Who Benefits Most From Tax-Deductible Long-Term Care Insurance?

When it comes to long-term care, one of the best-kept secrets is that Uncle Sam offers significant tax deductions to encourage planning. In the right circumstances, a couple who both are age 70 or older can deduct over $11,000 of insurance costs on their taxes.

Tax-deductible long-term care insurance is nothing new. Provisions offering this benefit have been available since 1996. The Internal Revenue Service increases the maximum deductible amount available each year. For 2022, the maximum amount possible is $5,640 for someone older than 70. In 2023, the amount increases to $5,960.

But tax deductibility comes with conditions and limitations. Most individuals purchasing long-term care insurance protection this year will not qualify for this significant benefit. Here’s what you need to know before you start considering your long-term care insurance options.

Only Certain Policies Will Qualify

The Health Portability and Accountability Act (HIPPA) included language that allows for tax-deductible long-term care insurance. These policies must include consumer-friendly provisions that legislators wanted to encourage. Until recently, these were the most-purchased form of long-term care insurance protection.

Premiums for qualified long-term care insurance policies are tax-deductible to the extent that they, along with other unreimbursed medical expenses (including Medicare premiums), exceed 7.5% of the insured's adjusted gross income in 2021.

In more recent years consumers have more frequently purchased linked-benefit long-term care policies. These combine a life insurance or annuity policy with the ability to access funds for qualifying long-term care needs. With only a few rare exceptions, these linked or combo policies do not qualify for tax deductibility. In instances where they do, only the nominal long-term care (LTC) portion of the premium will qualify.

Your insurance or financial professional can share whether the option being considered meets the qualifications for possible deductibility. It will also be very clearly spelled out in the policy contract, which is something you should always read carefully.

Business Owners Can Have Immediate Tax Benefits

The federal government extends special tax deduction benefits to encourage business owners to undertake long-term care planning. This is especially true for businesses established as C-corporations where 100% of the cost of insurance may be deductible as a business expense.

Businesses may even be able to designate who is covered by these corporate-paid benefits. Where owners are older, generally in their 50s, limited-pay insurance policies can be especially attractive. With these, the insurance premiums are paid in full after a set number of years. Someone could retire at age 65 with their long-term care protection in place without having to make any future payments.

For Individuals, Deduction Benefits Usually Come Down The Road

For most people, the potential to deduct their insurance premiums rarely comes immediately. Insurers require that applicants meet comprehensive health requirements. At older ages, generally after 65 or 70, fewer individuals are able to meet these criteria. As a result, the average age for accepted applicants today is around 57.

Purchasing coverage when you are still working and in relatively good health means two things. First, you’ll likely have an earned income, and second, you typically will have relatively few medical expenses. As a result, even after including the maximum LTC deductible amount, you are not likely to exceed the 7.5% health expense threshold. 

Meeting the threshold becomes much easier after retirement. Earned income is typically low and multiple medical expenses are more common. In addition, the IRS maximum deductible limit for LTC insurance premiums is higher. Adding $5,000 to $7,000 in insurance premium costs to amounts paid for Medicare, dental care, eyeglasses, hearing aids and other medical expenses means you are far more likely to meet the IRS’s medical expense threshold.

For a couple who are both age 70 or older, the 2022 maximum limit for long-term care insurance premiums is $11,280. This would be a benefit-rich policy — far greater than what most people actually have purchased. According to the 2022 Long-Term Care Insurance Price Index, a couple both age 65 would pay $9,675 annually for an initial benefit of $165,000 (for each) growing at 5% compounded annually.

How To Maximize Your Tax-Deductible Long-Term Care Insurance

Start to think about your long-term care plan between ages 55 and 65. That’s when costs are lower and the ability to qualify for insurance protection is significantly higher. A 55-year-old male purchasing an initial benefit of $165,000 growing at 3% compounded annually can expect to pay $2,200, according to the Price Index. A couple would pay just over $5,000.

A couple with earned income of $150,000 will need around $11,250 in qualifying health expenses to meet the minimum. Purchasing long-term care insurance gets you almost halfway there. After retirement, a $5,000 insurance premium meets the deductibility minimum threshold on its own when income is around $67,000.

The American Association for Long-Term Care Insurance can help connect consumers and business owners interested in learning more about tax-deductible long-term care insurance. The purchase of long-term care insurance is typically a one-time occurrence. Finding policies that meet the tax-qualified requirements and offer the maximum tax-planning benefits is vitally important.