Using Qualified Funds
to Buy LTC Insurance

It's NOT income tax-free,
​but it still might be a great idea!

Using Tax-Qualified Retirement Funds to Buy LTCI - The Full Story

There is a tremendous amount of misunderstanding - from misleading marketing messages - regarding paying for Hybrid LTC insurance with tax-qualified retirement funds like from an IRA.*
You CANNOT use pre-tax qualified retirement funds to pay for Hybrid LTC insurance - or any other type of LTC insurance - on a fully tax-free basis.

You CAN allocate IRA/retirement distributions to pay for LTC insurance, but you must pay income tax on all the distributions used to pay premiums for the LTC insurance coverage.
One company has a pre-packaged policy design that couples an IRA annuity with a Hybrid LTC insurance policy that has a 10-year premium payment structure.  But it is NOT a fully "tax-free" process.  Here is how it works:
  • Existing IRA funds are transferred - on a direct, "tax-free exchange" basis - into the new IRA annuity. This is no different than transferring any IRA funds into any other new IRA account.
  • Every year, the insurance company automatically, internally creates a TAXABLE distribution from the IRA annuity to pay the Hybrid LTC insurance premium.
  • You receive a Form 1099-R showing an income-taxable distribution from the IRA annuity for the full amount transferred into the Hybrid LTC insurance policy as a premium payment.
  • You must claim this distribution as income and pay income tax on it like any other IRA distribution.
  • Over 10 years the IRA annuity funds are depleted having been distributed/transferred into the Hybrid LTC insurance policy - all distributions for premiums on a fully INCOME-TAXABLE basis.
  • If you ever need care, LTC benefits paid from the policy are tax-free - like from any other LTC insurance policy.  If you never need care, the death benefit - like any other life insurance policy - is also paid income tax-free.
  • BUT, again, ALL of the distributions from the IRA paid into the Hybrid LTC policy create an income-taxable distribution when transferred.
There is value - some potential income tax savings - in "stretching" the IRA distributions out over 10 years vs. simply taking a lump-sum distribution.*
Choosing to withdraw and spend excess retirement/IRA funds "early" to help buy critical long-term care coverage is a great idea!
But this is not a unique strategy, and it is not limited to only buying Hybrid LTC coverage.

You can do it on your own.  Create an IRA annuity with the best annuity deal from any of dozens of companies with a fixed-term payout - maybe even for 15 or 20 years to stretch the income tax hit out even further - and simply allocate the taxable distributions toward any LTC insurance policy that is best-suited for your family's unique planning needs.  You can even pay lower-cost Traditional LTC insurance premiums this same way!

You do not even need to use an annuity.  Keep your IRA funds fully invested and diversified as you and your other advisors feel is best.  Just take a distribution each year for the amount of premium you need whether it is for a limited period of time or for an even lower "life-pay" premium.  This offers the maximum amount of control of your funds and a full range of LTC insurance policy options.

If you think a LTC planning strategy using some of your qualified retirement funds to purchase LTC insurance may be right for you, or you want to discuss all your options with a truly independent LTC specialist we're here ready to help you plan!

* The tax information presented here is for general information only and should not be used nor relied upon as specific tax advice.  Taxpayers should consult with their CPA or qualified tax professional for advice regarding their own tax situation and the tax status of LTC premiums and benefits.  Click here to read more about LTC insurance tax guidance.  LTC insurance coverages and policy descriptions are for illustrative, educational purposes only and are not meant to be a solicitation for coverage.  Not all policies or features are available in all states.