• 3-Minute Article
  • |
  • Mar 15, 2019

Long-Term Care Coverage Options and How They’re Taxed

How your health care costs could impact your taxes over time.

sitting retired couple with a tablet featured in long term care coverage options

Updated: May 30, 2023

Questions this article can help you answer:
  • How could my taxes be impacted if I pay for long-term care (LTC) costs out of pocket?
  • What other options could I consider other than traditional LTC insurance?
  • What are some of the benefits of a hybrid life insurance policy that includes LTC coverage?

Almost 70% of people turning age 65 today will one day require long-term care to help perform activities of daily living, such as bathing, dressing, or eating).1 When deciding how to pay for long-term care costs, self-funding (paying out of pocket) and purchasing LTC insurance coverage are two main options. Each can impact taxes in different ways.  

Below are some general tax considerations, but remember to consult with your tax and legal professionals for guidance on your particular situation before buying a policy or using policy benefits. 


Tax Effects of Paying Out of Pocket

If you pay for long-term care costs from your own income or assets, you first pay taxes on the income when it’s earned and could also pay taxes on any invested assets if there are taxable gains when you sell. This means you may need to account for taxes (in addition to the amount needed for care) if you plan to use taxable investment assets to pay for LTC expenses.


Long-Term Care Coverage: Traditional or Hybrid

If paying out of pocket isn’t possible, LTC insurance coverage could be another option. With traditional long-term care insurance policies, you typically pay an annual premium for life in return for LTC coverage, if you need it. One increasingly popular route is a hybrid life insurance policy with long-term care rider.2 With a hybrid LTC policy, loved ones can receive a partial or full life insurance death benefit, and you can use part of the policy’s death benefit to help pay for long-term care expenses, should you need it.  

Learn about three main features of a hybrid life insurance policy with long-term care coverage and how they are taxed.

1) Death Benefit

Because a hybrid LTC policy is a life insurance policy, it provides a life insurance death benefit in addition to long-term care coverage. The death benefit may be reduced if the policy’s long-term care benefits are used. When the life insurance death benefit is paid, it is generally paid to your beneficiaries free of federal income tax.

2) LTC Benefit Payments

Life insurance policies that are structured to provide qualified long-term care coverage may provide benefits that are income tax free, up to certain limits under the tax law.3 Exceptions that could cause long-term care benefits to be taxable may apply.  

3) Cash Value

Because it’s a permanent life insurance policy, a hybrid policy typically provides cash value. The cash value generally grows tax-deferred. If you surrender the policy or access cash value through a policy loan, those distributions may be taxable and could reduce or eliminate coverage, including the policy’s long-term care benefits.


Choosing the Coverage to Fit Your Needs

Below is a summary of some of the general differences between traditional long-term care insurance and hybrid life insurance policies with LTC coverage.3 Your financial professional can provide a complete comparison and help you determine which type of policy may best meet your needs. 

  Traditional Long-Term Insurance Hybrid Life Insurance With Long-Term Care Coverage
Life Insurance Death Benefit Does not provide a life insurance death benefit Provides a death benefit
Cash Value Generally does not provide cash value Generally provides cash value
Tax-Favored LTC Benefit Payments May provide tax-favored LTC benefit payments May provide tax-favored LTC benefit payments
Premiums for Long-Term Care Coverage A portion of premiums paid for long-term care coverage may be included with uncompensated medical expenses as an income tax deduction if the costs exceed 7.5% of your adjusted gross income.5 Only a portion of long-term care premiums may be counted, and this cap varies by age. Generally not tax-deductible if the premiums paid for long-term care coverage are deducted from the life insurance policy’s cash value.

Larry B. Harris, a certified public accountant and certified financial planner,4 advises that it’s important to keep the differences between types of LTC policies in mind – how they’re taxed is just one of many factors to consider when choosing long-term care insurance. “There is no right or wrong answer,” Larry says. “This is a decision that should involve your financial professional and an elder-care attorney.” 



Conversation Starters

The Hybrid Life Insurance With Long-Term Care Coverage Questionnaire includes key facts about hybrid life insurance and could help you determine if this type of coverage may be right for you. Speak with your financial professional about your long-term care coverage options and the tax implications to help find a solution that best suits your needs.

Download Questionnaire