AD Banker Comprehensive Practice Exam

What are the tax consequences for benefits received from an individual LTC policy if premiums were deducted?

1. Fully taxed

2. Not taxable

3. Tax-deferred

4. 7.5% is taxable

The correct answer is: Not taxable

When benefits are received from an individual long-term care (LTC) insurance policy where the premiums were previously deducted, those benefits are generally not taxable. This is because the tax code allows for the exclusion of benefits received from such policies when the premiums paid were not deductible for tax purposes. In cases where the taxpayer has taken a tax deduction for the premiums, there might be a different treatment, but typically with individual policies, the benefits received are considered a return on investment, and therefore do not count as taxable income. The reasoning behind this principle is to prevent double taxation on the same income, making it advantageous for policyholders. Understanding the tax treatment of LTC policy benefits helps individuals effectively plan for their financial future and manage their healthcare expenses without being burdened by unexpected tax liabilities.