Federal Tax Incentives for Long-Term Care Insurance: Actuarial Issues and Public Policy Implications

Due to the same demographic changes that threaten the financial health of Social Security and Medicare, the public funding of long-term care services will face increasing pressure in the years to come. A tax policy that provides incentives for private long-term care insurance is one way to ease that pressure and increase the availability of long-term care coverage to those who need it. Possible options for tax incentives include: � Providing above-the-line income tax deductions and/or tax credits � Providing deductions through cafeteria plans and flexible spending accounts � Allowing premium payments without penalty from IRA, 401(k), and similar tax-deferred retirement accounts. Possible strategies to limit losses in tax revenues include: � Setting maximum caps for the amount of tax incentive � Adding income phase-out amounts to target lower income taxpayers � Setting an age cap on tax incentive eligibility � Limiting tax incentives for a specific number of years. This issue brief discusses the actuarial and public policy implications of using federal tax incentives to encourage the purchase of private long-term care insurance.