long term

More than 66% of Americans will require long term care at some point in their lives. While certain risk factors may make the need for long term care more likely, no one can rule out what care they may or may not require later in life. This makes Long Term Care Insurance an absolutely critical tool for the financial wellbeing of most Americans. Unfortunately, planning and paying for Long Term Care Insurance can often feel like a confusing and overwhelming challenge.

In part, that’s because Long Term Care Insurance (LTCI) is highly individualized and customizable. This makes sense! Everyone has unique needs, means, and goals. Plans are designed to give consumers options. Taking the time to create the perfect plan for your life will pay off with a LTCI policy that best suits your future.

As with the rest of American healthcare, financial considerations play a significant role in long term care and, therefore, in moving forward with your Long Term Care Insurance policy. So, once you craft the perfect plan for your needs, how do you successfully fund that plan? There are a variety of methods one can use, from paying out of pocket to using an IRA, each with their own benefits, drawbacks, and tax implications. Planning for the funding and tax strategies involved can help ensure that your Long Term Care Insurance policy delivers the kind of value you’re looking for.

Why Planning Matters

If you have a long term care event, such as a stroke or an accident, or if you are not able to perform at least two of the six activities of daily living (ADLs), you’re going to need care. And because these long term care events usually are not predictable, it’s hard to know when you’ll need to start paying for that care. That makes Long Term Care Insurance an essential tool for ensuring individuals receive the care they need. 

Without LTCI, those who need long term care will need to rely on other financial resources. And that can be quite challenging.

Paying for Long Term Care Yourself

Paying for long term care without Long Term Care Insurance is known as self-funding. While this is certainly an option, be “eyes wide open” about it – it can be incredibly costly. The average annual cost of home health care or facility care can be well over $100,000. Additionally, the unpredictability of a long term care event means that you will usually need to act quickly. This can diminish the amount of time you have to plan, exacerbating the damage to your financial future. 

That’s because when you self-fund, you may need to:

  • Pay for every aspect of your long term care out of your own pocket.
  • Use your retirement funds to pay for your care, draining your Traditional or Beneficiary retirement accounts.
  • Deplete these retirement funds more quickly than you planned. And because you’re removing these funds sooner than you anticipated, you’ll likely also be at a tax disadvantage. Having a plan for taxes in retirement planning is important here.
  • Rely on other funding sources. Retirement funds are not the only ones at risk. Some long term care patients who do not have insurance may be required to liquidate other assets to pay for care. In this way, long term care can very easily and very quickly eat into a wide variety of savings.

As your long term care costs eat into your financial resources, you will likely need to make hard decisions about your outlook. This can quickly become an escalating exercise in attrition, and you will need to plan for:

  • Liquidating assets to cover the costs: You will want to do this without compromising long term investment goals. 
  • Considering what to liquidate first: This can be challenging while undergoing a personal health crisis or a new diagnosis. 
  • The amount of money needed to pay for Long Term Care: Often difficult to predict and varies based on the type of care needed and the length of time care is needed.

However, when you have a Long Term Care Insurance plan in place, you and your family will be in a much better position to weather the costs of a long term care event. You may not have to dip into your retirement savings, your assets, or the vast majority of your savings. This makes LTCI a critical tool for consumers. 

Using an IRA Account to Fund LTCI

When done in a way that is planned and thoughtful, it’s possible to successfully use retirement funds as effective funding sources for Long Term Care Insurance. What funding a LTCI policy with an IRA looks like may vary depending on the type of IRA you have. 

Funding LTCI For Individuals with a Traditional IRA

A traditional IRA is the most common form of this retirement account, and more than a third of Americans were investing in these accounts as of 2024. Some people may use a traditional IRA to partially fund their retirement; for others, it may be intended to fully fund their retirement. 

The way these accounts work is that, once you reach the age of 73 (or 75 if you were born in 1960 or later), you are required to start withdrawing money from your IRA. It’s something called Required Minimum Distribution (or RMD). This required withdrawal can then be reinvested in protecting your golden years by funding Long Term Care Insurance. This RMD can be taken out as early as 59-and-a-half years old without a tax penalty.

