Four Tax-Efficient Ways to Pay Long-Term Care Insurance Premiums

It’s an unfortunate and often hard reality to contemplate, but up to 80 percent of Americans will face a period of sustained disability before their deaths. What is harder is that most of those Americans will not have done even the most rudimentary planning for this event or for the extended care it will require.

The truth is, long-term care (LTC) is expensive and we know that paying premiums can be a burden to some households. We recently covered how a quality estate plan can help you in terms of disability and long-term care, and today we are sharing four ways the tax code can help you with the expenses for long-term care premiums.

1.  Health Savings Account (HSA)

As of 2018, depending on your age, the HSA can provide up to $5,200 to help fund your LTC premiums as well as toward premiums on LTC benefits for a spouse. “The funds can offset premiums on a traditional LTC insurance policy, or a hybrid life or annuity policy that includes LTC benefits such as an LTC rider” (1).

2.  Deduct LTC premiums as a medical expense

If you are not using HSA withdrawals to fund LTC premiums and your medical expenses exceed 10% of your annual adjusted gross income (7.5% for individuals 65 years or older), you may be able to deduct your premiums on qualified LTC coverage on your individual tax return.

3. Tax-Free 1035 Exchange of Annuity

By nature, long-term care insurance is tax-free allowing clients to benefit by allowing, “like-kind property to be exchanged without triggering taxation on any gain in the contract” (1). This means clients may be able to exchange either a partial (if insurance allows) or full annuity contract for either a new contract with LTC benefits or a traditional LTC policy.

One important thing to note, however, is in order for tax-payers to take advantage of this exchange, the funds must be assigned or obtained directly between prior life insurance or annuity company, directly to the new company and not to the individual or policy owner.

4. Tax-free 1035 Exchange of a Life Insurance Policy

There may come a time where you have an existing life insurance policy but due to unforeseen events you need to exchange or create a new policy that includes LTC coverage. Individuals can switch out their life insurance policy with a 1035 tax-free exchange making it possible for them to add or create a new policy that includes an LTC or chronic illness rider if they require one. For more details, you can read the full article from Highland Brokerage.

An estate plan is more than just distribution of assets, it establishes a plan for you and your loved ones in the event life circumstances require difficult medical decisions to be made, including provisions for long-term care. Our knowledgeable attorneys can provide you with a consultation and answer all your estate planning questions.

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