Originally published August 2016. Last updated March 2026.
Long-term care insurance is expensive. But there are several ways to reduce the after-tax cost.
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1. Tax-Free Transfer from Life Insurance (1035 Exchange)
If you have a permanent life insurance policy with cash value that you no longer need for its death benefit, you can do a tax-free 1035 exchange to fund a long-term care policy or a hybrid life/LTC policy.
The cash value transfers directly without triggering income tax. This is especially useful if your life insurance need has decreased (kids are grown, mortgage is paid) but your long-term care need has increased.
2. Tax-Free Transfer from an Annuity (1035 Exchange)
Same concept, different source. You can 1035 exchange an annuity into a long-term care policy or an annuity with LTC benefits. The transfer is tax-free as long as it’s done directly between the insurance companies.
This can be a smart move if you’re sitting on an old annuity with significant gains. Cashing it out would trigger income tax on the gains. A 1035 exchange avoids that entirely.
3. Deduct LTC Premiums as a Medical Expense
Premiums for qualified long-term care insurance policies are deductible as a medical expense, subject to age-based limits. The 2025 deductible limits:
- Age 40 or under: $480
- Ages 41-50: $900
- Ages 51-60: $1,790
- Ages 61-70: $4,770
- Ages 71+: $5,960
These amounts are per person. A married couple both age 65 could deduct up to $9,540 in LTC premiums.
The catch: medical expenses are only deductible to the extent they exceed 7.5% of your adjusted gross income, and only if you itemize. For many retirees with lower AGIs, this threshold is more achievable than it sounds.
4. Use HSA Funds
If you have a health savings account, you can use HSA funds to pay qualified long-term care insurance premiums up to the same age-based limits listed above. The withdrawal is tax-free.
This is one of the best uses of an HSA in retirement. You funded it with pre-tax dollars, it grew tax-free, and you’re withdrawing it tax-free for LTC premiums. Triple tax benefit on a significant expense.
Bonus: Employer-Sponsored LTC Plans
Some employers offer group long-term care insurance. Premiums are usually lower than individual policies because they’re negotiated at group rates. Even if the employer doesn’t subsidize the premium, the group rate alone can save 10-30% compared to buying individually.
If your employer offers this benefit, it’s worth a look, especially if you’re in your 40s or 50s and premiums are still affordable.
FAQ
Are LTC benefits taxable when I receive them?
For qualified policies, benefits are generally tax-free up to certain daily limits ($420/day in 2025, or actual costs incurred). Indemnity-style policies that pay a flat daily rate may have benefits taxable above this threshold.
What’s a hybrid policy?
A hybrid policy combines life insurance (or an annuity) with long-term care benefits. If you need care, it pays for it. If you don’t, your heirs get a death benefit. It eliminates the “use it or lose it” concern of traditional LTC policies.
Schedule a free 20-minute consultation to explore the most tax-efficient way to fund your long-term care plan.
R.L. Brown Wealth Management
106 W Vine St, Suite 300, Lexington, KY 40507
859.317.5889
