Planning to preserve assets while providing long-term-care options

A question all CPAs and financial advisers need to be asking their clients is: “If you were to need long–term care (LTC), either at home or in a facility, how would you pay for it?”

Many people believe Medicare pays for LTC, but, as we know, it does not. Many think Medicaid will be a solution when the time comes, but changes in the Medicaid program leave its future in doubt. Plus, they will need to meet the eligibility requirements by spending down their assets and meeting other income criteria.

People with substantial nest eggs may be planning to self–fund LTC, which can work — until expenses start to drain their assets. Monthly care costs often range from $6,000 to $25,000, and few want to deplete their savings at that pace, potentially leaving little to nothing behind for their heirs. LTC insurance (LTCI) helps offset these expenses, though some out–of–pocket costs may still apply, especially during the policy’s elimination (deductible) period.

Client awareness and education are paramount. That is why financial professionals should proactively address the topic of LTC planning with their clients, regardless of those clients’ age. Before a health crisis creates an emergency situation, clients should, with an adviser’s help, determine funding sources and create a plan based on financial readiness. Many younger clients are open to the discussion because they have experienced LTC issues with their parents. Others may not be ready until they are in their 50s, 60s, or even older.

Long-term-care insurance

LTCI may be part of the plan because, although the industry as a whole has struggled in the past couple of decades, it has evolved and adapted by offering more options than ever before. There are still traditional policies, but there are also:

• Hybrid policies combining LTCI with life insurance or annuities;
• Universal life plans with larger death benefits that can be used for LTC;
• Universal life with chronic-illness riders that can be used for LTC; and
• Group plans offered by employers for five or more individuals.

These options must be customized based on the individual’s eligibility for insurance and financial readiness. Because it is not a one–size–fits–all solution, we and our industry colleagues are frequently called upon to consult with other financial professionals about the best way to serve their clients.

One of the ways the industry has adapted is by offering hybrid plans that feature an asset–based policy combining LTCI with another asset, usually a whole–life insurance policy or an annuity. These policies have grown in popularity compared to stand–alone policies because they are not “use it or lose it.”

If the benefits of a traditional policy are not used, some insureds may feel their premium dollars were wasted. However, these plans do provide peace of mind, ensuring that if care is needed, expenses are covered and families have support in the decision–making process. Hybrid policies, on the other hand, guarantee a payout — whether through LTCI benefits, life insurance, or a combination of both — so the insured or their beneficiaries always receive value, even if little or none of the LTCI coverage is used.

Another popular hybrid feature is that, depending on the carrier, premiums may be spread out over longer periods (five, 10, 15 years, or more) and still be guaranteed never to increase.

There are also plans that combine a whole–life policy with an LTC or chronic–illness rider. If LTC is needed, a portion of the death benefit can be used to cover the costs, with the remaining amount paid to beneficiaries upon death.

Couples can also have the option of purchasing a joint policy that offers a pool of benefits they can both use for their LTC needs down the road. This can be a nice alternative to buying two policies separately. For example, a couple can share eight years of LTC benefits; if they start receiving care around the same time, the benefits will last four years each. Since the average LTCI payout is less than three years, there is a good chance they will not outlive their benefits. However, one never knows who might need LTC and for how long.

If your client is still working, ask whether their employer offers a group LTCI policy as an option in their benefits package. Group LTCI plans have always been available, and they are gaining popularity. The industry has launched new hybrid options that increase accessibility in terms of cost and coverage. For example, many group LTCI plans offer guaranteed–issue coverage or minimal underwriting, meaning all eligible employees can enroll regardless of health status or with very easy underwriting, which is particularly beneficial for individuals with preexisting conditions.

Tax-saving strategies with LTCI

When advisers start talking to clients about saving on taxes, they are likely to listen. In the case of LTCI, there are several tax–advantaged strategies.

One of the most commonly used is deducting the cost of LTCI premiums as part of health and medical expenses when a client can itemize. Between ages 61 and 70 (for premiums paid in 2025), the limit on LTC premiums as an itemized medical deduction is $4,810 per person, and it is $6,020 for ages 71 and over (Sec. 213(d)(10); Rev. Proc. 2024–40, §2.28). However, because of increases in the standard deduction in recent years, approximately fewer than 10% of taxpayers itemize (IRS, Statistics of Income, Table 1.3, Sources of Income, Adjustments, Deductions, Credits, and Tax Items, by Filing Status, Tax Year 2022), so it is important for clients to talk to their tax adviser about this.

It is estimated that about 44% of U.S. households owned an individual retirement account (IRA) in 2024 (Investment Company Institute, “The Role of IRAs in US Households’ Saving for Retirement, 2024” (March 2025)), and the most common type is a traditional IRA. This is one of the most undesirable assets because taxes must be paid on withdrawals, which are taxed as ordinary income. Required minimum distributions (RMDs) are required by Dec. 31 each year for most IRA owners when they reach age 73 (increasing to 75 for owners turning 73 after 2032).

However, clients can avoid some of these tax consequences by converting taxable assets into tax–free LTC benefits. Clients over 59½ with large IRAs can take a lump sum and put it into an annuity that, over the next 10 years, pays for the LTC policy or a hybrid policy. Additionally, through a Sec. 1035 exchange, funds can be transferred from an existing life insurance policy or annuity to a new LTCI policy. This allows individuals to potentially access funds for LTC needs without incurring immediate federal income tax on any gains from the original investment. And any LTC benefits that are paid out from the new hybrid life or annuity with LTC are tax–free.

The benefits of converting taxable assets into tax–free LTC benefits are that they provide funds if care is needed during a long life and that, if they are not used, a death benefit is paid to beneficiaries. If the client does not use the hybrid annuity, the beneficiary would still be responsible for taxes on the gains.

IRA withdrawals can also be used to fund LTCI premiums. The tax advantage is that this can spread the tax consequence out over 10 years instead of all in a lump sum. Every dollar of premium paid into an LTCI policy buys more than one dollar in tax–free benefits, up to a lifetime maximum, while helping to meet the RMD.

How an adviser can help

As one can see, the LTCI landscape is complex and littered with potholes, and most families are unprepared for the situations that arise with aging, illness, and caregiving. While LTCI is not designed to cover all care costs, having a plan in place helps families make informed decisions when care is needed, helps protect assets, and removes some financial stress.

Advisers should start early with clients by reviewing all available LTC solutions and narrowing down the options that best fit their needs. As carriers now have decades of claims experience, medical underwriting has become more detailed and stringent. For instance, a client with a medical marijuana card should disclose it upfront, as some carriers automatically decline applications on that basis. In addition, certain carriers may also consider upcoming foreign travel in their underwriting decisions.

For guidance and support throughout the research, underwriting, and application process, financial professionals can team up with LTCI professionals who also offer boots–on–the–ground knowledge and assistance in finding elder law attorneys, geriatric care managers, and caregivers.

LTCI is the only insurance that people avoid because they think, “What if I don’t need it?” As more and more Americans need care, we all need to think in terms of “What if I do need it?” just as we do with health, auto, and home insurance. This is especially true because the cost of care can run to hundreds of thousands of dollars annually, depending on options and location, for those who need it 24/7.

Contributors

Brian Gordon, CLTC, is president, and Peter Florek, CLTC, is vice president, both of Gordon Associates, serving clients nationwide from their headquarters in suburban Chicago. For more information about this column, contact thetaxadviser@aicpa.org.

MEMBER RESOURCES

Article

“Guiding Clients Through a Health Transition,” AICPA & CIMA Insights Blog, Feb. 12, 2024

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Health Transitions Guide, Vols. 1–4

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