long-term care insurance tax deduction

Americans are frighteningly unprepared for their future long-term care needs. Long-term care insurance offers a solution, and it’s more affordable when policyholders take advantage of the long-term care insurance tax deduction.

A Looming Crisis

You may have heard people sound the alarm over a developing retirement crisis. Many people are behind on their retirement savings, and they need to catch up if they want to enjoy their golden years. The long-term care crisis is part of this, but it gets less attention, possibility because people drastically underestimate how expensive long-term care can be.

According to Fidelity, a 2022 survey found that Americans expect a couple to spend $41,000 on healthcare during retirement, but the actual average cost is $315,000 for a 65-year-old couple retiring in 2023.

To make matters worse, healthcare expenses and insurance coverage typically exclude long-term care costs. Medicare covers medically necessary healthcare costs – although enrollees are responsible for premiums and deductibles. Long-term care is often considered non-medical and therefore not covered. Many people don’t realize this. They assume that Medicare will cover all of their long-term care costs, and they don’t find out the truth until they need care and realize they don’t have coverage.

Most Retirees Will Need Long-Term Care

If your house had a 60% chance of flooding, you’d probably want to buy flood insurance. According to the Administration for Community Living (ACL), 60% of retirees will need long-term care at some point. That’s a good reason to buy long-term care insurance.

Long-term care isn’t cheap, either. The ACL says a semi-private room in a nursing home can run $6,844 per month on average. If you need care for a year, that’s $82,128. For many seniors, this represents an unexpected cost and a financial crisis. To make matters worse, many states have filial responsibility laws that mean adult children can be held financial responsible for their parents’ care.

Cost Is a Barrier

At this point, long-term care should sound like a no-brainer. Most seniors will need long-term care, it’s expensive, and it’s not covered by Medicare, so buying long-term care insurance makes sense. However, there’s a catch. Long-term care insurance can be expensive.

According to the 2024 Price Index Report from the American Association for Long-Term Care Insurance (AALTCI), a 55-year-old couple can expect to pay around $5,000 a year for long-term care protection that will have a value of $800,000 when they need care at age 85.

That $5,000 a year price tag can be a dealbreaker for older adults on a tight budget, but turning down coverage could be a big mistake. When you consider how expensive long-term care is, and how the odds of needing it are higher than the odds of not needing it, the price tag looks pretty reasonable.

Nevertheless, if someone simply can’t afford coverage, it’s not going to happen. To help people secure the long-term care insurance they need, brokers need to find a way to make it more affordable. Thankfully, there are a few strategies that can help.

How to Lower the Cost of Long-Term Care Insurance

If $5,000 a year is out of the question, purchasing long-term care insurance may still be possible with the following strategies.

  • Purchase less coverage. The AALTCI says a 55-year-old couple could bring their costs down to $2,080 a year if they forgo the future growth of benefits option. Keep in mind that this means that they’ll have less coverage, and the cost of long-term care is likely to increase over the years. Nevertheless, some coverage is better than none.
  • Use HSA funds. Many older Americans have HSAs that provide a tax-advantaged way to pay for eligible medical costs, but they may not realize that long-term care insurance premiums can count as an eligible expense. There are restrictions and annual limits to consider when using this strategy, but it could help people pay for coverage. This handout has more information.
  • Claim the LTCI tax deduction. Long-term care insurance premiums can be tax deductible. Once again, there are restrictions and annual limits to keep in mind when using this strategy. How much you can deduct will depend on your age and whether you’re taking the deduction as an individual, an S-Corp or a C-Corp.

To learn more about claiming the long-term care insurance tax deduction, download the LTCI Tax Case Study.


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