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This section addresses the main differences between the tax qualified (TQ) and the non-tax qualified policies. Which one is right for you? You can only make this decision after you look at both of your options.
Because tax qualified policies are now considered the same as accident and health policies, they may be eligible for tax deductions. They must also adhere to the standards set forth by HIPAA. Non-tax qualified policies are currently not eligible for any tax deductions and they do not have to meet all of the standards that HIPAA requires. Below we will examine the differences in benefit triggers, tax deduction status, and the taxability of benefits.
Tax Qualified Policies:
These policies are required to use the same criteria to qualify when benefits should be paid under a policy. Included in the benefit triggers for a TQ policy are the following:
- The insured is expected to be unable to perform (without "hands-on or stand-by" assistance) at least 2 of 5 or more activities of daily living (ADLs). The activities of daily living are: bathing, eating, dressing, toileting, transferring, and continence. (California requires all 6 ADLs to be used.)
- Cognitive Impairment: The insured is diagnosed with a severe cognitive impairment where it is determined they are a threat to themselves or others.
- 90-Day Certification: TQ policies require certification from a health care practitioner of expected need for care of at least 90 days. NTQ policies do not require this certification.
- If you do not initially get the 90-day certification and you end up needing care longer than 90 days, your health care practitioner can certify that happened and the insurance company will pay retroactively based on your elimination period.
- If you do not get the 90-day certification and only need care for say, twenty days, those days would not count towards your deductible.
Non-Tax Qualified Policies:
These policies have no standardized benefit triggers. Therefore, the carrier can determine how liberal or strict they want their benefit triggers to be. Non-Tax Qualified benefit triggers can include medical necessity as a benefit trigger, and can require that the policyholder only needs help with one activity of daily living.
Tax Qualified Policies:
The premiums paid for these policies are eligible for both Federal and State tax deductions. These are discussed in detail in the Federal and State section.
Non-Tax Qualified Policies:
The premiums paid for these policies currently do not receive any tax deductions.
Form 1099-LTC:
All carriers are required to issue Form 1099-LTC to all beneficiaries when benefits are paid from either a TQ or NTQ policy. Benefits received from a TQ policy are income tax free, but there is no mention or decision relative to the taxation of benefits received from a non-tax qualified policy.
Per diem benefits received on a TQ policy are tax free up to $250 for the year 2005. If you receive per diem benefits above $250, they may be taxed as income, unless your actual long-term care expenses were also above $250.
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