THE NEW GUIDELINES
"You've heard by now that long-term-care insurance (LTCI) is treated like health insurance for tax purposes, as long as it meets certain requirements. In order to qualify, insurance companies have to change their policies to meet the new federal guidelines and resubmit them to state insurance departments for approval.
If you bought a policy prior to this year, your policy will be grandfathered under the new law and will qualify for the tax benefits as well.
The New Tax Benefits
The law says qualified LTCI should now be considered a form of accident and health insurance used to pay for long-term-care services. It defines long-term care as "necessary diagnostic, preventive, therapeutic, curing, treating, mitigating and rehabilitative services, and maintenance or personal care services" required by a chronically ill person. As a result of the change, you should be aware of the following:
Policy premiums may be tax deductible. If you itemize deductions, premiums you pay for a qualified LTCI policy may be deducted to the extent that premiums plus other medical expenses exceed 7.5% of your adjusted gross income.
In 1997, if your age before the close of a tax year is 40 or less, up to $200 of LTCI premiums can be included as a medical expense per year. If you're 41 to 50, the limit is $375; 51 to 60, $750; 61 to 70, $2,000; 71 or older, $2,500. Amounts will be adjusted annually for inflation.
Policy reimbursements are tax-free. The new law says that reimbursements from qualified policies are not taxable income. However, if you have a per diem policy-one that pays a set amount regardless of actual expenses-income is tax-free up to $175 per day. Above that amount, payments are tax-free only when they reimburse actual expenses. The limit will be adjusted annually for inflation.
New Long-Term-Care Provisions
In order to qualify for beneficial tax treatment, policies must, among other things, no longer use language that would permit you to tap benefits in your policy just because your doctor determines that long-term care is medically necessary. (Insured individuals whose grandfathered policies contain such language may still obtain benefits that way.)
Along with consumer protections, such as inflation protection and protection in case of unintentional policy lapses, new tax-qualified policies must include the following provisions:
Certification. Before a policy-holder can file for benefits under a policy, he or she must be certified as chronically ill by a licensed health-care practitioner, such as a physician, registered nurse or social worker. A chronically ill person is one who has:
Excerpted with permission from Kiplinger's Retirement Report. © 1997 by The Kiplinger Washington Editors, Inc. Special subscription price for Grand Times readers, $29.95 for one year (regularly $59.95). 800-544-0155. or visit their web site at http://www.kiplinger.com
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