The Life Insurance Marketing and Research Association recently published an article which noted that 70% of people will need some kind of long-term care, yet only 3% of people over the age of 50 have long-term care insurance.
A popular misconception is that Medicare will cover all medical costs in retirement. However, the reimbursement for nursing home care is limited and does not extend to long-term care. Long-term nursing home care costs can vary significantly based on the level of care needed, but annual expenses can exceed $100,000 in many parts of the country. In many surveys, one of the largest desires for seniors is to continue to live at home as long as possible, which could be still more expensive. According to a recent article from Agingcare.com – How Much Does 24/7 In-Home Care Cost?:
“The median monthly rate for live-in home care is $10,646, according to proprietary data gathered by AgingCare’s senior living referral service counterpart A Place for Mom. This is significantly less expensive than the median monthly price tag of $19,656 for 24/7 in-home care.”
The government incentive to purchase long-term care insurance (LTCI) is that a portion of the premium expense may be treated as a medical expense. As such, the premiums are an itemized deduction, to the extent that the taxpayer’s medical expenses exceed 7.5% of adjusted gross income. The American Association for Long-Term Care Insurance published the 2026 deduction caps for LTCI premiums:
Attained Age Before Close of Taxable Year | 2026 Limit |
|---|---|
40 or less | $500 |
More than 40 but not more than 50 | $930 |
More than 50 but not more than 60 | $1,860 |
More than 60 but not more than 70 | $4,960 |
More than 70 | $6,200 |
This government deduction is a nice benefit, but it doesn’t typically significantly influence the decision to invest in an LTCI policy. Affluent individuals are likely to consider self-insurance, such as an IRA or brokerage account to meet nursing home or in-home care expenses.
The potential tax consequences of the self-insure option for long-term care
As long as the long-term care insurance policy is tax-qualified, the payout from it to cover qualified expenses is not taxed at a federal level. On the other hand, if one is self-insuring and suddenly needs to sell assets to cover over $100k in additional long-term care expenses, that may incur significant additional taxes.
Should the additional income come from a traditional IRA or 401(k), it would be fully taxed as ordinary income. It’s important to consider that the additional distribution could push an individual or couple into a higher tax bracket, and therefore increase the amount of Social Security benefits subject to the income tax. Alternatively, one might choose to leave the retirement assets to grow for a longer time, turning instead to an after-tax portfolio to fund the long-term care. However, that also might push one into a higher tax bracket. Furthermore, those assets could have received a basis step-up at death, and heirs might have avoided the taxes entirely.
When we utilize insurance, it not only provides us with a way to mitigate the risk of a particular event, but it also gives us more control over how and when our money is spent, allowing more tax-efficient management of funds. There are several reasons to consider long-term care insurance other than portfolio management, and we list many of them on our website here. Our client advisors would be pleased to elaborate as well. Click here to schedule a meeting with an experienced professional near you.
A larger underlying issue, and potential solution
Many people who have successfully self-managed their portfolio have a hard time turning over the reins to anyone else. They may be very successful and in a position where, even should long-term care be needed for many years, there wouldn’t be any need for a fire-sale of assets. In this instance, self-insuring may be a perfectly adequate alternative solution.
Having this resource may mean less incentive to make arrangements and plans in advance for long-term care or for someone to step in should incapacity strike. Incapacity can cause tremendous damage when a person is no longer able to carefully monitor their investment portfolio. That is why one of the largest selling points of a living trust is the ability to set guidelines ahead of time so the trust officer can step in to provide continued financial management.
When many people think of trust services, they think of a trust existing past a person’s life to preserve their legacy, usually a testamentary trust created at death, but more and more affluent families are using living trusts. A living trust can be adjusted (even disbanded), one can maintain control of their assets, and it can create a set of directives for continued management. Many use them as a way to enjoy retirement to its fullest while ensuring continued management when travelling. However, the greater benefit is often the peace of mind that comes from knowing experienced professionals will continue to administer the trust, in line with one's wishes, in the event one is unable to continue to do so due to illness or incapacity.
Each person’s needs are unique. For more information on trusts, and how they can protect privacy, offer support should incapacity strike, provide asset protection from creditors, or lay the foundation for a lasting legacy, contact one of our local trust officers.
Other ways an advisor can help
It’s not just long-term care that can cause a fire-sale of assets creating a tax burden. Required minimum distributions, the sale of a business, and lump-sum retirement payouts are only a few of the many large financial events one might encounter during their life. Meeting with a tax advisor every year may be worthwhile, even when no big events are currently taking place. In addition to your tax advisor, an experienced client advisor at Arvest Wealth Management offers a comprehensive financial planning perspective. Furthermore, they can facilitate connections with our local trust officers. Depending on your situation, the advisor may present strategies regarding deferring income and accelerating deductions, strategic tax planning within your portfolio, or options for rebalancing or harvesting tax losses. Let us know if you’d like more information.
This content has been prepared by The Merrill Anderson Company and is intended as a general guideline.
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Arvest and its associates do not provide tax or legal advice. The information presented here is not intended as, and should not be considered, tax or legal advice. Consult your tax and legal advisors accordingly.
