3 tax-smart ways to pay for long-term care insurance

By: Kimberly Lankford

Long-term-care insurance can help cover the high cost of receiving care in a nursing home, or an assisted-living facility or in your own home. Premiums can be expensive, but you can stretch your money by using tax-free or tax-deductible money to cover a portion of these costs. While Congress discusses a plan that could eventually permit people to withdraw up to $2,000 from their IRAs and 401(k)s each year without taxes or penalties for long-term-care insurance premiums, there are already a few tax-advantaged ways to pay for long-term-care premiums now. The following strategies can help you qualify for tax breaks for long-term-care premiums.

1. Tax-free withdrawals from a health savings account. If you have a HSA, you can withdraw money tax-free each year to pay for long-term-care insurance premiums, with the amount based on your age. This is a frequently overlooked use of HSA money, and a good reason to start building up money in an HSA even if you don’t have many medical expenses now.

The amount you can withdraw for long-term-care premiums each year increases with age, and this break becomes very valuable in your 60s and 70s. In 2019, you can withdraw up to $420 tax-free from an HSA for long-term-care premiums if you’re age 40 or younger; $790 if you’re 41 to 50; $1,580 if you’re 51 to 60; $4,220 if you’re 61 to 70; and $5,270 if you’re 71 or older (the numbers are slightly higher for 2020).

To qualify, the long-term-care policy can only provide services for qualified long-term-care coverage — most standalone long-term-care policies count, but hybrid policies that include life insurance and long-term care coverage usually aren’t eligible. Ask your insurer if your policy qualifies.

To qualify to contribute to an HSA in 2019, you must have an HSA-eligible health insurance policy with a deductible of at least $1,350 for self-only coverage, or $2,700 for family coverage. For more information about HSAs, see Six strategies to make the most of a health savings account.

2. Tax deduction for long-term care premiums. A portion of your long-term-care insurance premiums can count as a tax-deductible medical expense, if you itemize your income-tax deductions. You can only deduct eligible medical expenses that exceed 10% of your adjusted gross income in 2019 — making this deduction more valuable after your income drops in retirement.

The tax-deductible portion of your long-term-care premiums is based on your age — with the same limits that apply to the tax-free HSA withdrawals. The rules for eligible long-term-care policies are the same, too — only standalone policies count. For more information, including a list of all of the medical expenses that count for the tax break, see IRS Publication 502 Medical and Dental Expenses.

3. Tax-free transfer from a life insurance policy to pay long-term care premiums. If you have a permanent life insurance policy that has built up cash value, you may be able to roll over the cash value tax-free to pay for long-term-care insurance premiums (called a “1035 exchange”). Both hybrid life insurance/long-term care insurance policies as well as standalone policies are eligible for this tax break. You can either transfer all of the cash value directly to the long-term-care or hybrid policy, or you may be able to gradually transfer some money from the cash value every year to pay long-term-care premiums. The rules can be complicated — make sure to work with a knowledgeable agent if you are considering a 1035 exchange to ensure it is processed properly. For more information, see What to do with life insurance you no longer need.

Thanks for reading! Enjoyed this article? Share it with others and sign up below to get articles like this delivered to your inbox weekly.

Saturday Insurance Services, LLC (“Saturday” or “Saturday Insurance”) is a licensed, digital insurance advisor. All tools, quotes, and information provided by Saturday are for educational purposes only and based on the limited information, if any, provided by you. We urge you to consult with your financial and tax advisors before making any purchase decisions. All quotes and estimates are non-binding and are not to be construed as a guarantee you will be able to purchase insurance. Availability of insurance and final pricing is determined solely by our insurer partners and subject to their review and acceptance of a completed application. All product guarantees are subject to the claims-paying ability of your insurer.