Effects Of A Tax Deduction For Long Term Care Insurance
January 6, 2000
The cost of long-term care at home or in nursing homes isn't covered by Medicare, and Medicaid provides assistance only for those who have depleted their assets and have very low incomes. Yet only about 5 million private long-term care (LTC) insurance policies were sold from 1991 to 1996.
Up to 10 million people would purchase LTC insurance by 2005 if the premiums were deductible from federal income taxes for individuals who don't itemize, says a study commissioned by the Health Insurance Association of America. Moreover, the savings to Medicaid would more than offset the revenues lost by the federal government due to the tax deduction.
More people would buy LTC insurance because a 100 percent above-the-line (non-itemized) tax deduction would lower the net cost of purchasing such policies.
- The average annual premium for an LTC policy in 1995 was $1,806, and the average annual income of an LTC insurance purchaser was about $37,000.
- For this individual, paying a marginal tax rate of 19 percent, a 100 percent tax deduction would save $343 per year in federal taxes -- reducing the net cost of the premiums to $1,460.
- Furthermore, the deduction would result in overall Medicaid savings of $1.06 for every dollar lost from tax revenues.
About 500,000 new LTC insurance policies are sold annually, and a 100 percent tax deduction would increase that number by up to 120,000. If this projection holds up, Medicaid would save $3.5 billion to $3.8 billion annually.
Source: Marc A. Cohen and Maurice Weinrobe, "Tax Deductibility of Long-Term Care Insurance Premiums: Implications for Market Growth and Public Long-Term Care Expenditures," September 1999, Health Insurance Association of America.
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