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Most Overlook Tax Advantaged LongTerm Care Insurance

Armen Hareyan's picture

Millions of U.S. employees with Health Savings Accounts (HSAs) are not aware of the ability to use these pre-tax funds to purchase long term care insurance a new study finds.

Just under one-third (31%) of respondents to a poll conducted by the American Association for Long-Term Care Insurance knew HSA dollars could be used to purchase insurance protection.

The growth of Health Savings Accounts, first introduced in 2003, has been dramatic. Some 8 million Americans are now covered by HSA-qualified high deductible health insurance plans, over six times as many as were enrolled in March 2005 plans. Experts note this still represents a small percentage of those eligible for the tax-advantaged savings plan.

The average amount invested in an HSA account for individuals between ages 41 and 50 is $6,249 according to the First Quarter 2009 report by Canopy Financial. For a family, the average invested is $9,757. Account balances for those ages 51 and over exceed $11,000.

The survey found that individuals recognized HSA funds could be used to pay for medical costs and prescription medications. Few indicated an awareness of the provision that permits the pre-tax dollars to purchase long-term care insurance protection either on an individual basis or when it is offered by their employer. Tax-qualified long-term care insurance premiums can be reimbursed through an HSA, tax-free up to the Eligible Premium amount that is indexed each year.

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The 2009 Long-Term Care Insurance Price Index, produced by the industry trade association, notes that a 55 year-old individual in good health would pay $723 a year for $115,000 in current benefits. The coverage would grow to over $305,000 of protection 20 years from now. The entire cost of premiums could be paid using the tax-advantaged HSA account in this instance providing a significant cost saving advantage available to employees. Many states also now offer tax incentives for the purchase of long-term care insurance.

Government studies report that for individuals making HSA contributions, about 41 percent did not withdraw any HSA funds within the same year, while about 22 percent withdrew as much or more than their reported contributions. About 93 percent of reported withdrawals were claimed for qualified medical expenses.

Some 8 million Americans own long term care insurance according to industry experts. Long-term care insurance industry experts predicts that if more people understood they could use their HSA dollars to obtain protection, the number would grow by at least 20 percent.

2009 Eligible Tax Deductible Limits for Long-Term Care Insurance

Age 40 but not yet 50 $ 600
Age 50 but not yet 60 $1,190
Age 60 but not yet 70 $3,180
70 or older $3,980

Written by Jesse Slome from the American Association for Long Term Care Insurance