4 Tax-Friendly Ways to Pay for Long-Term-Care Insurance

Take the sting out of the cost of your insurance premiums.

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I read your recent article on long-term-care insurance. Are there any tax strategies I can use to help cover the premiums for this insurance?

Take Our Quiz: 10 Things You Should Know About Long-Term Care

Yes, there are several tax-advantaged ways to help take the sting out of the costs of long-term-care coverage.

1. Tax-free withdrawals from an HSA. If you have a health savings account, you can withdraw money tax-free to pay a portion of eligible long-term-care insurance premiums. The amount you can withdraw is based on your age. In 2016, the limit for each person is $390 per year if you are 40 or younger; it is $730 for people ages 41 to 50; $1,460 for ages 51 to 60; $3,900 for ages 61 to 70; and $4,870 for ages 71 and older. You can withdraw up to those limits tax-free for your spouse’s coverage, too. See IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans (opens in new tab), for more information.

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2. Deduct long-term-care premiums as a medical expense. A portion of your long-term-care premiums can qualify as a tax-deductible medical expense; the same age-based limits apply to these deductions as to health savings account withdrawals. You can’t double dip and deduct the expenses if you took a tax-free HSA withdrawal to pay the same costs. Medical expenses are deductible to the extent they exceed 10% of your adjusted gross income, or more than 7.5% of your AGI if you’re 65 or older. Most traditional long-term-care policies issued in the past several years are eligible. See IRS Publication 502, Medical and Dental Expenses (opens in new tab), for more information about the requirements.

3. Make a tax-free transfer from an annuity. You can transfer money tax-free from an annuity to cover premiums for a traditional long-term-care policy or to pay for another annuity that also provides long-term-care benefits. The transfer (called a 1035 exchange) must be made directly from the annuity to pay the premiums. If you withdraw the money from the annuity rather than making the tax-free transfer, you have to pay income taxes on the gains, which are taxed first, before you recover your principal. For more information, see Use Annuities to Pay for Long-Term Care. Your long-term-care insurer should be able to help you make the transfer.

4. Make a tax-free transfer from permanent life insurance. You can also make a tax-free 1035 exchange from a cash-value life insurance policy to pay long-term-care premiums, either for a traditional long-term-care policy or a policy that combines life insurance and long-term-care benefits. The money can come from the policy’s cash value, or you can use the policy’s dividends to pay the long-term-care premiums. This strategy can be useful as you get older and your primary needs change from life insurance to long-term care.

For more information, see Options for Dealing With Rising Long-Term-Care Insurance Premiums.

Kimberly Lankford
Contributing Editor, Kiplinger's Personal Finance

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.