Q: Are there any tax advantages to purchasing long-term care insurance?
Gary, Washington DC
A: Yes, there are. Long-term care insurance is a policy you can buy that pays for your nursing home or assisted living care when you get older. It's a better alternative than draining your entire nest egg, or selling all your possessions and going on Medicaid. In particular, combining long-term care insurance with an HSA is the best option...
You can find out more about long-term care insurance in IRS Publication 502, Medical Expenses. Here is how the publication defines a long-term care insurance contract:
A qualified long-term care insurance contract is an insurance contract that provides only coverage of qualified long-term care services. The contract must:
- Be guaranteed renewable,
- Not provide for a cash surrender value or other money that can be paid, assigned, pledged, or borrowed,
- Provide that refunds, other than refunds on the death of the insured or complete surrender or cancellation of the contract, and dividends under the contract must be used only to reduce future premiums or increase future benefits, and
- Generally not pay or reimburse expenses incurred for services or items that would be reimbursed under Medicare, except where Medicare is a secondary payer, or the contract makes per diem or other periodic payments without regard to expenses.
A certain amount of premiums paid for long-term care insurance is tax-advantaged. The amount varies based on age:
- Age 40 or under - $310
- Age 41 to 50 - $580
- Age 51 to 60 - $1,150
- Age 61 to 70 - $3,080
- Age 71 or over - $3,850
Of course, taking advantage of this tax break might be difficult. There is no above-the-line adjustment for them, and if you want to use the itemized deduction you run into the 7.5% wall.
That generally leaves tax-advantaged accounts. This means health savings accounts (HSAs), and health reimbursement arrangements (HRAs). Distributions from these accounts for long-term care premiums (subject to the above limits) are qualified. Oddly, long-term care insurance premiums cannot be paid for from flexible spending accounts (FSAs).