For those under 59, you can still use your IRA to fund Long Term Care Insurance, but there will be tax penalties involved. However, many clients will fund their LTCI in small parts over many years, decreasing the annual tax penalty involved (and making those penalties easier to absorb). This means you’ll be able to plan for and more easily absorb the costs involved. Many LTCI policies (for example, hybrid plans) will lock in the premium price until the policy is paid up.

Funding LTCI For Individuals with a Beneficiary IRA

It’s also common for individuals to inherit an IRA. Because of changes in the law under the CARES Act, beneficiary IRAs must now be used within 10 years. You can use the funds all at once, a little every year, or at any pace that suits your needs. There’s still no penalty for those aged 59-and-a-half or over.

If you’ve only got ten years to use your Beneficiary IRA account, it makes sense to continue investing in your long term health and retirement plans. Consider using your IRA to fund a Long Term Care Insurance Policy, building more stability and security for your future. The benefits associated with LTCI won’t have the ten year cash-in date the way your Beneficiary IRA account will.

In this sense, you can honor the long-term intention of the original gift or Beneficiary IRA, and protect your financial future.

Additional IRA Funding Options

For some consumers, it will make sense to draw funding for Long Term Care Insurance directly from an IRA account. There are two ways that one can accomplish this:

  • Find an insurance company that offers a LTCI which will take a direct transfer from an IRA: Unfortunately this option is relatively rare, as there are not many insurance companies that will do this.
  • Transfer the money into an IRA Single Premium Immediate Annuity (SPIA): This type of account can be designed with guaranteed years of term certain to payout (most common is ten years). This can then pay a ten-year paid up premium for a LTCI policy.  The payouts (sometimes called distributions) from the SPIA will be fully taxable to the policyholder as ordinary income, but this is spread out over the ten-year period rather than taking the tax hit all in year one. We recommend one utilizes the same insurance company to handle both the SPIA and the LTCI policy. 

How to Plan for Taxes with IRA Funding

Using your IRA to purchase LTCI isn’t right for everyone. There’s no one-size-fits-all strategy, and everyone’s situation will be slightly different. That’s why we always recommend that people work with their financial advisor and LTCI specialist together. Having an estimate of the LTCI you may need can also help you plan more effectively.

Different insurance carriers will also offer different options. That’s why at Gordon Associates, we work with every client on an individual basis. If something doesn’t make sense or it’s not the right fit for you, we’ll say so. 

You can also bring in an accountant to help you navigate these questions. They’ll be able to bring a keen eye towards how your decisions will impact your finances of today and tomorrow.

Other Strategies for Paying for Long Term Care Insurance

Long Term Care Insurance can provide a significant value. The right policy can safeguard against the rising costs of long term care, help cover the cost of in-home caregivers and home health agencies, and insulate you from the costs of assisted living facilities. Even though there is a significant value in the long run, balancing your day-to-day and month-to-month costs can be a challenge. 

That’s why it’s important to use every advantage you can to help you fund your LTCI. For example, there are several federal and state tax deductions that can offer significant assistance:

  • 1035 Exchange: This deduction covers conversion of the cash value of a life insurance policy to use to add on LTCI, creating a Hybrid Asset-Based Life with an LTCI Rider. It also applies to the creation of an annuity with LTCI rider. This can convey a higher value of benefits compared to the annuity’s value. For example, a $200,000 annuity can pay out $200,000 in value or be utilized to purchase a Hybrid LTCI with total benefits of $500,000 guaranteed (varies by carrier, state, age and gender). 
  • Health Savings Account (HSA): Take out an age-based dollar amount from a health savings account to help pay Long Term Care Insurance premiums. Keep in mind there are rules based on age so it’s a good idea to consult plan benefit publications.
  • Gifting: If you gift money to a family member (based on IRS limits), the gifted amount can be used to help pay for LTCI premiums. There is a tax-free advantage to the recipient and it reduces the estate size of the gift provider upon death, which can have further tax benefits.

