Is Long-Term Care Insurance Tax Deductible?


Are you pre-planning for long-term care? If so, you’ve probably seen the exorbitant prices for nursing homes, assisted living facilities, and home care. For example, the annual cost for a semi-private room in a nursing home is just under $100,000 per year, and home care costs average around $50,000 annually.

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These prices are beyond the reach of most of us; paying out-of-pocket isn’t an option. Medicare doesn’t cover long-term care. Medicaid will pay nursing home costs only after you’ve depleted all of your financial assets. That leaves one other option: long-term care insurance.

Long-term care insurance is an option that more and more people are turning to. Of course, nobody likes paying insurance premiums, but there is a very good chance that you’re going to need long-term care at some point in your life. The Department of Health and Human Services estimates that 70% of adults over age 65 will need care.

Since long-term care insurance is something people don’t generally start thinking about until they reach their fifties or sixties, the premiums aren’t inexpensive. According to the American Association for Long-Term Care Insurance (AALTCI), the average long-term care insurance rates for a 55-year-old male are $1,700 per year and $2,675 per year for a 55-year old female.

If you have pre-existing medical conditions, insurance companies will very likely raise your rate anywhere from 50% to as high as 200% of the standard premium. They also may decline to issue you a policy if you don’t meet their underwriting requirements.

Since the premiums can get much steeper every year you get older, many people want to know if there is some type of tax break if you buy long-term care insurance. This article will address when it is deductible, when it isn’t, how much you can deduct, and more. 

Can You Deduct Long-Term Care Insurance Premiums?

The good news is that the Internal Revenue Service has included in the tax laws of the U.S. the deductibility of long-term care insurance premiums IF you qualify, which isn’t easy, but it is possible.

To deduct your premiums from your federal income taxes, you must meet the following criteria:

  • The policy must be tax-qualified, which most policies are. Your insurer can confirm if your policy is tax-qualified.
  • The policy must be guaranteed renewable and not provide any cash surrender value.
  • The policy does not pay or reimburse expenses that would be reimbursed under Medicare.
  • You itemize your deductions.
  • Your medical expenses must exceed 7.5 percent of your adjusted gross income, and you can only deduct expenses that exceed that amount. For example, if your adjusted gross income is $100,000, you must have $7,500 or more of deductible medical expenses to get a deduction. If you have $10,000 in medical expenses, you can take a $2,500 deduction ($10,000 - $7,500).

All five of these must be met to qualify for tax-deductibility status. Remember, tax laws change frequently. Consult with your tax advisor to confirm that you are eligible to deduct your long-term care insurance premiums.

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What Does the Deduction Look Like?

Like just about every other part of the tax code that allows deductions, the IRS has its limits when it comes to deducting your long-term care insurance premium.

For the tax year 2021, you can deduct the amounts shown below when you use Schedule A on your Form 1040 or in calculating the health insurance premium deduction for the self-employed:

  • Age 40 or under: $450
  • Age 41 to 50: $850
  • Age 51 to 60: $1,690
  • Age 61 to 70: $4,520
  • Age 71 and over: $5,640

If you happen to have a Health Savings Account (HSA), it can be used to pay your long-term care insurance premiums.  Your Flexible Spending Account (FSA) cannot be used to pay for long-term care insurance premiums.

State Tax Credits and Incentives

In addition to federal tax deductions, you may also be able to deduct your premiums on your state income tax return

For example, if you live in New York State, you can receive a tax credit of up to $1,500 for taxpayers who have an adjusted gross income (AGI) of below $250,000 beginning in the tax year 2020.

Minnesota provides a state income tax credit that equals 25 percent of qualifying long-term care insurance premiums for one beneficiary, up to a maximum of $100 for individual filers and a maximum of $200 for couples filing jointly.

North Dakota’s credit equals the premiums you paid during the year, up to a maximum of $250 per qualified filer.

For a complete list of state tax incentives and credits for your long-term care insurance premiums, AALTCI’s website can provide you with the information you’re looking for. But, be aware that their website states the information hasn’t been updated for a few years and to consult your tax advisor for current state tax deduction and credit rules.

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Good News For the Self-Employed

Self-employed individuals can also deduct their long-term care insurance premiums up to the limits listed above. This also includes any premiums paid for a spouse and dependents.

However, if you’re self-employed and at some point during the year you worked for an employer who offered a subsidized plan, you can’t deduct your premiums during that tax year.

Employers who pay all or part of long-term care insurance premiums for their employees can deduct the entire amount as a business expense, with no limits. And, the contribution made by the employer is not included in an employee’s taxable income.

When Can You Not Deduct Long-Term Care Insurance Premiums?

Unless you meet all of the criteria listed above, your long-term care insurance premiums are not deductible. 

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Are Long-Term Care Insurance Benefits Taxable?

Since long-term care insurance premiums receive the same tax treatment as health insurance premiums do, it follows suit that long-term care insurance benefits receive similar tax treatment written in the tax code as health insurance benefits.

Specifically, IRS Publication 525 states that any money a policyholder has been paid for “personal injury or sickness” is generally not included in a person’s taxable income.

But, don’t be surprised if you still receive tax forms from the insurance company for the tax year you received benefit payments. The IRS requires insurance companies to provide people who have filed an approved claim a Form 1099 reporting payments made under the policy. This form typically comes in January of the following year, when you should receive your other tax forms.

Your tax preparer can help you sort all of this out when preparing your taxes.

How You Can Reduce Your Long-Term Care Insurance Costs

As you’re evaluating your long-term care options, you’re going to be completing an application. On the application, the insurance company will ask you to make important choices concerning your policy’s features and benefits. Those questions will pertain to the elimination period, benefit length period, and the daily benefit amount. 

Let’s look at how you can reduce your costs for your long-term care insurance for parents, and yourself.

Elimination period – this is the period of time between the date you file your claim for benefits payment until the time the insurance company begins paying out benefits. 

For example, if you file a claim on October 1st and have a 90-day elimination period, you’ll have to pay any expenses incurred during that time out of your own pocket. This can add up to a substantial sum in a short period of just three months.

For this reason, many people choose a shorter elimination period, like 30 or 60 days. They don’t have the money to pay 90 days of expenses, but they don’t realize how much more they pay in premiums each month.

If at all possible, select a longer elimination period. It will lower your premium substantially, just like a higher deductible reduces your health insurance premium.

Benefit length period: Many people choose a “lifetime benefit” period when applying for their policy because they fear running out of money before they pass away in a facility. What they don’t realize is that, according to Kiplinger, the average stay for nursing-home residents is 28 months, and the average stay for assisted-living residents is 27 months.

You can reduce your premium by selecting a shorter benefit period. Choosing a three-year or five-year benefit period instead of a lifetime benefit period will save you thousands of dollars per year in premium payments.

Daily benefit amount: The maximum daily benefit you’ll find available will be around $380 per day (it varies by insurance company). Just like you don’t need the shortest elimination period or the longest benefit length period, you don’t need the maximum daily benefit amount. 

You’ll realize substantial savings with a lower benefit amount of $180 - $220 per day. There’s always the chance that the cost of care will be higher in the future, so be sure to add an “inflation rider” to your policy. This rider is designed to keep pace with inflation, though there’s no guarantee that it will.

Choose an Experienced Advisor

Long-term care insurance is a complex product. For best results, consult an insurance agent who specializes in long-term care insurance. They should be knowledgeable about the different policies available and should also be up-to-date on the latest statistics on the cost of long-term care. 

If you can, work with an independent agent who represents several different long-term care insurers. They’ll be able to compare policies and provide you with a solution that best meets your needs.

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