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Do you pay taxes on long-term care benefits?

The tax implications of your long-term care benefits depend on the type of policy you purchase.  Getty Images

Taxes are an important consideration as you plan for retirement. If you've saved for your retirement in a traditional 401k or IRA, you'll need to consider the income tax burden associated with the money you draw from your account throughout your golden years. 

However, IRAs and 401ks aren't the only retirement income sources that have the potential to create taxable events. So, it's important to ask questions about the taxability of any money you could potentially receive, either in the form of cash or in the form of goods and services provided. After all, a surprise tax bill could have a detrimental impact on your retirement budget.

In turn, you may be wondering about your long-term care insurance policy. Will you have to pay taxes on the value of the benefits you receive?  

Learn more about your long-term care insurance policy options now

Do you pay taxes on long-term care benefits?

"The tax treatment of long-term care benefits depends on the source of the benefits and the specific circumstances surrounding your long-term care insurance policy," says Cameron Burskey, senior partner and managing director of retirement security at Cornerstone Financial Services. "Generally, benefits received from a tax-qualified long-term care insurance policy are not considered taxable income. This means that if you have a policy that meets the criteria set by the Internal Revenue Service (IRS), the benefits you receive from that policy are typically tax-free."

But that doesn't mean all long-term care insurance policies offer tax-free benefits. 

"To be considered tax-qualified, a long-term care insurance policy must adhere to certain standards outlined by the federal government. Policies that meet these criteria are often referred to as 'tax-qualified policies," Burskey says. So, you should ask your agent if the policy you're considering is tax-qualified.  

After all, if you receive long-term care benefits from a non-tax-qualified policy or another source, Burskey says your benefits may be subject to taxation.

How to avoid taxes on long-term care benefits

In general, one of the best ways to avoid paying taxes on long-term care benefits is to make sure you purchase a tax-qualified policy. That means the policy you purchase must meet the following requirements:

  • Benefit requirements: Benefits kick in on qualified policies when you're chronically ill, which means you're unable to do at least two daily living activities without assistance for 90 days. You could also qualify if you need supervision as a result of a severe cognitive impairment.  
  • Certification and prescription: A licensed healthcare provider must certify that you're eligible for benefits. They must also prescribe a plan of care that includes long-term care services. 
  • Guaranteed renewable policy: Qualified policies are guaranteed renewable. This is a consumer protection measure that means as long as you pay your premiums, your long-term care coverage is guaranteed. 

Purchase a qualified long-term care insurance policy now to get the coverage you need

Common questions about long-term care insurance

Tax implications may not be the only long-term care insurance questions you have. Here are the answers to some of the most common questions about long-term care insurance: 

Can long-term care insurance help you age at home?

That depends on the policy you purchase. Some long-term care policies only provide benefits if you move into a nursing home or assisted living community. But, there are plenty of other policies that could provide benefits if you decide to age at home

For example, these policies may cover the cost of home healthcare, family caregivers, home renovations and more. So, if you plan to age in place, be sure to purchase a long-term care policy that covers these types of expenses. 

When is the best time to buy long-term care insurance?

In many cases, the best time to buy long-term care insurance is when you're in your mid-50s. Keep in mind that the longer you wait to purchase a policy, the more expensive your premiums will be. As such, it's important to buy long-term care insurance as soon as possible. 

Is long-term care insurance worth it?

Whether or not long-term care insurance is worth it for you depends on a wide range of factors. Some of the most important include: 

  • Your health: Your health is a major factor in determining your eligibility and your premiums. So, it will play a role in whether long-term care insurance is worth it for you. 
  • The premiums: Long-term insurance can be expensive, especially as you age. This coverage is typically only worth it if you can comfortably afford the premiums.
  • The coverage: Long-term care insurance is only worth it if it provides the coverage you're looking for. For example, if you plan to age in place, but the policy you're considering only covers you if you move into a nursing home or assisted living community, it may not be worth purchasing the policy.      

Don't wait for your rates to go up. Buy long-term care insurance now

The bottom line

Long-term care benefits may or may not be taxable. If you don't want to pay income taxes on the long-term care benefits you receive, make sure to purchase a tax-qualified insurance policy. 

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