Long-Term Care Insurance Premiums Should Be Fully Deductible

If long-term care insurance (LTCI) premiums were fully deductible on federal and state taxes, do you think more people would be inclined to purchase coverage? We do.

Today, premiums on tax-qualified long-term care insurance policies may be deductible depending on how policyholders file federal taxes. In most cases the amount of the deduction is restricted by an age-based limit defined annually by the IRS.

In 33 states a deduction or credit is allowed on state taxes.

This deductibility applies to tax-qualified policies only. The product that qualifies is the traditional standalone design. Today, these products comprise less than 20% of the policies sold.

Very few hybrid policies – life insurance or annuity based designs – have a tax-qualified component, but some do.

Hybrid designs are often funded with a 1035 exchange. This can be a tax-advantaged way to exchange the cash value of an existing policy without long-term care benefits for a new policy with long-term care benefits without creating a tax event.

Doing this type of exchange may depend on the insurance carrier issuing the original policy. Some carriers will honor a partial exchange. Others require a total exchange. Whether the existing policy has a fixed rate or a variable rate can be a factor in what exchange options are available.

In his article, “When and how to deduct long-term care insurance,” Michael Kitces details how LTCI premiums are deductible depending on how the policy is purchased. It’s thorough and a valuable resource.