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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.

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