How to pay long-term care premiums from your IRA

July 3, 2024

Can I Use Tax-Qualified Retirement Funds to Buy Long-Term Care Insurance?

Yes, current tax law allows you to use IRA/retirement distributions to cover the cost of hybrid long-term care (LTC) insurance, or any other type of LTC insurance. But you will need to pay income tax on the distributions used for the premiums.

To simplify the process, one insurance company offers a policy design that couples an IRA annuity with a hybrid long-term care insurance policy. This policy features a 10-year premium payment structure (20-year in CA).


Here’s how the policy works:

  • Transfer of IRA Funds: Existing IRA funds are transferred on a direct rollover, “tax-free exchange” basis into the new IRA annuity. This process is no different than transferring IRA funds into any other new IRA account. Plus, the company gives a 25% boost to your IRA towards the hybrid LTC policy.
  • Taxable Distribution for Premiums: Every year, the insurance company automatically creates a taxable distribution from the IRA annuity to pay the hybrid life insurance with long-term care insurance premium.
  • Form 1099-R: You receive a Form 1099-R showing a taxable distribution from the IRA annuity for the full amount transferred into the hybrid LTC insurance policy as a premium payment.
  • Income Tax on Distributions: You must claim this distribution as income and pay income tax on it like any other IRA distribution. And this can be counted towards your Required Minimum Distribution (RMD) requirements.
  • Depletion of IRA Annuity Funds: Over 10 years, the IRA annuity funds are depleted as they are distributed/transferred into the hybrid long-term care insurance policy.
  • Tax-Free Long-Term Care Benefits: If you ever need care, long-term care benefits paid from the policy are tax-free, similar to 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.

While this strategy involves taxable distributions, there is value and potential income tax savings in “stretching” the IRA distributions over 10 years, compared to taking a lump-sum distribution. Plus, current law allows tax deductions for long-term care insurance premiums.

Choosing to withdraw and spend excess retirement/IRA funds early to help buy critical long-term care coverage is a prudent idea.

Best Options For Your Tax Qualified Money

Explore paying LTC insurance premiums from your IRA.

Alternative Strategies for Qualified Funds

This strategy is not unique to buying hybrid long-term care coverage. Here are some alternative methods we can help you explore:

How to Fund LTC insurance with an IRA Annuity – We help you choose the most competitive IRA annuity from any of dozens of companies, selecting a fixed-term payout of 15 or 20 years to stretch the income tax hit even further. Simply allocate the taxable distributions toward any LTC insurance policy that best suits your family’s unique planning needs. This method allows for more flexible planning and potentially better financial management.

Lower Cost Traditional LTC Insurance Premiums – Using the same method, you can pay lower-cost traditional long-term care insurance premiums. This flexibility allows you to choose the type of LTC insurance that best fits your financial situation and health care needs without being tied to a specific company’s hybrid LTC policy. Even on a policy with a lifetime premium, you can use this strategy with a lifetime income Single Premium Immediate Annuity (SPIA). As a bonus, once a long-term care claim begins and the premium stops, you can use the extra income to supplement your plan or however you need.

Maintain Your Current IRA Investments – Alternatively, you do not need to use an annuity. You can keep your IRA funds fully invested and diversified as you see fit. Each year, take a distribution for the amount of the premium needed, whether it is for a limited period or an even lower “life-pay” premium. This approach offers maximum control over your funds and a full range of long-term care insurance options.


Summary of LTC Planning with Qualified Money

  • Paying long-term care insurance premiums from your IRA can be a valuable strategy to ensure you have the necessary coverage while managing your retirement funds efficiently.
  • By understanding the tax implications and exploring various methods, you can choose the best option for your financial goals and health care needs. This leaves your cash available for other investments, and can even give your IRA a boost to help fund a 10-pay or longer duration hybrid plan.
  • A Single Premium Immediate Annuity (SPIA) will earn interest annually and pay out more than you put in. Additionally, when compared to a single-pay option, this strategy of spreading distributions over multiple years gives you greater tax deductibility.

Work with a Long-Term Care Specialist

A long-term care specialist can help you navigate choosing the best long-term care insurance and its integration with your retirement funds. Here are some reasons why working with a specialist is beneficial:

Expertise and Knowledge – Get professional guidance on the different types of LTC insurance policies available, health qualifying criteria and benefits. This ensures you get the best coverage for your needs.

Access to Multiple Carriers – Long-term care specialists work with multiple insurance carriers. This allows them to compare different policies, providers, and plan types.

Personalized Recommendations – You’ll get professional recommendations to help tailor a plan that fits your budget while providing maximum coverage based on your unique financial situation and health status.

Get Started >

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About the Author: Craig Matesky
Reviewed by: Mike Berger