Many long-term-care (LTC) insurance policies in the market are “Tax-Qualified,” or “TQ,” meaning that they meet the federal standards for favorable tax treatment specified by the Health Insurance Portability and Accountability Act of 1996 (HIPAA) (or were grandfathered in to that definition). This is an attractive option for most insureds because under TQ policies, certain LTC insurance benefits qualify for favorable federal income tax treatment — if the policy pays only benefits that reimburse the insured for qualified LTC costs, the insured will not owe federal income tax on those benefits. Likewise, premiums are tax-deductible up to a maximum limit that increases with age. These benefits are not provided by policies that are “Non-Tax-Qualified,” or “NTQ.”
Congress included provisions concerning LTC insurance within HIPAA in an attempt to improve access to private LTC insurance. In doing so, however, Congress created some confusion for both insureds and insurers. For instance, in order to qualify as a TQ policy, the policy must contain a multitude of statutorily required provisions and language. Specifically, TQ policies must provide coverage for “qualified long-term care services,” which “are required by a chronically ill individual, and are provided pursuant to a plan of care prescribed by a licensed health care practitioner.” 26 U.S.C. § 7702B(c)(1). The term “chronically ill” is defined as “any individual who has been certified by a licensed health care practitioner as—
(i) being unable to perform (without substantial assistance from another individual) at least 2 activities of daily living for a period of at least 90 days due to a loss of functional capacity … or
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