Without long-term care insurance, an individual is in effect, self-insuring for the possibility of long-term care. Self-insuring puts retirement income is at risk, may require illiquid assets to be liquidated, and the value of equities might be compromised when sold in a low market to cover expenses. Without long-term care insurance, couples should be prepared to accumulate $200,000 - $400,000 to pay for long-term care expenses.
For those who prefer not to pay for long-term care out of pocket, below are a few tax-friendly ways to pay for long-term care insurance:
- Qualified LTCI policy: When paid for directly by an individual, premiums for a qualified LTCi policy may be a federal income tax deduction for those who itemize. Deductions are limited however, by age and amount and only to the extent that the total amount of qualifying medical expenses exceed 10 percent of Adjusted Gross Income. Premiums for self, spouse, dependent children, and parents who otherwise qualify as a dependent are eligible for the deduction.
- Health Savings Accounts: HSAs funded by pre-tax contributions, can be a source for premium dollars. HSA balances rollover year to year, allowing a balance to accumulate. And although contributions to HSAs must end once enrolled in Medicare, withdrawals are not similarly restricted. Withdrawals for long-term care insurance are subject to the same age-based limitations as above and are not subject to income tax.
- Cash value from a life insurance policy or annuity: Life insurance may be used to fund a long-term care policy. The cost basis of the life insurance or the annuity is transferred to the long-term care policy. Regulations also allow partial 1035 exchanges, in that case the cost basis is pro-rated to the portion of cash value transfer to the new LTCi policy. Not all carriers accept 1035 exchange funds, so it is wise to confirm before initiating the exchange, otherwise the policy owner may have tax consequences.
- Employer-sponsored plans: Employers paying long-term care premiums for owners and employees have even more attractive tax advantages. That will be the subject of a subsequent article.
Self-insuring for long-term care expenses can be a risky decision. Help clients avoid the risk by providing the above information. Your DIS long-term care specialist will provide the background you need to guide your client through the various options to pay for long-term care insurance. Call us today for a quote or just to learn more.