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Small and medium business owners are often unaware of the significant tax benefits associated with purchasing long term care insurance. Benefits exist for both traditional and hybrid long term care policies which are increasingly popular today.
The most favorable tax benefits go to a C-Corporation when purchasing long term care insurance coverage for the owner and all covered employees. The ability for FTE owners to purchase coverage through the company is also very attractive.
Hybrid or linked benefit long term care policies are usually a combination of a life insurance policy and a long term care rider. The tax rules applicable to hybrid policies are different from those for traditional SLD policies. Depending on what suits your needs and finances, selecting the right policy as well as the right policy options can result in significantly greater tax deductions. This is especially true when it comes to hybrid or linked-benefit long-term care.
Not all hybrid policies offer tax deductibility
When it comes to hybrid SLD policies today, some policies are compliant with Internal Revenue Code (IRC) Section 7702B. These are considered tax qualified long term care insurance riders. Others meet IRC 101(g) and are considered chronic condition endorsements. Although both offer similar coverage, the latter may not meet the regulations to be tax deductible.
According to the latest data from the American Association for Long-Term Care Insurance, about 60% of all hybrid LTC policies purchased in 2021 were 101(g) plans. Therefore, if tax deductibility is your goal, determining which IRC rules apply can be an important first step in the plan comparison process.
Life insurance premiums are treated as compensation
Hybrid policies combine the benefits of life insurance with the ability to provide payouts if the policyholder needs eligible long-term care. Business dollars used to pay employee life insurance premiums will be fully tax deductible to the employer as ordinary and necessary business expenses.
The amount paid for the life insurance premium will be reported as compensation received and will be fully taxable to the employee as ordinary income. An employer may provide additional compensation to the employee to help cover taxes.
If the hybrid long term care policy contract is properly designed and filed, the premiums associated with the long term care coverage should be fully deductible to the employer as accident and sickness insurance. Payments for an accident and health insurance plan (which includes tax-qualified long-term care) will not be included in the employee’s income. Any future benefits the employee receives will also be tax-exempt per IRS guidelines.
Using a plan designed to minimize the life insurance portion of coverage while maximizing potential future long-term care benefits can result in significant tax savings.
Limited Compensation Policies Can Maximize Tax Benefits
Most people associated the purchase of long-term care insurance with what are called lifetime premiums. Simply put, the company or the insured pays annually until care is needed or death occurs.
Business owners, especially those approaching retirement age, can take advantage of options that can result in a policy that is paid up within a set period of years or when the owner reaches retirement age. 65 years. For businesses with sufficient income, this can be an ideal way to maximize allowable business deductions. For the policyholder or other people covered, it’s a way of never having to worry about paying future premiums or facing the risk of rising rates.
Multiple endorsements can maximize potential deductible amounts
Hybrid long term care policies combine a life insurance policy with one or more LTC riders. When the rider is paid with a separate identifiable premium, this amount can be considered within the tax deductible guidelines. For those looking to maximize tax deductibility, finding a policy with multiple SLD endorsements can prove extremely beneficial.
From a planning perspective, imagine a 50-year-old business owner looking to buy paid-up coverage within 5 years. Equal coverage from the same insurer can add $17,736 to the individual’s taxable income with $2,264 allocated as non-taxable LTC premiums.
By choosing a plan that offers a qualifying inflation growth rider, taxable income is reduced by $8,000. At the same time, the potential long-term care benefit pool available at age 80 increases from $500,000 to $1,355,000.
A hybrid long-term care specialist can help maximize tax deductions
For business owners, maximizing tax deductibility is an important consideration. Others to keep in mind include the fact that costs for virtually identical policy benefits can vary depending on the insurance company chosen.
Experts recommend talking to more than one advisor or asking for plan proposals from an experienced hybrid long-term care agent who can compare multiple companies. To contact a specialist, contact the American Association for Long-Term Care Insurance. Specialists can compare the tax-deductible costs and benefits available with traditional and hybrid LTC policies.