Unlocking Tax Benefits of Long-Term Care Insurance for Better Financial Planning

5 hours ago

Planning for future healthcare needs is essential, yet many individuals remain unaware of the significant tax advantages associated with long-term care (LTC) insurance. As healthcare costs continue to rise, understanding how to leverage these benefits can help clients preserve their wealth and avoid unexpected financial burdens. Proper LTC planning not only provides peace of mind but can also offer valuable tax savings, making it a critical component of comprehensive retirement strategies.

Long-term care expenses are often misunderstood, with many Americans relying on Medicare to cover costs that it simply does not fully address. Medicare typically pays only for a limited period—around 100 days—of skilled nursing care following a hospital stay. This leaves many to wonder how they will fund extended care needs. Early planning is crucial because unanticipated LTC expenses can significantly threaten a client’s financial security. Implementing a well-structured LTC plan before a crisis occurs ensures they are prepared and can avoid the pitfalls of inadequate coverage.

Planning for LTC Expenses with Coverage Options

One of the most cost-effective ways to prepare for potential LTC costs is through dedicated long-term care insurance policies. The LTC industry has evolved considerably, offering a broad array of policies that differ greatly from traditional plans. Modern policies often include features such as guaranteed premiums and benefits, which provide stability and predictability. Furthermore, many policies offer a death benefit if LTC services are not utilized, with some policies returning premiums paid or offering a death benefit that exceeds the premiums. Certain plans even include a return of premium feature, ensuring your clients’ investments are protected whether or not they need LTC services. These flexible options make LTC insurance a strategic choice for risk mitigation.

Beyond providing coverage, LTC policies can also deliver tax advantages that may help make premiums more affordable. These benefits are an important consideration when assisting clients in planning for their future care needs. While this overview is not exhaustive, it highlights the key points clients should consider as part of their long-term planning.

Are Long-Term Care Premiums Tax Deductible?

Yes, in many cases, LTC insurance premiums qualify for tax deductions. To be eligible, clients must meet certain criteria:

They must itemize deductions on their tax returns.
Their out-of-pocket medical expenses, including LTC premiums, must total at least 7.5% of their adjusted gross income (AGI). Premium payments can help reach this threshold.
Only premiums paid specifically for LTC coverage—separate from insurance costs—are deductible.
The deductible limits are determined by age at the end of the tax year, with higher limits for older clients. For example, individuals aged 61–70 can deduct up to $4,810 in premiums in 2025, according to IRS guidelines.

For detailed, up-to-date information on deduction limits, clients can consult IRS resources or their tax professionals.

Using Health Savings Accounts (HSAs) for LTC Premiums

Clients who do not qualify for a tax deduction might still benefit from using their HSA funds to pay LTC premiums. Contributions to HSAs are tax-free, and distributions used for qualified medical expenses—including LTC premiums—are also tax-free. This approach allows clients to reimburse themselves for LTC costs up to the age-based limits without incurring tax penalties. It’s important to note that only LTC premiums qualify; life insurance premiums do not. For clients with HSAs, this option offers a flexible way to fund LTC expenses efficiently.

Tax Benefits for Self-Employed Individuals

Self-employed clients or owners of pass-through entities such as S-Corporations, partnerships, or LLCs can often claim a full deduction for LTC premiums without the same restrictions faced by individual taxpayers. Unlike individuals who must itemize deductions and meet certain medical expense thresholds, self-employed owners can deduct LTC premiums directly, simplifying the process. Additionally, their spouses are eligible for these deductions, providing further financial relief. This advantage makes LTC insurance particularly attractive for entrepreneurs and small business owners looking to optimize their tax strategies.

Do Unused LTC Tax Deductions Carry Over?

Unfortunately, LTC deductions cannot be carried forward into subsequent years. Each deduction corresponds to premiums paid within the specific tax year. For example, paying premiums over multiple years results in multiple deductions, but unused deductions do not roll over. Clients should plan their premium payments carefully to maximize their tax benefits within each tax cycle.

Which LTC Products Are Deductible and HSA Eligible?

Traditional LTC insurance policies generally qualify for both deductions and HSA eligibility.
Some hybrid policies that combine LTC benefits with other coverages may also meet these criteria.
LTC riders added to life insurance policies are rarely deductible because they are funded through the policy’s cash value or cost of insurance, not separate premiums.
LTC riders on annuities typically do not qualify for deductions due to the way they are financed.

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Are Long-Term Care Benefits Taxable?

In most cases, LTC benefits are received tax-free. Under the guidelines established by the IRS, policyholders can typically receive benefits up to the HIPAA-established per diem amount or the actual LTC expenses incurred, whichever is greater. Since most policies are sold at amounts designed to be tax-free, beneficiaries generally do not owe taxes on these benefits, providing financial relief when it’s needed most.

Can You Deduct LTC Expenses Paid with a Policy?

No, clients cannot claim a deduction for LTC expenses that have already been paid through their insurance policy—this would constitute “double dipping.” However, if LTC expenses exceed the benefits received, the excess can qualify as a medical expense deduction or HSA distribution, provided the client itemizes deductions and meets other requirements.

Using HSA Funds and Tax Deductions Simultaneously

Clients cannot use both HSA funds and claim a tax deduction for the same LTC premiums. They must choose one method of payment. Typically, clients opt for the tax deduction if they qualify, as it allows them to preserve their HSA funds for future needs. Remember, HSA dollars can be used freely for qualified medical expenses without additional tax benefits.

Final Thoughts

Long-term care expenses pose a significant threat to retirement savings if not properly addressed. Helping clients develop a comprehensive plan now can prevent financial surprises later. There are many LTC insurance options available today that can deliver peace of mind, whether clients ultimately require care or not, and help safeguard their assets, spouses, and heirs. Early planning ensures that clients are better prepared to face future healthcare costs confidently.

To assist clients in designing income strategies and incorporating health and longevity resources, consult our expert resources.

Author

Shawn Britt

Technical Director, Advanced Consulting Group, Nationwide Retirement Institute

With over 25 years of experience in the life insurance and LTC industries, Shawn Britt has been a dedicated member of Nationwide’s advanced sales team since 2005. Her expertise helps clients understand complex financial products and optimize their long-term care strategies.

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