Tax-Deductible Long-Term Care
The IRS Gave You a Break
What the federal government did with regard to a business being able to deduct the premiums for LTCI was significant. Under HIPAA (Health Insurance Portability and Accountability Act of 1996), LTCI premiums are treated like health insurance premiums for the self-employed. That means an owner of a C-Corporation, S-Corporation, P.C., or LLC can now take a tax deduction for 100% of the LTCI (the deduction is limited for owner/employees in non-C-Corps). There is no good reason for a business owner (C-Corporation) to pay for his/her LTCI on an after-tax basis.
Would you purchase Long-Term Care Insurance if it were FREE?
While we all know nothing is for free, if set up correctly, LTCI can seem like it is free when using a return of premium rider. An example is the best way to illustrate the point.
Problem: Dr. Smith, age 55, has an estate of $2,000,000 and an income of $400,000 a year. He is worried about paying possibly over $100,000+ over his lifetime for long-term care coverage for himself and his wife. Dr. Smith also doesn’t like buying insurance and does not want to pay LTCI for the next 30 years while he waits to become sick. His solution to his problem is through a (1) limited pay LTCI policy paid for through his medical office on a (2) tax deductible manner with a (3) return of premium rider.
Solution: 1) Dr. Smith’s corporation pays a deductible premium of $8,985 a year for ten years (out-of-pocket cost for the physician is $5,391 a year); 2) Dr. Smith gets disabled at age 75 and needs home health care ($200 a day) until death at age 85; (Total LTC benefit for ten years = $730,000.) 3) Dr. Smith dies at age 85 and his heirs receive back the entire premium paid because of the Return of Premium rider. This amount equals $89,850, which will pass income-tax-free to the heirs.* *Some companies have a setoff on the return of premium rider for benefits paid.
Bottom line The LTCI cost Dr. Smith $53,910 out-of-pocket over the ten-year pay period. His heirs receive $89,850 in cash (income-tax-free) from the LTCI company because of the return of premium rider, and his estate did not have to pay for the $730,000 in LTC costs incurred from age 75 to 85. Total Cost: $89,850; Total Benefit: $819,850. By purchasing LTCI through the corporation with pre-tax dollars, Dr. Smith was able to protect his estate from LTC costs and was also able to return the entire premium to his heirs income-tax-free at death.
Getting help We hope that after reading this material you are sufficiently motivated to learn more about LTCI.