We’re living longer than ever before. That’s the good news. The average life expectancy in the U.S. is over 75 years for men and 80 for women.
On the other hand, health care costs are increasing―and research indicates that more than 70 percent of us will require long-term care at some point in our lives. More than 40 percent will need nursing home care.
The costs can be considerable and traditional health care policies do not cover most long-term care services. Neither does Medicare, except in rare circumstances with demonstrated financial need.
That means most Americans must pay privately for long-term care services, potentially threatening the assets in their retirement or estate plans.
As a result, more and more people are purchasing, or considering purchasing, long-term care insurance as an important part of their financial, retirement and estate planning. With the proper planning, long-term care insurance can help to prevent a potentially significant drain on your financial assets, or the assets of parents and family members. It is becoming more common, even for affluent couples.
You may choose to purchase long-term care insurance as part of your financial, retirement, and estate planning processes, to protect your assets. The financial protection it affords can also give you more control over the care you receive if you become chronically ill, including enhancing opportunities to remain in your home while you receive the care.
Long-term care insurance can even help to ensure that your family doesn’t become responsible for your expenses. In many states, filial responsibility laws allow states to require adult children to provide financial support and cover the cost of care for indigent parents. Although Washington has no such a provision, Oregon, Idaho, Montana, and California have adopted filial responsibility laws.
While long-term care insurance may not be for everyone, given the increased importance of long-term care in our aging society it pays to understand the basics issues and evaluate the benefits of long-term care as part of your own financial planning.
A Few Definitions
Long-term care generally refers to the mix of skilled and nonskilled services that you may require over an extended period to address your health care and personal needs, as well as the activities of daily living―generally in response to a chronic illness or a disability.
Although the majority of such services are provided at home, they can include care provided in adult day service facilities, nursing homes, and other institutional settings.
These days, long-term care is considered such an important financial consideration that the federal government and a number of states provide financial and tax incentives to assist with the cost of insurance.
For tax purposes, the IRS defines qualified long-term care services as “necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, rehabilitative services, and maintenance and personal care services that are required by a chronically ill individual and provided pursuant to a plan of care prescribed by a licensed health care practitioner.”
Long-term care insurance refers to an insurance contract or policy that specifically provides benefits for long-term care services. Under federal tax rules, the contract must meet a number of specific requirements to qualify for special federal income tax benefits.
Important Considerations in Selecting a Long-Term Care Policy
According to AARP, many people wait to consider long-term care insurance until they begin to experience health concerns in their 70s or 80s. By then, it’s often too late. Insurance carriers may consider you to be too high a risk under the circumstances or the premiums may be unaffordable, even for very wealthy seniors.
AARP suggests that the best time to purchase long-term care insurance may be during middle age.
As with most insurance, the features of any long-term care coverage can vary considerably from policy to policy. Any policy you consider for yourself or a family member should include an outline of coverage describing all of the benefits, terms, and limitations―clearly and in substantial detail.
Important considerations in evaluating a long-term care policy include the following:
Coverage
Does the policy cover home care, assisted living, adult day service facilities, and nursing home care? Will it pay for at-home care provided by a family member or a friend?
Limitations for Pre-Existing Conditions
If you have an existing medical condition before you purchase long-term care insurance, is care related to that condition covered by the policy? If yes, is there a waiting period during which time the policy will not pay for your care? How far back in time does the policy look in determining a pre-existing condition?
Maximum Benefit
What is the maximum amount the policy will pay each day or each month for your care?
Inflation Protection
Are the maximum daily or monthly benefits adjusted for inflation? According to AARP, there are two types of inflation protection: “the right to add coverage at a later date, and automatic coverage increases.”
Benefit Period
Is there a limit to the period of time you can receive benefits under the policy for any type of care (for example, nursing home care, home health care, intermediate or custodial care), or does the benefit period extend throughout your lifetime?
Initial Waiting Period
After you purchase the policy, is there a period of time before your care is covered under the policy?
Elimination Period
Aside from the initial waiting period, does your policy require you to pay for a predetermined number of days of care before your coverage kicks in?
Non-Forfeiture Benefit
Will the policy continue to pay for your care if you stop paying the premium?
Cancellation Policies
Can you cancel the policy within a specified number of days to receive a full refund? Does the policy include a guarantee that the insurer cannot cancel or terminate it when you reach a certain age or because of any physical or mental health condition?
Federal Income Tax Considerations
The federal government provides a number of tax incentives that address both the premiums you pay for long-term care insurance and the benefits you may eventually receive.
Premiums Paid by Individuals
As an incentive to purchase long-term care insurance for yourself, your spouse, or a dependent, the federal government allows you to deduct a portion of your premiums for qualified long-term care contracts as an itemized deduction on your federal income tax return.
The maximum amount (per person) of this medical expense for 2008 depends on the age of the person insured, as follows:
|
Age
|
Maximum Deduction for 2008
|
|
71 or over
|
$3,850
|
|
61 to 70
|
$3,080
|
|
51 to 60
|
$1,150
|
|
41 to 50
|
$580
|
|
40 or under
|
$310
|
For federal tax purposes, your total medical expenses (including the applicable amount of long-term care insurance premiums) are deductible as itemized expenses only to the extent that they exceed 7.5 percent of your adjusted gross income (AGI).
Premiums Paid by Self-Employed Individuals
If you’re self-employed, you can deduct the actual amount of your eligible long-term care premiums (and those of your spouse and dependents), subject to the age-based limitation described above.
Your deduction is not subject to the 7.5 percent of AGI itemized-deduction rule―it is subtracted from your gross income in calculating adjusted gross income. However, you cannot take the deduction if you are eligible for long-term care insurance under a plan offered by your spouse’s employer―or your own employer, if applicable.
For this deduction, you don’t have to be a sole proprietor. You’re also considered self-employed if you work in your business as a partner in a partnership, a member of a limited liability company, or a more than two-percent shareholder in an S corporation.
Premiums Paid by Employers
Employers who provide long-term care coverage for employees and their spouses and dependents, as well as retirees and spouses, under an employer-sponsored plan can deduct the full amount of the premiums as business expenses.
If you’re the employee of an employer who provides this benefit, the premiums are not included in your gross income subject to federal income tax.
Premiums Partially Paid by Employers
Some employers share the cost of long-term insurance premiums with their employees. It’s referred to as a contributory arrangement. In this case the cost of the premium is prorated. The employer can deduct its share of the premium and the employee can deduct his or her share under the rules applicable to individuals.
Long-Term Care Benefits
Long-term care benefits paid on a per-diem or other periodic basis are generally excludable from federal taxable income, subject to a limit that is indexed annually for inflation. The maximum excludable amount for any period is calculated as the larger of either the total cost for services received during the period or $270 per day (for 2008)―less any reimbursements you received.
There is one major exception: If you receive your benefits based on a long-term care insurance benefit provided by your employer―or as the spouse or dependent of such an employee―the full benefit amount is free from federal income tax.
State Tax Considerations
Washington State has no state income tax provision, and therefore does not offer an income tax benefit for long-term care insurance. However, other states with income taxes do offer credits or deductions. When you evaluate the importance of long-term care insurance to your long-term financial plans, factor in any available state tax benefits.
For More Information
There are a number of online resources for information on all aspects of long-term care insurance, including the following:
National Clearinghouse for Long-Term Care Information (sponsored by the U.S. