Tax Benefits of Long-term Care Insurance: Everything You Need to Know

Thang Truong
Thang Truong
Updated on:

Seniors and others who purchase long-term care insurance may be wondering about taxes. Is long-term care insurance tax-deductible? Does it count as income if you get a lump sum payout? Is there a difference between traditional long-term care insurance and hybrid policies? We’ll examine the tax benefits of long-term care insurance, hybrid insurance, and answer your questions. 

Hybrid Long-Term Care Insurance Tax Benefits

If you have a qualified hybrid long-term care/life insurance policy, there are three things you need to know regarding taxes. 

Death benefit: Since this is essentially a life insurance policy, any death benefit that passes to your heirs does so tax-free.

Long-term care benefit payments: Long-term care benefits are considered medical expenses and are generally tax-free. 

Premiums: Some hybrid policies get tax-deductible status, if you can identify what portion of the premium is used to pay for the long-term care. Companies that can offer tax-deductibility for the long-term care portion of the insurance include:

If there’s no way to differentiate what part of the premium goes to the life insurance and what part goes to the long-term care benefits, then premiums are not tax-deductible.

Many of these policies offer a return of premium rider. If you do decide to get your premium refunded to you, you may be taxed on the money. 

>>MORE: The Best Hybrid Long-Term Care Insurance Companies

Tax Benefits in Permanent Life Insurance Policies With a Chronic Illness Rider 

In this case, since the primary function of the insurance is the life insurance part, while the chronic illness benefit and death benefit of the policy are tax-free, the premiums are not tax-deductible.

>>MORE: Long-Term Care Rider vs. Chronic Illness Rider: How Are They Different?

Tax Benefits in Traditional Long-Term Care Insurance

Benefit payments: Traditional long-term care insurance with a cash indemnity, the maximum tax-free benefit is now $380 per day or $11,558 a month. Anything over those limits is taxable. For example, if your long-term care needs are $400 a day, then only $20 per day is taxable. 

Premiums: Premiums might be tax-deductible, depending on how old you are and how much you spend on premiums.

  • If you’re self-employed, you can take the entire amount listed in the table below as a tax deduction.
  • Individuals who are not self-employed can have tax deductible benefits on the premium amount that exceeds 10% of their AGI (Adjusted gross income). Get the total of the traditional long-term care insurance premium amount and all your other unreimbursed medical expenses, anything over 10% of your AGI is tax-deductible. It’s important to note that only the expenses that exceed 10% of your AGI are tax-deductible—you don’t get to deduct all your medical expenses once you hit that certain number. 

Here is the maximum deductible annual premium for self-employed people:

40 or less$430
Over 71$5,430

Anything under this amount listed in the table is tax-deductible because the IRS considers them a form of medical expenses. As you can see, when you first start buying long-term care insurance, very little is tax-deductible. As you grow older, though, the benefits increase. 

If you do have a health savings account, you can use that tax-free money to pay for your long-term insurance premiums, subject to age-based limitations. 

>>MORE: The Best Traditional Long-Term Care Insurance Companies

What is a Qualified Long-Term Care Policy?

You must have a “qualified policy” to achieve any kind of tax-deductibility. A qualified policy must meet certain requirements, including:

  • It must offer the consumer inflation options
  • It must offer the consumer non-forfeiture protection
  • It must offer ADL and cognitive impairment triggers 

The consumer doesn’t necessarily have to buy inflation protection or non-forfeiture protection, it just has to be offered to them. 

States That Offer Tax Deductions for Long-Term Care Insurance

Not every state offers tax benefits for long-term care insurance. States that do offer some benefits include:

  • Alabama
  • Arkansas
  • California
  • Colorado
  • District of Columbia
  • Hawaii
  • Idaho
  • Indiana
  • Iowa
  • Kentucky
  • Louisiana
  • Maine
  • Maryland
  • Minnesota
  • Missouri
  • Montana
  • Nebraska
  • New Jersey
  • New Mexico
  • New York
  • North Carolina
  • North Dakota
  • Ohio
  • Virginia
  • West Virginia
  • Wisconsin

All of these states offer some tax advantages for long-term care insurance, but they don’t all offer the same benefits. Check with your state to see what the benefits are. If your state is not listed, there are no benefits currently. 

