The tax advantages of long-term care insurance

Key takeaways:

• Long-term care policies offer tax advantages your clients may not be aware of. 
• LTC insurance premiums are potentially eligible for a tax deduction, or if they have an HSA, they can reimburse themselves for some or all of the cost of LTC premiums 
• LTC benefits are generally tax free

03/31/2025 – Long-term care (LTC), and how it’s paid for is one of the biggest misconceptions in America today. It’s been found that 49% of Americans aged 40 and older are expecting Medicare to pay for their LTC expenses.¹ The truth is that Medicare only covers 100 days of skilled care after a qualifying hospital stay. Knowing that, what other options have you considered for funding potential LTC expenses? It’s never too early to begin putting a plan in place, because LTC expenses that are not planned for can unravel financial security for your clients, their spouse, and their family. Now is the best time to think about LTC planning and what options really do exist – before an incident happens, and they find out the plan or program they assumed would pay for their care is not an option at all. 

Planning for LTC expenses with LTC Coverage

One cost efficient way to plan for LTC expenses is with long-term care coverage. The LTC industry has done a great job at developing new LTC policies that are quite different from what your grandmother owned. You can now buy a policy with guaranteed premiums and guaranteed LTC benefits. Even better, if you don’t use your LTC benefits, a death benefit is paid to your beneficiary. The amount of death benefit will vary by policy; with some policies it is generally at least equal to the premiums you paid, but with other policies the amount could be much more than you paid in premium. And some policies have a return of premium feature if you change your mind and want your money back. These policies can provide a winning outcome whether you need LTC services or not!

Long-term care policies also offer tax advantages your clients may not know about; and some of these advantages can help make purchasing LTC coverage more affordable. We’ll go over some of the tax advantages and common client questions here, and though this list is not exclusive, it will give you a general idea of what your client can expect as you help them plan for future LTC needs.

Are long-term care premiums tax deductible?

Yes, LTC insurance premiums are eligible for a tax deduction if you can meet the qualifications.

1. You must be able to itemize deductions.
2. You must have 7½% of your adjusted gross income (AGI) in out of pocket in medical expenses to deduct LTC premiums. The LTC premiums can help you get to the 7½% requirement.
3. The LTC portions of a policy must be paid for with separate identifiable LTC premiums, not cost of insurance.
4. Deductions are subject to age-based limits in the tax year premiums are paid (see chart below). 

Can you use Health Savings Account (HSA) dollars to pay for LTC premiums?

Yes! If you don’t qualify for the tax deduction, but have a Health Savings Account (HSA), you’ll be able to reimburse yourself for some or all of the cost of LTC premiums – up to the age-based limits shown above - with tax-free distributions from your HSA. Only LTC premiums apply, (life insurance premiums do not qualify) however there are no other requirements to meet. The tax savings are basically the same as a tax deduction, so it may be wise to first check and see if the tax deduction is available.

Can you get a better tax deduction for LTC premiums if you’re self-employed?

The amount of the tax deduction for a self-employed business owner of a pass-through entity² is the same as for individual taxpayers and is subject to the same age-based limits as shown in the above chart. However, these business owners aren’t subject to same qualifiers that individual taxpayers are subject to, meaning there is no need to itemize deductions or have 7½% of AGI in out-of-pocket medical expenses. This means they’re assured of getting the tax deduction! In addition, the spouse of the business owner also qualifies for this advantage.

Do unused LTC tax deductions carry over into the next tax year?

Unfortunately, no. A deduction can only be taken in the tax year an LTC premium is paid and will be subject to the above chart. For example, if you pay for your policy with one single premium, then you get one deduction. If you pay premiums over 5 years, you’ll be eligible for five deductions. 

Which LTC products are deductible and HSA eligible, and which are not?

1. Traditional LTC policy premiums are deductible and HSA eligible
2. Some linked benefit hybrid LTC policies have deductible LTC premiums and are HSA eligible
3. LTC riders on life insurance are rarely deductible (when so, it would likely be on whole-life policies). That’s because the riders on almost all life insurance policies are paid for with a cost of insurance taken from cash value, not a “separate identifiable premium.”
4. LTC riders on annuities are typically not deductible as they are paid for with a cost of insurance taken from the contract value. 

Sources

[1] New York Times - “States Try Easing the Burden of Long-Term Care’s High Cost” – Mark Miller, June 16, 2023

[2] A pass-through business entity refers to an S-Corporation, Partnership, or LLC