Rev. Rul. 58-602

Advice has been requested as to the proper treatment, for Federal income tax purposes, of the premium paid and benefits received by a taxpayer who holds an accident and health policy which provides insurance against the costs of medical care, where the benefits are not paid on a reimbursement basis, but rather on an indemnity basis, the benefits under the policy being paid irrespective of the amount of expenses incurred by the policyholder.

In the instant case, the policy issued by an indemnity and life insurance company insures the policyholder against loss due to certain hospital and surgical expenses incurred as a result of accidental bodily injury which is received while the policy is in effect, or as a result of sickness which first manifests itself while the policy is in effect. However, such indemnity is provided only if and to the extent that the policy makes specific provision therefor and is subject to the exclusions relating to workmen's compensation laws, to Federal Government hospitals, and to other exceptions, limitations, reductions and other provisions contained therein. In essence, the policy provides hospital and surgical benefits on an indemnity basis with the amount of the benefit provided under the policy being payable irrespective of the amount of the hospital and surgical expenses incurred by the policyholder. The facts in the instant case disclose that the premium paid by the policyholder is for insurance against medical and surgical expenses and that the payments received by the policyholder are not reimbursement for loss of earnings, but are made only for the purpose of covering medical and surgical expenses, even though, under the policy, he could receive payments greater in amount than was actually expended by him for such purpose.

Section 213 of the Internal Revenue Code of 1954 allows as a deduction expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, his spouse, or a dependent, subject to certain limitations.

The term `medical care' is defined in section 213 of the Code as meaning 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 (including amounts paid for accident or health insurance), or for transportation primarily for and essential to medical care.

Section 1.213-1(e)(1) of the Income Tax Regulations provides that amounts paid for hospitalization insurance, for membership in an association furnishing cooperative or so-called free choice medical service, or for group hospitalization and clinical care are expenses paid for medical care. However, premiums paid by a taxpayer under an insurance contract which provides reimbursement for loss of earnings due to accident or illness do not constitute amounts expended for medical care. See also Revenue Ruling 19, C.B. 1953-1, 59.

Section 104(a)(3) of the Code provides, insofar as pertinent, that, except in the case of amounts attributable to (but not in excess of) deductions allowed under section 213 of the Code for any prior taxable years, gross income does not include amounts received through accident or health insurance for personal injury or sickness. Section 1.104-1(d) of the Income Tax Regulations further provides that if an individual purchases a policy of accident or health insurance out of his own funds, amounts received thereunder for personal injuries or sickness are excludable from his gross income under section 104(a)(3) of the Code. However, in computing the deduction for medical expense allowable under section 213 of the Code the aggregate amounts expended by taxpayer for medical care must be reduced by the aggregate indemnities received under these insurance policies. Rev. Rul. 56-18, C.B. 1956-1, 135.

Accordingly, the premium paid in the instant case for an accident and health insurance policy, which provides solely for indemnification of the policyholder for hospital and surgical expenses, is deductible as a medical expense to the extent provided in section 213 of the Internal Revenue Code of 1954, even though the benefits under the policy are paid irrespective of the amount of medical expenses incurred by the policyholder. Further, such policy constitutes an accident and health insurance policy within the purview of section 104(a)(3) of the Code and the amounts received by the policyholder, pursuant to the provisions of the policy, are excludable from gross income to the extent provided in section 104(a)(3) of the Code.