Generally, benefits paid by a long-term care policy are free from taxes at the state level.

Last Thoughts

Long-term care insurance is quite expensive, whether you have traditional long-term care insurance or the more popular hybrid LTC/life insurance type. Getting the most deductions possible is one way to save yourself a little money. 

Thang Truong

Thang Truong covers small business insurance and small business success at BravoPolicy. He is a licensed P&C insurance agent. Previously, he held product leadership positions at, Capital One, NerdWallet, and Mulberry Technology. He holds a MBA degree from UC Berkeley - Haas School of Business.

More Stories

6 Best Indexed Universal Life Insurance (IUL) for 2023

Are you looking for a way to set aside some extra money for your senior years, and maybe a little extra for loved ones to inherit? Most people opt for indexed universal life insurance because it offers the greatest cash value growth tied to the performance of S&P 500 index with the least risk thanks […]

Best Self-Directed Roth IRA Companies for 2023

A self-directed Roth IRA is much like a regular Roth IRA, but offers more flexibility as far as what you can invest in. Whereas a regular Roth will only let you invest in stocks, bonds, mutual funds, ETFs, and real-estate investment trusts, a self-directed Roth lets you invest in a greater variety of investment options.  […]

The 5 Best Hybrid Long-Term Care Insurance Companies for 2023

If you’ve decided to plan for every eventuality, you’d be smart to include a plan to cover long-term care. Someone turning 65 this year has an almost 70% chance of needing some type of long-term care, and about 13% of those will need it for five years or more. Long-term care is expensive and can […]

The 3 Best Traditional Long-Term Care Insurance Companies for 2023

Long term care is something that no one likes to think about, but unfortunately, many people will eventually need. Health care costs are skyrocketing, and a lengthy stay at a long-term care facility can easily bankrupt most people’s nest eggs. Long-term care insurance is one way to protect both yourself and your retirement savings. Out […]

The Best Long-Term Care Insurance Companies in California for 2023

California residents who are keen to protect themselves and their families against the worst events in life may be considering long-term care insurance. However, you might not know much about LTC insurance or how it is handled in California. Let’s take a look: What is Long-Term Care Insurance? Long-term care insurance helps pay for long-term […]

The Best Long-Term Care Insurance Companies in Arizona for 2023

Arizona is a great place to retire. It’s warm, there’s no snow to shovel, and Arizona improves the quality of life for anyone with allergies or asthma. When you pack your bags and retire to Arizona, you’re probably not thinking about long-term care. But the sad reality is that 47% of men and 58% of […]

The Best Long-Term Care Insurance Companies in Florida for 2023

There’s a lot of good reasons to retire in Florida. The weather is warm, the beaches are beautiful, and there are lots of other retirees to socialize with. Also, Florida has no state income taxes, no inheritance taxes, and no estate taxes. When you pack up your things and move to Florida, you’re probably not […]

Private Placement Life Insurance: Everything You Need to Know

If you haven’t heard of private placement life insurance, you probably don’t qualify to buy it. Private placement life insurance is typically for investors with millions in liquid cash that they need to invest for tax reasons.  What is Private Placement Life Insurance? Who Qualifies for Private Placement Life Insurance? Benefits of Private Placement Life […]

Nationwide IUL – A Strong Product With Great Features and Excellent Ratings

The Nationwide IUL product can help you either supplement your retirement income or ensure your beneficiaries future by leaving them a nice tax-free death benefit. Obviously, you have many options when it comes to IUL policies, so you want to know how does Nationwide’s policy stack up against the competition? Let’s take a look. Pros […]

Transamerica IUL – A Solid Product but High Consumer Complaint Score & Law Suits

Consumers looking to supplement their retirement income often settle on an indexed life insurance policy. These policies build cash value based on market performance and allow your heirs to enjoy a tax-free death benefit. Let’s take a look at Transamerica’s indexed universal life insurance policy and see what makes it stand apart from other such […]