Owners of small and midsized businesses are often unaware of the significant tax benefits associated with the purchase of long-term care insurance. The benefits exist for both traditional as well as for hybrid long-term care policies which today are increasingly popular.
The most favorable tax advantages go to a C-Corporation when purchasing long-term care insurance coverage for the owner and any covered employees. Also quite valuable is the opportunity for owners of pass- through entities to purchase coverage through the business.
Hybrid or linked-benefit long-term care policies are typically a combination of a life insurance policy along with a long-term care rider. The tax rules applicable for hybrid policies are different than those for traditional LTC policies. Whichever suits your needs and finances, selecting the right policy along with the right policy options can result in significantly greater tax deductions. This is especially true when it comes to hybrid or linked-benefit long-term care.
Not All Hybrid Policies Offer Tax Deductibility
When it comes to hybrid LTC policies today, there are policies that meet Internal Revenue Code (IRC) Section 7702B. These are considered tax-qualified long-term care insurance riders. Others meet IRC Section 101(g) and are considered chronic illness riders. While both provide similar coverage, the latter may likely not meet the regulations to qualify as tax deductible.
According to the latest data from the American Association for Long-Term Care Insurance, roughly 60 percent of all hybrid LTC policies purchased in 2021 were 101(g) plans. As a result, if tax deductibility is your desired goal, determining which IRC rules apply can be an important first step in the plan comparison process.
Life Insurance Premiums Are Treated As Compensation
Hybrid policies combine the benefits of life insurance with the ability to provide payments should the policyholder require qualifying long-term care. Business dollars used to pay the employee’s life insurance premiums will be fully tax deductible to the employer as an ordinary and necessary business expense.
The amount paid for the life insurance premium will be reported as compensation received and will be fully taxable to the employee as ordinary income. An employer can provide additional compensation to the employee to help cover the taxes.
If the hybrid long-term care policy contract is properly designed and filed, premiums associated with the long-term care coverage should be fully deductible to the employer as accident and health insurance. Payments for an accident and health plan (which includes tax-qualified LTC) will not be included in the employee’s income. Any future benefits the employee receives will also be tax free within IRS guidelines.
Utilizing a plan design to minimize the life insurance portion of the coverage while maximizing the potential future long-term care benefit can result in significant tax savings.
Limited Pay Policies Can Maximize Tax Benefits
Most individuals associated the purchase of long-term care insurance with what are referred to as lifetime premiums. In simple terms, the business or policyholder pays annually until either care is needed or death occurs.
Business owners, especially those nearing retirement age, can take advantage of options that can yield a policy that is paid-up within a set period of years or when the policyholder turns age 65. For businesses with sufficient income, this can be an ideal way to maximize qualifying business deductions. For the policy owner or other covered individuals, it’s a way to never have to worry about paying future premiums or dealing with risk of rate increases.
Multiple Riders Can Maximize The Potential Deductible Amounts
Hybrid long-term care policies combine a life insurance policy along with one or more LTC riders. When the rider is paid for with a separate identifiable premium, that amount can qualify as meeting the tax-deductible guidelines. For those seeking to maximize tax deductibility, looking for a policy with multiple LTC riders can prove extremely beneficial.
From a planning standpoint, consider a 50-year-old male business owner looking to purchase coverage that is paid-up within 5 years. Equal coverage from the same insurer can result in $17,736 added to the individual’s taxable income with $2,264 allocated as non-taxable LTC premiums.
Selecting a plan that offers a qualifying inflation growth rider, the taxable income is reduced by $8,000. At the same time, the potential long-term care benefit pool available at age 80 is increased from $500,000 to $1,355,000.
A Hybrid Long-Term Care Specialist Can Help Maximize Tax Deductions
For business owners maximizing the tax deductibility is an important consideration. Others to keep in mind include the fact that costs for virtually identical policy benefits can vary based on the insurance company selected.
Experts recommend speaking to more than one advisor or seeking plan proposals from an experienced hybrid long-term care agent able to compare multiple companies. To connect with a specialist, contact the American Association for Long-Term Care Insurance. Specialists can compare costs and tax deductible benefits available with both traditional and hybrid LTC policies.
About Jesse Slome
Medicare Expert – Director Long Term Care Insurance Association, Medicare Supplement Insurance & Critical Illness Insurance Association