Long-Term Care Insurance

A wide range of proposals have been made to increase incentives to buy long-term care insurance. Some of these proposals seek to clarify the tax treatment of payments from long-term care insurance policies and long-term care riders to life insurance policies. Others seek to liberalize tax treatment either by allowing long-term care insurance premiums to be deductible or by allowing payments from policies to be tax-exempt. This report does not discuss specific proposals but instead examines generic types--including pension, life insurance, and health insurance--and shows how the related tax incentives would affect the price of long-term care insurance depending upon (1) the age and tax bracket of the consumers and (2) whether the coverage is employer provided or individually purchased. GAO also examines how these alternative tax treatments would affect the lifetime benefits and costs of individuals of different ages and tax brackets.

GAO found that: (1) although long-term care insurance policies offer a flat annual premium paid as long as the policy is in effect, rely on investment earnings to provide insurance resources, and have higher annual premiums for older individuals, their purchase incentives and criteria for payment of benefits differ; (2) younger purchasers of long-term care insurance generally pay lower annual premiums because of the larger number of payments expected, lower probabilities of young purchasers needing care, better risk pooling, and accumulation of investment earnings to reduce the annual premium; (3) insurance companies benefit from early purchase when investment earnings are tax deferred or exempt; (4) although several proposals for improving incentives to purchase long-term care insurance involve allowing insurance premiums to be tax exempt or deductible under an accident and health insurance model, long-term care insurance policies must be defined and distributions monitored so that the proposals will not create tax shelters and favor consumers in higher tax brackets; (5) long-term insurance coverage would benefit a larger population if employers provided long-term care insurance as a fringe benefit, but it would probably cost more in forgone revenue; and (6) although most insurance proposals would raise premium costs and increase protection against inflation, few of the proposals would have tax implications.