taxes

Tax advantages of long-term care insurance

C corporation deduction

If you own or belong to a C corporation, the tax savings alone can be a compelling reason to purchase long-term care insurance.

"A C corporation gives you the greatest tax deduction," says Slome. "They have the greatest latitude in terms of what they're able to do. You can deduct 100 percent of the LTC premiums, they're not subject to the age-based limits and the business can establish a defined group that the business pays for."

For instance, a C corporation may set up a defined group consisting of upper management and purchase long-term care policies for each member and their spouses. To really maximize the tax savings, they may even opt for accelerated payment of the policies, typically over a 10-year period or to age 65, according to Slome.

"So now you've accelerated the tax deduction when the company needs it, and at age 65 when you stop working or own the company, you now own LTC insurance that is fully paid for," says Slome. "You never have to pay a penny in retirement, and you never have to face rate increases because it's paid for."

Cash-value life insurance and nonqualified annuities

Uncle Sam has also created a tax incentive for owners of cash-value life insurance and nonqualified annuities to shift some of their money into long-term care insurance.

Interest withdrawn from a cash-value life or annuity is normally taxed, says Olson. But if you use that interest to pay your long-term care insurance premium, you avoid the taxman completely.

"If you have substantial cash buildup in a nonqualified annuity, you can even do a tax-free exchange into an annuity that has an LTC rider," says Sullivan. "If you need it for long-term care, the payment is going to come out as a nontaxable benefit, and in the meantime, the internal cash buildup within the policy can be used to pay the premiums tax-free."

In the same way, owners of old cash-value life policies can do a tax-free transfer into a single-pay long-term care policy without having to pay tax on the gains within the life policy.

State income tax credits

Half of the states offer some form of tax credit or state income tax deduction as an incentive to purchase long-term care insurance, with some ranging as high as 25 percent of the total long-term care insurance premiums paid during the taxable year.

"Nobody knows about that, including many accountants," says Slome. "Not only are there tax deductions in a few states, there are tax credits, which are even better."

HSA/MSA premium payments

If you have a health savings account or Medicare medical savings account, you can use the money in your account to pay for most or all of your long-term care insurance premiums on a pretax basis.

"If you maximize your HSA every year while you're employed, when you retire, you can have enough in the HSA to pay for your LTC premium each year," says Olson.

advertisement

Show Bankrate's community sharing policy
          Connect with us
Find Senior Housing Near You

Let us help you compare

  • Pictures
  • Pricing
  • Options
Zip code or City, State

Get Help Now

advertisement
CD & INVESTING NEWSLETTER

Learn the latest trends that will help grow your portfolio, plus tips on investing strategies. Delivered weekly.

Blog

Dr Don Taylor

Helping seniors is a SNAP

A $1 donation to the Supplemental Nutrition Assistance Program (SNAP) provides up to $60 in benefits to seniors.  ... Read more

advertisement

Senior Living Adviser

Where can I find Mom's IRA CDs?

Dear Senior Living Adviser, We found two IRA CDs from 1990 and 1992 in our mother's safe deposit box after she passed last year. The bank where the CDs were drawn has merged twice since that time. The bank has no record...

View more Bankrate Advisers »

Partner Center
advertisement

Connect with us