Designing the basic benefits of a long-term care insurance plan, whether it is a traditional standalone policy or a hybrid life/LTC plan, is relatively straightforward: Choose an initial monthly benefit. Decide whether you want that benefit to grow over time through inflation protection. Then determine whether having a death benefit or cash value is important if long-term care is never needed.
Let’s consider a 60-year-old female executive who has accumulated a substantial portion of her liquid net worth in a 401(k). She wants a plan with:
With this plan design, her maximum monthly LTC benefit grows to approximately $12,563 at age 85, with a total LTC benefit pool of approximately $630,690. Easy, right?
The harder question may be: How should she pay for it?
Paying premiums from income or savings
One option would be to purchase a traditional LTC insurance policy and pay an initial annual premium of approximately $6,366 using income or other savings.
If she paid that premium for 30 years, her cumulative premiums would total approximately $190,980. Because this example uses a lifetime-pay traditional policy, future premiums would not necessarily be guaranteed. And actual premiums paid could also be affected by the policy’s waiver-of-premium provisions if she qualified for benefits.
It’s not a bad approach. But what if in one transaction she could use a portion of her qualified retirement assets instead of remembering to pay premiums from current income or after-tax savings?
Using qualified retirement assets
Some carriers offer a funding arrangement that connects a qualified annuity with a separately issued hybrid life/LTC policy.
Here is how the strategy works in this example. Again, she wants a plan with $6,000 per month in benefits, 4-year benefit period, and 3% compound inflation protection.
She repositions $143,078 from an eligible 401(k), IRA or other qualified retirement account into a qualified annuity.
The annuity makes 20 scheduled annual distributions of approximately $10,731.
Those distributions pay the premiums on a 20-pay hybrid life/LTC policy.
The distributions are generally taxable as ordinary income. Once she reaches her required beginning age, eligible distributions may also count toward her required minimum distributions.
Note that the annuity’s scheduled income calculation is what supports the 20 annual payments. It is not simply the original deposit divided by 20.
It is also important to remember that money may not be available for transfer from every 401(k). The employer’s plan rules and the participant’s eligibility for a distribution or rollover must be reviewed first.
What are the potential advantages?
1. Automatic premium payments
First, the premium-funding process is automatic. The client does not have to remember to make a separate premium payment each year. That can provide valuable peace of mind with a policy intended to remain in place for decades.
2. Preserving other savings
Second, the strategy preserves savings that may be more liquid and flexible.
Cash, taxable investments and other after-tax assets can be used for emergencies, travel, home improvements, and ordinary retirement expenses. For someone who has accumulated a large percentage of their wealth in qualified retirement accounts, using part of those assets for LTC planning may allow more flexible savings to remain available.
3. Benefits even if care is never needed
Third, the resulting hybrid policy provides meaningful value even if long-term care is never needed.
In this example, the policy includes a $144,000 death benefit. It also has an illustrated cash surrender value of $107,846 at age 85.
Those features distinguish a hybrid policy from traditional LTC insurance, which is primarily designed to provide insurance protection and generally does not offer a death benefit or cash value if no claim occurs.
The policy values should still be reviewed carefully. Loans, withdrawals, policy changes, and failure to make required premium payments can affect available benefits and guarantees.
4. Potential tax advantages
Finally, tax-qualified LTC insurance may provide certain tax advantages.
Reimbursement benefits for qualified LTC expenses are generally received income-tax-free. Different rules can apply to cash-indemnity benefits, including limits based on actual qualified expenses and the applicable federal per-diem amount.
A portion of a hybrid policy’s separately identified LTC premium may also be treated as an eligible medical expense. The amount is subject to annual age-based limits and other tax rules.
For 2026, the eligible premium limits include:
Age 51 through 60: $1,860
Age 61 through 70: $4,960
Over age 70: $6,200
These amounts represent the maximum LTC premium that can be treated as an eligible medical expense. They do not necessarily represent the consumer’s actual tax deduction.
