We have a Long-Term Care policy with an insurance company (CNA). This year they increased the premiums again but this year we were given an option to pay the increased premium or terminate the policy. We decided to terminated the policy. At that point we

[newtoTT1]

We have a Long-Term Care policy with an insurance company (CNA). This year they increased the premiums again but this year we were given an option to pay the increased premium or terminate the policy. We decided to terminated the policy.

At that point we were giving a check to close the account which we deposited in our checking account.

Our question is how to handle the money (given to us by the insurance company) on our Federal and State income tax forms.

I donot know how the Feds and our state (PA) handle these things. Your help is greatly appreciated

[DavidD66]

How the payment is treated for tax purposes depends.  The amount you received (the surrender value) of your LTC policy may be taxable depending on the circumstances of your surrender. If you are only receiving back the premiums you paid it is not taxable, unless you have deducted the premium payments as an itemized deduction (medical expense) on your tax returns in previous years.  In that case, you have to include the amount previously deducted as other income on your tax return.  The insurance company should have sent you either a Form 1099-LTC or a statement showing the details of your payment which you can use to determine if the payment was taxable.  If you did not receive anything, I suggest you contact the insurance company.   

[newtoTT1]

As you suggested, I contacted the insurance co. The person I spoke with said I didn't need a 1099. So, she was of no help. I waited to the next day and called the insurance co. again after explaining the problem, as I did on the first call, she said she would mail one (1099) out, but it would take 10 business days. She was unable to tell me what the 1099 said.
Thanks for the explanation and the support. You are a great help.
When I do get the 1099, I am assuming it will show the sum of money they sent me for terminating the policy but not the premiums I paid. I never deducted any of the premiums on my taxes. The 1099 will show the termination money but they have no way of knowing the premiums were not deducted. How do I show the deduction for the premiums I paid over the years? (I am assuming the 1099 will only show the termination payout).
I want to thank you very much for your time and expertise. You have been a great help and I thank you very much for taking the time to help me.

[newtoTT1]

As you suggested, I contacted the insurance co. The person I spoke with said I didn't need a 1099. So, she was of no help. I waited to the next day and called the insurance co. again after explaining the problem, as I did on the first call, she said she would mail one (1099) out, but it would take 10 business days. She was unable to tell me what the 1099 said.
Thanks for the explanation and the support. You are a great help.
When I do get the 1099, I am assuming it will show the sum of money they sent me for terminating the policy but not the premiums I paid. I never deducted any of the premiums on my taxes. The 1099 will show the termination money but they have no way of knowing the premiums were not deducted. How do I show the deduction for the premiums I paid over the years? (I am assuming the 1099 will only show the termination payout).
I want to thank you very much for your time and expertise. You have been a great help and I thank you very much for taking the time to help me.

[MonikaK1 · Accepted solution]

Only the amount you received that exceeds the premiums you paid would be taxable, as long as you didn't deduct the premiums. Any 1099 issued should only be for amounts you earned on the policy if it had a cash surrender value. Review your policy; it should have a section about cash surrender value if applicable. Contact the company if you have questions about the 1099 when you receive it.

The surrender of an insurance policy or endowment contract for its cash surrender value, as distinguished from an exchange of policies or contracts, results in taxable income where the amount received on surrender exceeds the premiums or consideration paid.

When you surrender the policy, the amount of the cash basis is considered a tax-free return of principal. Only the amount you receive over the cash basis will be taxed as regular income. Any refund on a complete surrender or cancellation of the contract shall be includible in gross income to the extent that any deduction or exclusion was allowable with respect to the premiums.

[newtoTT1]

Good morning,

Sorry it took so long to get back to you but the insurance company was giving me mixed messages.

I called CNA and spoke to a representative who was going to send a 1099 form. After about two weeks of waiting I called the Company again because I did not get the 1099. This time I got a different person who gave me a different answer. The representative said that since I opened the policy after 1997 (I opened the policy in 1998) it was Tax Qualified and that no 1099 is required. The representative could not help me with what that means relative to my situation and suggested I find a tax consultant.

I did a search on the web and initially got confused with the language but I think now I have some understanding of the situation. To the best of my knowledge, since I did not deduct my LTC policy premiums on my income taxes over the years, the payment for the surrender of the Long-Term policy is not taxable.

Assuming some part of the surrender value is taxable, how/where do I put the sum given for the surrender value and where/how do I put the premiums (cost basis). The policy itself only addresses surrender value when benefits are being received.

Please share your understanding of this situation and whether the lump sum Tax Qualified payment is taxable or not.

Thank you so much for your time and help on this tax question.

[MarilynG1]

If you know the total amount of premiums you paid for the policy, subtract that amount from the surrender amount you received.  The balance (if any) can be entered under Wages & Income > Miscellaneous Income, 1099-A, 1099-C, Other Reportable Income > Other Taxable Income.

Add description 'insurance surrender value' (or something like that) and the Amount.

You are correct that the surrender value would not be taxable if you never deducted your premiums.  The only thing unknown here is if your policy accumulated any Cash Value over the years that you received as part of the surrender, then that amount would be taxable.

@newtoTT1 

[cupofjoemaui]

Hello!

I have had a LTC plan since 2003 with CNA and recently they sent a letter about a buyout.  My situation looks to be exactly what you have described in this posting.  Can you give details about what was the end result? 

Did you have to pay taxes? 

What forms did you fill out on Turbo Tax? 

My LTC plan is Tax Qualified and they said I would not receive a 1099.  Thanks for any help in advance! 

[Carl]

I can't fathom why everyone is going around their elbow to get to their thumb. It's really simple. If (and "ONLY" if) any of the payout is reportable income on your 2024 tax return, the insurance company will send you a 1099-R. Now understand there's a difference between "reportable" income, and "taxable" income. Just because you may be required to report it on your tax return, DOES NOT mean it's taxable.
If you receive a 1099-R, any taxable amount will be reported in box 2a of the 1099-R. If box 2a is blank, "AND" taxable amount not determined is not checked in box 2b, then nothing is taxable. Typically, you'll never receive a 1099-R like that. You just won't be issued a 1099-R, which means you don't have to report anything on any tax return.
If a 1099-R is issued by the insurance company to you, they are required by law to send it not later than Jan 31st. So if you've not received a 1099-R by the end of the first week of February, it's a good bet they're not sending you one at all, because you don't have to report it on your tax return.
Now, the only exception to all of the above that I am aware of, is if two conditions are met.
1) You itemized deductions in any prior year or years, "AND"

2) You deducted the premiums you paid for that tax year as a SCH A tax deduction in the year you itemized.

[cupofjoemaui]

Thanks for the info. 

I have had this LTC policy since 2003 and have never deducted any of the monthly premiums on my taxes. The company is not in the LTC business anymore and seems they are trying to buy out the plans since the buyout would be considerably less then what they would pay if I were to actually use it for LTC.   As I mentioned they said I would not receive a 1099 and it was a "Tax Qualified" account. Based on what you have written it seems that I would not have to pay taxes on the money received from the buyout? 

Thanks in advance. Joe