Long Term Care Premiums: HSA Eligibility

What is long term care insurance?

Long term care insurance differs from traditional health insurance in that it does not cover medical services, but rather the long term care expenses that will arise with age, such as personal and custodial care, be it in the policyholder's home, a community organization or other facility. This form of insurance will reimburse policyholders, typically with a pre-selected limit, that will cover the cost of caregivers who will assist individuals with day-to-day tasks, such as bathing, dressing and eating (U.S. Department of Health and Human Services).

What are insurance premiums?

Insurance premiums are the amounts paid to an insurance company to cover the cost of one's health insurance plan. These amounts can be paid out monthly, quarterly or annually, and their value is heavily contingent on factors including the type of coverage, the likelihood of a claim being made, where the policyholder lives or operates a business, the policyholder's inherent risk or behavior and competitive pricing with other insurance companies.

In addition to being a source of revenue, premiums are an insurance company's means of covering the many liabilities that come with the plans that they underwrite, as well as investing these amounts for larger returns. However, state insurance regulators work to make sure that companies will have adequate reserves to cover any claims that policyholders may file to ensure that their medical expenses are covered. Last but not least, premiums may fluctuate and increase/decrease after each policy period, which is based on numerous factors, including claims made in the past plan year or cost of coverage increases/reductions (Investopedia).

How are insurance premiums reimbursed?

For a policyholder to continue to receive coverage through his/her insurance plan, premiums must be paid according to the policy's payment plan schedule, but it is left up the policyholder to decide where these funds should come from. For instance, a flexible spending account (FSA) is only designed to cover medical products and services for an account holder, his/her spouse and dependents. As regulation IRC 213(d)(1) states regarding the FSA account spending: "medical care includes amounts paid for the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body." Long term care insurance premiums fall outside of this definition and pay for coverage, not direct medical care.

Conversely, business-sponsored accounts like health reimbursement arrangements (HRAs) may be underwritten to cover long term care insurance premiums, but this is left up to the employer to decide and varies greatly. However, health savings accounts (HSAs) are personal savings accounts that are designed to cover health and related expenses, and therefore they can be used to pay for long term care insurance premiums if the policyholder desires.