Other Funding Considerations to Think About

The above are not the only considerations you need to think about when funding your Long Term Care Insurance. In fact, paying for Long Term Care Insurance can sometimes benefit from a patchwork approach, and this patchwork approach can sometimes lead to unforeseen expenses, penalties, or even benefits.. Some additional information to consider includes the following:

    • Cash Indemnity Plans: Under this type of plan, when you are eligible for benefits, the policyholder has the flexibility to pay anyone for care. This does not require submission of a receipt or invoice. And, it gives the policyholder more flexibility to select their own caregiver vs. a Reimbursement Plan that has more regulations (such as licensed caregivers and state guidelines). The cash indemnity option is particularly helpful with home health care. You can even pay a family member or non-licensed caregiver. This type of plan can significantly impact your funding strategies and should be considered within the wider context of your financial picture.
  • Medicaid: Believe it or not, Medicaid is the primary payer of long term care across the country. While Medicaid cannot in and of itself help fund Long Term Care Insurance, its role in funding long term care should absolutely be considered as part of your overall planning process.

As you plan your future and consider your options, it’s important to remember that there will always be bumps in the road and unanticipated developments. You can’t plan for everything. But you can give yourself a hedge against risk (and a safety net) so you can fully enjoy your retirement.

It’s Time to Enjoy the Benefits of LTCI

There are some significant benefits of Long Term Care Insurance. Some of these benefits are especially potent when your LTCI is purchased with your IRA, but most are fairly universal.

    • Your money works harder for you: in the financial world, this is called leverage. Every dollar you pay in premium is worth more than one dollar in benefits. A $20,000 policy, for example, earns you far more than $20,000 in benefits over the long term.
    • You can leave a bigger and better legacy: Medical expenses can drain your IRA, savings, and investments. LTCI can help prevent that, limiting your care costs, making it easier to leave something to your children in the process.
    • Added benefits: If you invest in a hybrid plan, you may also gain access to life insurance benefits (depending on the formulation of your plan).
  • You can decide on the care you get: LTCI gives you and your family a greater ability to influence the quality of care you receive.
  • You can protect your assets: With Long Term Care Insurance, you’ll have a greater ability to protect your assets and use them in a way that makes sense for you and your carer.
  • You’ll have a plan in place: When a long term care event strikes, you will have a plan in place. This means you won’t have to panic or make big decisions in a short amount of time.  
  • You can better weather uncertainty:. Remember that market downturns do not affect policy benefits and it’s something your client and their family can consistently rely on. During times like these, when unexpected challenges take place and inflation seems never-ending, it is important to have a secure financial strategy that can provide guaranteed benefits/income for your client and their family’s future. 

Is Stand Alone or Hybrid LTCI Better?

The planning strategies outlined in this article are generally used to obtain a Hybrid Asset-Based policy.  There are far less options to exchange when it comes to Traditional Stand-Alone LTCI, but some options may be available to you depending on the carrier guidelines.

With Stand-Alone LTCI the premiums are not guaranteed, but they can be less expensive than a Hybrid policy. A Hybrid policy has both premium and benefit guarantees that a stand alone policy does not. Which is best for you will depend on your unique situation and your goals.

Underwriting is also a big factor when considering company and policy options. LTCI is not one-size-fits-all insurance. Every family has different circumstances and preferences when planning for consequences of long term care. A long term care planning specialist can help determine insurability, review coverage options, and assist with the implementation of the plan.

How to Choose the Right Funding Strategy

There’s no one right way to fund your Long Term Care Insurance. Every individual and every family is different, with unique considerations. The goal here is to examine all of your options, from self-funding to using your IRA to purchase LTCI, and determine which is the best course of action for you. You’ll need to weigh your healthcare goals, your legacy goals, and your overall financial and wellness picture.

This can be a lot to consider and weigh on your own. And that’s why getting help from qualified professionals and financial planners is critical. At Gordon Associates, our team will help you find what works best for your needs and your goals. 

Find the right Long Term Care Insurance solution and contact us today!

On March 25, 2026   /   Blog