Long-Term Care Insurance:

Tax Preferences Reduce Costs More for Those in Higher Tax Brackets

GGD-93-110: Published: Jun 22, 1993. Publicly Released: Jul 23, 1993.

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Pursuant to a congressional request, GAO provided information on the potential effect of applying various insurance premium proposals on long-term care insurance, focusing on how: (1) various tax incentives would affect long-term care policies, lifetime benefits, and individual costs; and (2) consumer age, tax bracket, and private or company-provided insurance would affect premiums.

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.

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