How LTC Rider Benefits are Taxed
First, it’s beneficial to have an understanding of how LTC riders are taxed. LTC riders are designed to qualify for favorable federal income tax treatment under Section 7702B of the Internal Revenue Code, as amended. This favorable tax treatment extends up to the greater of the HIPAA limit, or actual long-term care expenses.
The IRS HIPAA limit is currently $400 per day for 2021. That results in $12,000 per month (for a 30-day month).
Chances are, the life insurance with LTC riders that you purchased won't be needed for 20-30 years from now. If we assume the 2021 limit increases for inflation at 3 percent, the daily HIPAA limit in 25 years would be $837, or $25,110 per month.
In next blogpost, we will get to the differences between indemnity and reimbursement.