Life & Health Insurance Exam (National Portion)Taxes, Retirement, and Other Insurance ConceptsMedium
A client has a qualified long-term care insurance policy. They receive benefits for covered services. How are these benefits generally treated for federal income tax purposes?
- ALong-term care benefits are taxable only if they exceed the total premiums paid.
- BAll long-term care benefits are fully taxable as ordinary income.
- CLong-term care benefits are generally received income tax-free, up to a per diem limit.
- DLong-term care benefits are taxable as capital gains.
Show answer & explanationAnswer & explanation
Correct answer: C. Long-term care benefits are generally received income tax-free, up to a per diem limit.
Qualified long-term care insurance benefits are generally received income tax-free, up to a certain per diem (daily) limit. Benefits exceeding this limit may be taxable.
Why the other options are wrong
- A. This rule typically applies to cash value surrenders in life insurance, not long-term care benefits.
- B. This is incorrect; qualified LTC benefits are generally tax-advantaged.
- D. LTC benefits are not treated as capital gains.
Taxation of Qualified Long-Term Care Benefits
Benefits received from a qualified long-term care insurance policy are generally received income tax-free, up to a specified daily limit.
- Must be a 'qualified' LTC policy.
- Benefits are tax-free up to a per diem limit (indexed for inflation).
- Premiums may be tax-deductible as medical expenses, subject to age-based limits.
Memory trick: LTC benefits are 'Long-Term Care, Tax-Free' (up to the limit).