Life Care Contract--Is it Health Insurance or not?

[Ringers]

One of my clients moved into a retirement home and signed a Life Care Contract which guarantees her a discount on all of her health services and additional nursing services for the remainder of her life or until she voluntarily terminates the contract.  She paid approximately $152000 and her estate will receive $136800 of this amount back upon her death or she will receive the $136800 if she chooses to discontinue the contract and move out.  My question is, does the $15200 she will not get back qualify as deductible Medical insurance and, if so, does it qualify upon payment of the contract amount or upon termination (either through death or discontinuation of the contract)?

 

Thanks in advance!

 

 

[Jack from Ohio]

This one is easy.  What is the name of the health insurance company she paid the premiums to?  No insurance company, no deductible premiums.

 

Short answer... No.

[jklcpa]

Yes, the portion that is nonrefundable is considered prepaid medical expense, and this is an exception to the rule that says payments for medical that are substantially beyond a year aren't deductible in that year.  You need to look at the policy though.  Here is the section from pub 502 -

 

 

Lifetime Care—Advance Payments

You can include in medical expenses a part of a life-care fee or “founder's fee” you pay either monthly or as a lump sum under an agreement with a retirement home. The part of the payment you include is the amount properly allocable to medical care. The agreement must require that you pay a specific fee as a condition for the home's promise to provide lifetime care that includes medical care. You can use a statement from the retirement home to prove the amount properly allocable to medical care. The statement must be based either on the home's prior experience or on information from a comparable home.

 

Dependents with disabilities.  You can include in medical expenses advance payments to a private institution for lifetime care, treatment, and training of your physically or mentally impaired child upon your death or when you become unable to provide care. The payments must be a condition for the institution's future acceptance of your child and must not be refundable.

 

Payments for future medical care.  Generally, you cannot include in medical expenses current payments for medical care (including medical insurance) to be provided substantially beyond the end of the year. This rule does not apply in situations where the future care is purchased in connection with obtaining lifetime care of the type described earlier.

 

 

If any of the cost was paid with tax-free funds, then that portion wouldn't be deductible.

 

Here is an article that popped up in my search that discusses the types of contracts and their levels of service.  You should look at the contract to see if it covers other services besides medical such as bill paying, housekeeping, running errands, etc, that aren't medically-related.  The article states that these can be deducted under sec 213, and talks about the actuarial and percentage methods of allocating when policies cover more than just medical expenses.

[Ringers]

Thank you. That is just what I was looking for!

I love this board!!!

[jklcpa]

You're welcome.

[TAXMAN]

My TP brings me a statement each year telling me what part of his funds are for medical care and services. His situation is very similar to the original post.