors are under the assumption that linked benefit policies are somehow categorized purely as a LTC product. While these type policies are intended to be for LTC protection - not for typical life insurance protection - the policy is still placed on a life insurance or annuity chassis. Thus, life insurance rules will still apply (or annuity rules when placed on an annuity).
The chart below is a general summary of the potential to deduct LTC premiums.
|Tax Deductibility Potential|
|LTC stand-alone policy – individually owned||YES – within IRS limits*|
|LTC stand-alone policy – paid for by a business or corporation||YES – rules and the amount varies per type of business and certain circumstances*|
|LTC rider on life insurance||NO, when the cost of the rider is paid from cash value deductions (most policies)**|
|LTC rider on annuities||NO|
|Chronic Illness rider on life insurance||NO|
Even when a charge for LTC premium can be listed as an IRC §213 tax deduction, it will be difficult for most people to meet the required floor to realize the deduction. Medical expenses generally must be high in a year when income is low. One should choose a LTC product solution that meets their financial strategy and the care needs they envision, not because there is potential for a tax deduction.
Shawn Britt, CLU, CLTC, is director, LTC initiatives, with Nationwide’s Advanced Consulting Group. Shawn may be contacted at [email protected].
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