For most individuals, eligible premiums are included with other unreimbursed medical expenses. The individual generally must itemize deductions, and medical expenses are deductible only to the extent they exceed the applicable percentage of adjusted gross income.
Eligible premiums may also be paid or reimbursed with Health Savings Account funds, subject to the age-based limit. The same premium cannot be reimbursed tax-free from an HSA and also claimed as an income tax deduction.
Self-employed individuals and businesses may have different and potentially more favorable rules. Consumers should consult their tax advisors regarding their individual circumstances.
Why might someone not use this strategy?
Qualified funding will not be the right answer for everyone. Here are several reasons someone might choose another approach.
1. The client is younger than age 59½
SECURE 2.0 now permits employer retirement plans to offer limited qualified LTC distributions without the additional 10% early-distribution tax.
For 2026, the eligible amount is limited to the least of:
The qualifying LTC insurance premium
10% of the participant’s vested account balance
$2,600
This is an optional plan provision, so an employer is not required to offer it. The distribution is also generally subject to ordinary income tax even though the additional 10% early distribution tax may not apply. [irs.gov], The limited SECURE 2.0 distribution should not be confused with the larger qualified-annuity funding strategy described in this example.
In addition, buying LTC coverage earlier may still make sense. Premiums tend to be lower at younger ages, and purchasing coverage while healthy reduces the risk that a future medical condition will affect eligibility.
2. The distributions increase taxable income
The annuity distributions used to pay the policy premiums are generally taxable. Additional taxable income could affect the client’s tax bracket, the taxation of Social Security benefits, eligibility for certain deductions or credits, and other parts of the financial plan. Once the client reaches Medicare age, higher income may also result in higher Medicare Part B and Part D premiums through the income-related monthly adjustment amount, commonly known as IRMAA.
This does not automatically make the strategy unattractive. It means the amount and timing of the distributions should be included in a multiyear tax projection.
3. The client gives up liquidity and investment potential
Repositioning qualified assets is not free. The client is giving up some liquidity and the potential future tax-deferred investment growth that might have occurred in the original retirement account. The annuity and insurance policy will also have their own contractual provisions, surrender values and restrictions.
The tradeoff is greater certainty. The client is exchanging a portion of their portfolio’s flexibility and growth potential for guaranteed premiums and defined LTC and life insurance benefits.
4. The desired carrier does not offer an integrated solution
Not every LTC insurance carrier offers an arrangement in which a qualified annuity automatically funds a separate hybrid life/LTC policy. Other carriers may allow clients to take ordinary IRA distributions and use the proceeds to pay policy premiums. That can still be a viable funding strategy, but it is different from an integrated arrangement built around scheduled annuity distributions.
5. Other assets may be more appropriate
A client with excess cash, low-yielding savings, or a non-qualified annuity may have a more tax-efficient or flexible funding source.
The decision should not begin with an assumption that qualified money is always the best money to use. It should begin with a comparison of:
Current and future income-tax exposure
Liquidity needs
Investment objectives
Future RMDs
Medicare premium exposure
Available insurance products
The value the client places on policy guarantees
The bottom line
The real advantage of this type of solution is peace of mind.
One asset-repositioning decision can create an LTC plan with scheduled funding, guaranteed premiums, and guaranteed policy benefits. For a consumer who has accumulated a large percentage of their wealth in qualified retirement accounts, it can also preserve more flexible after-tax assets for other retirement needs.
The strategy does not make qualified distributions tax-free, nor is it appropriate for every client. But it can provide a practical bridge between retirement assets accumulated for the future and insurance designed to protect that future.
The right funding source ultimately depends on the client’s tax circumstances, liquidity needs, health, investment objectives, and the importance they place on guarantees.
This example is hypothetical and based on carrier illustrations. Product availability, underwriting, benefits, premiums, tax treatment and policy values vary by carrier, state and individual circumstances. Guarantees are subject to the claims-paying ability of the issuing insurance company. This information is general in nature and is not intended as tax, legal, accounting, fiduciary or investment advice. Consumers should consult their financial, legal and tax professionals regarding their individual circumstances.