Are dad’s long-term care benefits taxable?

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Q. My father’s long-term care insurance is going to start paying benefits next month. I’ve heard they can be taxable to him. How can I know?
— New to long-term care

A. Long-term care insurance will cover some of the costs for care, but depending on your dad’s coverage, there may also be significant out-of-pocket costs.

The taxation of benefits is certainly important to understand, but it’s not a simple answer and depends on the policy.

Long-term care (LTC) benefits are generally not included in income for policies that pay benefits on a “reimbursement” method, said Ed Gaelick, a Chartered Life Underwriter and Chartered Financial Consultant with PSI Consultants in Glen Rock.

He said benefits paid by a policy on an “indemnity” method, generally, are also not included in income.

“Amounts that exceed the greater of the total qualified LTC expenses or a specific benefit amount per day may be taxable,” Gaelick said.

That amount was $340 per day for 2015 and 2016, and will go up to $360 a day in 2017, he said.

Gaelick said there are other possible “benefits” that are treated differently from a tax standpoint — such as “non-forfeiture” and “liens against life insurance policies” — so while your father probably will not pay income taxes on his benefits, knowing how your particular policy pays and getting advice from your accountant is important.

Premium payments also have varying tax consequences.

Gaelick said LTC insurance premiums are only tax-deductible for those who itemize deductions. Deductions are limited to the lesser of the actual premiums or eligible premium amount limits which are based on age, he said, and business owners may also have deductions available.

Gaelick said he’s gone through the process personally with care for his loved ones.

“This is a very emotional and trying time for many children of elderly — and sometimes not so elderly — parents,” he said. “I applaud you for purchasing private LTC insurance. It may be tough to pay the premiums for many years but as I found out and you will soon, the benefits will make paying for the necessary care much easier.”

Be sure to check with your accountant for the specifics on your dad’s policy, and best of luck to you both.

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