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Using Your HSA Account For Long Term Care Insurance Premiums

by Jack Lenenberg

Long Term Care Insurance Premiums SavingsA Health Savings Account is one of the most flexible tools to help you address the increasing costs of health care.  HSA's offer you a tax deduction for your contributions.  Your HSA benefits grow tax-deferred and your distributions from your HSA are also tax-free if used for medical expenses.  Included within the medical expenses definition are long term care insurance premiums, including the premiums you pay not only for yourself, but also for your spouse and your dependents.

To qualify for the tax-free HSA withdrawal your long term care insurance policy must meet the definition of qualified long term care insurance.

To be considered a tax qualified policy the long term care insurance policy must adhere to the guidelines set forth in IRC 7702(B).  Specifically this means your LTC policy must be guaranteed renewable, may only pay for long term care expenses, and must not contain any cash value.  Traditional stand-alone long term care insurance policies will generally always meet this definition.  Until recently, however, most hybrid long term care policies were not structured properly to afford you with the ability to complete any HSA withdrawals or or to derive any tax-deductibility of long term care insurance premiums.  

With hybrid long term care insurance policies the defining rule comes from the Pension Protection Act of 2006 which states that if the cost for the LTC Rider on a life insurance policy or annuity contract is withdrawn from the accumulated cash value of the policy then the LTC Rider cost will not be considered a medical expense.  Additionally, life insurance premiums will never be HSA eligible or tax deductible.

However today we now have hybrid long term care insurance policies that are being designed and structured in a way to provide you with the ability to withdraw the premiums from your HSA and provide you with a tax deduction.  Many LTC insurance companies are now designing the hybrid long term care insurance policies with "separately identifiable LTC premiums," not charges from cash value.  Therefore these hybrid contracts will now meet the definition of tax qualified long term care insurance under IRC 7702(B).  The LTC Rider premiums with these hybrid policies will now be allowed to be withdrawn from your HSA tax-free.

A few of the notable hybrid long term care insurance policies today that are implementing separately identifiable long term care insurance premiums for the purposes of HSA withdrawals and eligibility for tax deductions are Nationwide CareMatters II, OneAmerica Asset Care, and Securian SecureCare. With these policies the riders for the LTC acceleration of the life insurance benefit, the LTC Extension of Benefits and the optional Inflation Protection are all eligible for HSA withdrawals.

What is the HSA limit for tax-free withdrawals for long term care insurance premiums?

With tax-qualified traditional long term care policies and hybrid LTC policies that implement the separately identifiable LTC Rider premiums you may request a tax-free HSA withdrawal but only up to the insured's age-based limit.

The age-based limits for in 2020 for tax-free withdrawal of long term care insurance premiums from your HSA are the following:

40 & under $430

41-50 $810

51-60 $1630

61-70 $4350

71+ $5430

What if you don't have an HSA?

If you do not have a health savings account or if you do not use your health savings account for these long term care insurance expenses your premiums may still be deductible up to the age based limits above.  To qualify for the medical expense deduction you must itemize on your taxes, and your unreimbursed medical expenses in 2020 must exceed 7.5% of your adjusted gross income.  Additionally your state may provide a tax benefit to you as well.

The ever increasing cost of health care is an issue that is on most everyone's mind today.  Fortunately, you do have opportunities to efficiently pay for healthcare costs.  Should you have the availability of an HSA, the funding long term care insurance premiums through tax free withdrawals is a great opportunity.

Contact Us For Long Term Care Insurance Advice

We work with the leading underwriters of long term care insurance including OneAmerica, Lincoln Moneyguard, Pacific Life, Nationwide, Securian, Mutual of Omaha and National Guardian Life.  We can help you to find tax efficient ways to fund your long term care insurance policy whether through HSA withdrawals or through a tax free 1035 exchange of life insurance or annuity cash value.  Please contact us at (800) 891-5824 to receive customized advice and illustrations.  Or complete our quote request form. We look forward to hearing from you.

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