Tax Breaks for LTC Insurance
Individual Tax Deduction
Money from HSA or 401(h) health savings accounts can be used tax-free to pay LTC costs and insurance premiums.
Business Tax Deduction for LTC Premiums
Businesses can deduct some or all of the cost of premiums of qualified LTC insurance. Under HIPAA (Health Insurance Portability and Accountability Act of 1996), LTC insurance premiums can be claimed as tax deductions. That means a self-employed individual or an owner of a C-corporation, S-corporation, or LLC can take a tax deduction for up to 100% of the LTCI premium paid (the deduction is limited to age-based amounts for self-employed and owners of LLCs and partnerships). An owner (2% or more) of a C-corporation can deduct 100% of his/her LTC premium as a business expense. (As with other medical expenses, an individual tax-payer who itemizes using Schedule A may deduct age-limited amounts of LTC insurance premiums to the extent they exceed 10% of AGI.)
State Tax Deductions or Credits
Some of the states also provide annual tax deductions or tax credits for LTC insurance premiums paid during the year.
Would you purchase LTC insurance if it were free?
While we all know nothing is for free, if set up correctly, LTC insurance can seem like it is free when using a return of premium rider. An example is the best way to illustrate the point.
Problem: Dr. Smith, age 55, has an estate of $2,000,000 and an income of $400,000 a year. He is worried about paying possibly over $100,000+ over his lifetime for long-term care coverage for himself and his wife. Dr. Smith also doesn’t like buying insurance and does not want to pay LTCI for the next 30 years while he waits to become sick. His solution to the problem is a (1) limited-pay LTC policy paid by his medical office in a (2) tax deductible manner with a (3) return of premium rider.
Solution: 1) Dr. Smith’s corporation pays a deductible premium of $8,985 a year for ten years (out-of-pocket cost for the physician is $5,391 a year); 2) Dr. Smith gets disabled at age 75 and needs home health care ($200 a day) until death at age 85; (Total LTC benefit for ten years = $730,000.) 3) Dr. Smith dies at age 85 and his heirs receive back the entire premium paid because of the Return of Premium rider. This amount equals $89,850, which will pass income-tax-free to the heirs. (Some companies have a setoff against the return of premium for the amount benefits paid.)
Bottom line The LTCI cost Dr. Smith $53,910 out-of-pocket over the ten-year pay period. His heirs receive $89,850 in cash (income-tax-free) from the LTCI company because of the return of premium rider, and his estate did not have to pay for the $730,000 in LTC costs incurred from age 75 to 85. Total Cost: $89,850; Total Benefit: $819,850. By purchasing LTCI through the corporation with pre-tax dollars, Dr. Smith was able to protect his estate from LTC costs and was also able to return the entire premium to his heirs income-tax-free at death.