491 / Are benefits received under a qualified long-term care insurance contract taxable income?

A qualified long-term care insurance contract is treated as an accident and health insurance contract. See Q 477. Thus, amounts (other than dividends or premium refunds) received under such a contract are treated as amounts received for personal injuries and sickness and are treated as reimbursement for expenses actually incurred for medical care.¹ Since amounts received for personal injuries and sickness are generally not includable in gross income, benefits received under qualified long-term care insurance are generally not taxable.² See Q 343.

While there is no limit to the amount of benefits that may be received as reimbursement under a qualified LTC policy, this is not the case when benefits are paid as a “per diem” (i.e., without regard to the cost of services received). In the latter case, a calculation must be performed.

The taxpayer totals the sum of all per diem payments received during the year, including amounts received from QLTCI as well as accelerated death benefits received on account of “chronic illness” under IRC Section 101(g), but not including accelerated death benefits received on account of “terminal illness” under IRC Section 101(g).³