OVERVIEW OF TQ & NON-TQ  POLICIES

Tax Qualified versus Non-Tax-Qualified - The Bottom Line

The fundamental differences between a Tax-Qualified and a Non-Tax-Qualified Policy pertain to how disabled someone is in order to be eligible for the policies' benefits and how the premiums and benefits of the policies are treated for income tax purposes.

There are advantages and disadvantages to both TQ and NTQ policies. We believe you should understand the differences between these policies so that you can make an informed decision regarding which is best.

TAX-QUALIFIED POLICIES

Qualifying Language for Benefits:

• You must require assistance with at least 2 of the following 6 Activities of Daily Living (ADLs) for a period of at least 90 days (bathing, dressing, eating, transferring, toileting and continence).

Or

• You must have Severe Cognitive Impairment, such as Senile Dementia, Alzheimer's Disease, Organic Brain Syndrome, etc.

Tax Issues on Tax Qualified Benefits:

• The benefits received from a Tax-Qualified policy are generally tax free, subject to certain limitation regarding per diem payments.

Premiums & Tax-Deductibility for Tax Qualified Policies:

• Premiums are tax-deductible based on how a person files their taxes. Self-employed individuals gain significant tax deductibility based on their age. To see more details, see our Tax Deductibility Chart

NON-TAX QUALIFIED POLICIES

Qualifying Language for Benefits:

• You must require assistance with at least 1 of the following 7 ADLs for Home and Community-based Care, and 2 of the ADLs for Facility Care, (bathing, dressing, eating, ambulating, continence, transferring and toileting)

OR

• You must have Cognitive Impairment, (such as Senile Dementia, Alzheimer's Disease, Organic Brain Syndrome, etc.).

OR

• Care must be essential to your health, safety and welfare and certified by your physician as such, (sometimes this is called Medically Necessary).

Tax Issues on Non-Tax Qualified Benefits:

• There has been no formal ruling from the federal government about the taxability of benefits paid from a Non-Tax Qualified policy. The IRS has said that the benefits of a Non-Tax Qualified policy generally should not be taxable if they are paid under an accident and health insurance policy and are payable due to an injury or sickness.

Premiums & Tax-Deductibility for Non-Tax Qualified Policies:

• Premiums paid for a Non-Tax-Qualified policy are not deductible for Federal Income tax purposes, however, some states do permit a deduction on state income taxes.

EXAMPLES OF TQ vs. NTQ in Action

Situation 1: Facility Care

Rose, 74

Her Problem: Severe pain and fatigue from Fibromyalgia, osteoarthritis and gait instability.

Her Needs: Assistance with meal preparation, housekeeping, laundry and, occasional assistance with bathing.

The Verdict for a TQ policy: The claim would be denied under a TQ policy. Rose needs help with one ADL only, bathing. She is sometimes unsteady walking but able to move about without assistive devices or human assistance.

The Verdict for a NTQ policy: The claim is payable under the policy's Medically Necessary trigger. Rose was unable to remain at home due to the fatigue, pain and unsteadiness. She could not safely or adequately get out for groceries , cook, clean or get into and out of the tub. She moved to an Assisted Living Facility because she couldn't make it at home any longer.

Situation 2: Home Care

Husband and Wife, Gary, 87, and Irene, 81

Their Problem: Gary is an insulin-dependent diabetic, and has serious vision problems from a diabetic complication known as diabetic retinopathy. He also uses a walker outside, primarily for security given his vision loss. Irene is also a diabetic and on insulin. She, too has vision problems, stemming from glaucoma.

Their Needs: Assistance with medication administration (including insulin injections), meal preparation, housekeeping, laundry and transportation.

The Verdict for a TQ Policy: Their claims would be denied. Neither Gary, nor Irene yet need any assistance with any ADLs. Remember that even though Gary uses a walker outside, if you are capable of ambulating without another person's assistance, you are considered independent with that ADL.

The Verdict for a NTQ Policy: Gary and Irene's claims are payable under their policy's Medically Necessary triggers.

BENEFIT TRIGGERS OF THOSE WHO FILED CLAIMS IN 2002

(Penn Treaty Data Only)