@apzelic wrote:
I appreciate the answer but it leaves an ambiguity that I hope the poster will address and it is specifically this: The Genworth LTC Insurance is a “qualified” plan based on the IRS description of “qualified”. Some of the options for current subscribers include a pay-out of cash (I think up to $10K) which is clearly not a “benefit” of the original plan. Assuming (and I could be wrong here) that the cash settlement is not a “punitive” award (since the company admitted to no wrong-doing), is it then taxable? It would seem it would be simply because any premiums paid to date were tax-deductible under IRS rules.
My thanks in advance for addressing this ambiguity.
Unfortunately, a private letter ruling costs a minimum of $10,000.
The general principle is that a return of premiums would not be taxable, as long as the premiums were paid with after-tax dollars. (It would be taxable if you paid the premium with pre-tax dollars through an HSA or an employer pre-tax deduction, because it would be a reimbursement of a previous deduction, also called a taxable recovery.
If the money is to represent investment gains you should have received if the company was better managed, it would be reported as capital gains investment income.
If the policy was canceled and your money refunded, the refunded amount is taxable if it is more than the after-tax premiums you paid (because that represents an investment gain).
If these are punitive damages for wrongdoing, that is taxable. Interest is also taxable (such as, you were due $20K, but they were late in paying so you received a $20K settlement plus $1K of interest, the interest is taxable regardless of the taxability of the settlement.)
If the settlement represents money they should have paid for care for someone in care or who has passed, but did not because of bad business practices, then the money is not taxable because it would not have been taxable if it had been paid as a benefit for medical care.
Without knowing the specifics of the suit, there's not much more I can say. If you want someone to help you take a position and stand behind you if audited, you will need to hire your own expert.
