How to Use IRA Savings to Buy Long-Term Care Insurance
Long-term care insurance (LTCi) is an important element of good retirement planning, since it offers financial protection against unexpected illness or disability that would otherwise quickly diminish your savings.
Many LTCi Plans are Simply too Expensive for most RetireesAt the same time, the cost of medical care and assistance over a long period is even higher, and an unexpected illness could wipe out everything you've saved. You may not have enough after-tax dollars to pay for LTCi, but you can protect your retirement income by using money from your IRA to fund coverage.
Is It Possible to Avoid Taxes and Early Withdrawal Penalties?Typically, withdrawals or non-qualified investments (including insurance purchases) made with IRA funds before the age of 59 1/2 are subject to taxes and penalties. Certain allowances are made if you use IRA savings to pay for medical expenses that exceed 10 percent of your adjusted gross income, or if you're unemployed and using these funds to buy medical insurance.
Although these exemptions don't apply if you're buying LTCi directly with your IRA savings, there are some indirect options available that allow you to avoid taxes and penalties. Here are two: fund a 20-pay life insurance plan or a qualified Health Savings Account (HSA) with part of the money saved in a traditional IRA. Both options can be done penalty-free before age 59 1/2 .
Option 1: Convert Your IRA into LTC Insurance with a Tax-Qualified AnnuityIf you invest in a tax-qualified annuity that makes internal distributions to an insurance carrier, you can indirectly pay for long-term care coverage using IRA money without additional tax penalties.
Here's How the Process Works:
Step 1: Apply for 20-pay life insurance with LTC features.
Apply for a 20-pay life insurance plan with an LTC rider, which can accelerate the death benefit to pay for long-term care. This policy will be funded with tax-qualified annuities that make annual distributions to the insurance policy over a 20-year period. After you apply, complete the underwriting process, and receive approval, you will be given a quote for the annual premiums required for this plan. The premiums may be higher than those for term insurance, but limited-pay plans offer lifetime security.
Apply for IRA-based Annuity Plans to Fund the PolicyThe second step is to determine the up-front cost of an IRA-based annuity where the annual dollar amount of income is the same as the insurance premiums, over a period of 20 years. Apply for this annuity type and include instructions for the company to directly credit your 20-pay life insurance plan with the annual gains from the annuity.
Use a Direct Transfer of IRA Funds for Annuity PremiumsDirectly transfer funds from your IRA to purchase your 20-year annuity. By paying an equal dollar amount directly into your life insurance policy, this annuity will fund your insurance coverage and keep it active for 20 years, after which the LTCi policy is paid in full.