How to Use Your LTC Premiums to Reduce Your Tax Bill

While tax deductions are available to long-term care insurance owners, the particulars point to a decision between modest tax savings today versus more significant tax savings in the long run.

The Unavoidable Costs: Taxes and Insurance

If we’re being honest, there are two things that most people don’t want to spend their hard-earned assets on: taxes and insurance premiums. That said, the downside risk of not paying either of those expenses is severe enough to motivate many to pay their taxes and take some risk off the table beyond home, auto, health, and life insurance. For example, long-term care insurance has become another necessity for anyone wanting a high degree of control over how they receive care as they age.

How LTC Premiums Can Help Lower Taxes

Exactly how to achieve those savings will depend on the nature of the coverage and the particulars of the client’s tax planning. In terms of the coverage, four factors will impact how to take a deduction and the size of that deduction:

1. The insurance product must fall under Section 7702(b) of the Internal Revenue Code.
2. It also has to have separate charges related to the acceleration of benefits, continuation of benefits, and any inflation protection, as well as no cash value related to these product elements. This generally eliminates all long-term care riders available on traditional life insurance products. 
3. There are age-based limits to how much a client can deduct. See Table 1 for additional details.
4. The client must itemize, and their total medical expenses must exceed, 7.5% of AGI.

Real-World Deduction Scenarios

• Male, Age 55 
  • LTC Premium: $6,000
  • Deductible Limit: $1,800
  • Deduction = $1,800 
• Female, Age 72 
  • LTC Premium: $6,000 
  • Deductible Limit: $6,020 
  • Deduction = $6,000 (full premium covered) 

All the factors listed above prevent many from deducting any of these charges. Fortunately, there is another path for individuals to achieve a similar outcome. If their health insurance coverage includes a Health Savings Account (HSA), the most significant barrier from the list comes off the table: the need to itemize their taxes.

Using an HSA To Fund LTC Premiums

HSA participants can use their HSA assets to pay the portion of their LTC premiums attributable to the actual coverage using the guidelines listed above, capped by the age-based limit. Of course, if the client is already max-funding their HSA, they can simply pay as much of their premium as the age-based limit will allow from those assets, preserving their earned income for other purposes. If they’re not entirely funding, however, increasing their contribution to pay LTC premiums is the most straightforward way to achieve a deduction.

There are, however, several additional considerations to keep in mind: It may be in the client’s best interest to let those HSA funds grow rather than using them to pay premiums. Long-term care costs are not the only costs that rise as the years go by. Out-of-pocket expenditures increase as well. Further, preserving those HSA funds to pay for treatments that health insurance may not cover (despite being an appropriate treatment option) is also worth considering. 

Which Strategy Is Best?

Ultimately, there is no single correct answer here. If the client is a bit older and itemizes, simply taking the deduction via itemization is a clear winner. Beyond that, it is more complicated. For clients participating in an HSA or with a seasoned HSA from prior participation, using these funds is a viable tax minimization strategy that should be considered based on the particulars mentioned above and the balance of their tax planning. In addition, the decision regarding how to pay premiums may vary from year to year. 

The Bigger Picture: Making LTC Coverage More Accessible

The real advantage is that these strategies can make long-term care insurance more affordable, rendering coverage more accessible. In addition, while it is beyond the scope of this discussion, business owners have more tax-advantaged premium payment options available to them, as do employees with access to coverage through their benefits program.

If you're navigating long-term care planning and want to explore how tax strategies like premium deductions or HSA funding could benefit your clients, LIFE Brokerage is here to help. Our team aligns the right insurance products with your clients’ financial goals — with expert policy structure and tax efficiency insights. Reach out to us today to discuss custom solutions that simplify the complexities and add more value to your services.