Should Long Term Care Insurance (LTCI) Be Given Preferential Tax Treatment?

Abstract

This paper considers whether long term care insurance (LTCI) should receive preferences under the tax code. The analysis in this paper supports the view that additional tax incentives should not be used to stimulate the sale of LTCI. First, funding for long term care should not automatically take precedence over other savings goals like purchasing adequate life insurance, health insurance, and saving for retirement. Second, while many experts believe that LTCI products are substantially improved compared to products previously sold on the market there are still significant problems with many LTCI policies on the market. These problems include: (1) inappropriate sales of replacement policies, (2) the risk of general premium increases, (3) transferring policy obligations to an under-funded state organization, (4) inflexible benefit, (5) Policy-lapse risk, (6) issues pertaining to adverse selection, and (6) affordability. Tax incentives that stimulate the sale of LTCI through 401(k) plans are shown to be especially problematic because diversions of 401(k) savings for the purchase of long term care insurance will increase the number of workers who end their career with insufficient funds for their retirement.