Qualified vs Non-Qualified Policies

In the insurance world, the terms qualified and non-qualified indicate whether a specific retirement plan is qualified for advantages in tax.

An insurance policy that is often classified as qualified or non-qualified is the long term care insurance. A long term care insurance classified as qualified is taken as an itemized deduction until “certain limits”, provided that premiums and other related medical expenses that are unreimbursed are more than 7.5% of adjusted gross income.

The said “certain limits” are specified in the data from year 2002 as follows:
• $240 premiums annually for persons with ages 40 or below;
• $450 premiums annually for persons with ages 41-50;
• $900 premiums annually for persons with ages 51-60;
• $2,390 premiums annually for persons with ages 61-70;
• And $2,390 premiums annually for persons with ages 71 and above

The above amounts will increase each year based on Medical Consumer Price Index.

A policy to be considered qualified is required to comply with the federal requirements as stipulated in IRC Section 7702B(b). Long term care contracts must be curing, therapeutic, preventive, mitigating, treating, rehabilitative services, personal care and maintenance services, and necessary diagnostic. It must also be needed and requested by chronically ill persons.

The IRC in Section 7980C(c) stipulates that qualified long term care insurance plans should be handed over to the insurance policyholder within a period of 30 days as of the date of approval. It also further requires a carrier of the policy who denies a particular claim to furnish written explanation for the reasons of his denial. Moreover, he is also required to release all necessary information in line with the denial at a period of 60 days from the date of denial.

Additionally, benefit dollars that have been paid out on qualified long term care policies are considered non-taxable income subject to particular limitations.

On the other hand, plans considered to be unqualified contain unclear tax treatments. According to law, premiums paid to non-qualified long term care insurance policies cannot be deductible, and its corresponding benefits may be required to be integrated in taxable income. Experts suggest that before purchasing a non-qualified long term care insurance policy, one must first consult his tax adviser. A person who decides to purchase non-qualified insurance of this type is required to affix his signature in a statement of disclosure addressing such purchase.

Although life insurance is already considered tax-advantaged, financial plans that make use of life insurance is viewed as non-qualified. This is due to the fact that financial plans do not carry tax advantages with them.

The greatest example of this is the split-dollar arrangement, a financial plan that specifies how to pay a certain life insurance. The fact that the life insurance plan incorporates tax advantages doesn’t mean that it is also held by the split-dollar arrangement because such arrangement is non-qualified in the first place. However, non-qualified plans are able to decrease taxes to be paid. A deferred compensation plan, for example, can postpone and reduce income taxes that are due. The greatest advantage of non-qualified plans is its intrinsic characteristic of not needing to abide in various regulations by the IRS for it to retain its status.