For clients who own a tax-qualified LTC insurance policy, the tax advantages are significant. Whether it's a traditional or hybrid plan, benefits grow tax-free within the policy — and if a claim is made, those benefits are generally received tax-free as well. In 2026, benefits are tax-free up to the actual cost of care, or $430 per day for cash indemnity plans (indexed annually).
Now compare that to a client who decides to self-fund for long-term care. They're either drawing from taxable accounts, realizing capital gains by selling investments, or paying income taxes on qualified distributions. And most clients with Roth funds would prefer to preserve that tax-free growth for as long as possible. The tax drag of self-funding is real — and it's one of the strongest arguments for having an LTC plan in place.
It would be ideal if LTC insurance premiums were fully deductible for individuals. Unfortunately, individual deductions are limited by an age-based schedule and the 7.5% of AGI threshold.
The good news? There are several creative, tax-efficient strategies advisors can use to help clients fund LTC coverage. Here are six of the best approaches we see in practice:
LTC insurance premiums paid by an employer can be deducted as a business expense — and the employee is not taxed on the premium as income. Better yet, the benefits remain tax-free. This can even be done for a select group of employees — no need to cover the entire workforce.
For C-corporations, this strategy is especially powerful! The employer can deduct 100% of the actual premium paid (not limited to the age-based schedule), and the full premium is excluded from the employee's income and not subject to FICA (payroll) taxes. This applies to traditional LTC as well as the LTC premium portion of hybrid Life/LTC plans with separate identifiable premiums.
A note for self-employed clients: Sole proprietors, partners, LLC members, and greater-than-2% S-corporation shareholders can also deduct LTC premiums, but they are subject to the age-based eligible premium limits. Still, it's an above-the-line deduction — no need to exceed the 7.5% AGI threshold.
For employers looking to retain key talent, an executive bonus plan using a hybrid Life/LTC policy can be a win-win — and it works for most types of businesses, including C-corporations, S-corporations, LLCs, partnerships, and even tax-exempt organizations.
Here's how it works: Consider a business owner who wants to reward and retain a valued 55-year-old executive. The company selects a 10-pay hybrid Life/LTC plan and bonuses the employee $10,000 annually to cover the premium. The employer deducts the bonus as compensation expense. The employee pays income taxes on the bonus — but from year one, the policy's cash surrender value exceeds the cumulative taxes paid, creating immediate tangible value.
After 10 years, the employee owns a fully funded policy providing:
The employer may also choose a "double bonus" — covering both the premium and the employee's tax liability. This incentivizes longevity with the company while providing meaningful, lasting benefits beyond a cash payment.
For many clients, as they age their need for life insurance declines while their long-term care risk increases. A 1035 exchange allows them to reposition existing life insurance into a hybrid Life/LTC plan — tax-free.
Example: A self-employed 61-year-old male needs a long-term care plan paying a $5,000 monthly benefit with 3% compound inflation and a four-year benefit period. One option is a traditional LTC policy at approximately $3,200 in annual premiums — and at age 61, 100% of the premium would be deductible each year.
But this client also has older whole life policies with a combined cash value of $50,000. Through a tax-free 1035 exchange, he can reposition those policies into a hybrid Life/LTC plan providing the same $5,000 monthly LTC benefit, 3% compound inflation, and four-year benefit period — plus a $120,000 death benefit and approximately $95,000 in cash surrender value by age 90. The remaining annual premium would be approximately $5,400, of which $2,400 is the LTC Insurance portion and could be deducted by his business.
This is life-stage planning — shifting coverage from a risk that has diminished to one that is growing.
Here's a scenario we see frequently: a 70-year-old client tried to purchase traditional LTC insurance but the premium was too expensive — or they were declined on underwriting. However, they own a deferred non-qualified annuity past its surrender period with a current value of $200,000.
Through a 1035 exchange, the client can reposition the annuity into an Annuity/LTC plan — turning the $200,000 into $600,000 of LTC benefits, available over 72 months at $8,333 per month. Because the LTC benefits are tax-qualified, they are paid tax-free. This effectively allows the client to extract gains from the annuity without a taxable event — a significant advantage for annuities with large, embedded gains.
Annuity/LTC plans also tend to have more flexible underwriting, making them accessible to clients who may not qualify for traditional or hybrid life/LTC coverage.
For clients whose who have substantial assets held in IRAs and other qualified plans, some carriers have designed innovative products that create a bridge from qualified assets to LTC coverage.
Example: A 60-year-old female client uses $200,000 from her qualified plan to fund an annuity, which subsequently funds a 10-pay hybrid Life/LTC policy. Yes, there is a taxable event as premiums are distributed from the qualified plan — but the carrier bonuses the annuity by 25% to help offset the annual tax bills. The $25,000 annual distribution used to pay premiums counts toward Required Minimum Distributions (RMDs).
The resulting plan pays up to $110,000 annually in LTC benefits — in this example, for an unlimited benefit period. And being a hybrid plan, there's also a death benefit of approximately $221,000 and a cash surrender value of roughly $104,000 at the end of the premium-pay period. This strategy converts retirement dollars into tax-free LTC benefits while managing how and when taxes are paid.
In 2026, individuals can gift up to $19,000 annually ($38,000 for married couples) without impacting the lifetime gift exclusion. A parent or grandparent can use this exclusion to fund a hybrid LTC plan for adult children — a powerful multigenerational planning strategy.
Example: A 70-year-old widower with a $16 million estate wants to reduce estate tax liability while providing LTC protection for his 40-year-old married son. He gifts $10,000 annually for 10 years to fund a MoneyGuard Fixed Advantage® policy.
The result:
If the gifts come from required minimum distributions (RMDs), the strategy accomplishes even more — reducing the taxable estate, satisfying RMD obligations, and creating substantial tax-free LTC benefits for the next generation.
The strategies above are just the starting point — each can be tailored to a client's unique financial picture, tax situation, and family goals. What they all have in common is that they transform dollars that would otherwise be taxable upon withdrawal into tax-free long-term care benefits that protect retirement assets, preserve legacies, and provide peace of mind.
As an advisor, you are uniquely positioned to identify which strategy — or combination of strategies — fits each client. Whether it's a business owner who can deduct premiums through their C-corporation, a retiree sitting on an underperforming life policy, or a parent looking to invest in the next generation's financial security, there is a tax-efficient path to LTC coverage.
The conversation doesn't start with "Do you want LTC Insurance?" — it starts with "Let me show you how we can make it work within your financial plan."
Disclaimer: This information is general in nature and not intended to be tax, legal, accounting or other professional advice. The information provided is based on current laws, which are subject to change at any time, and has not been endorsed by any government agency. If you have questions regarding a particular situation, contact your legal or tax advisors.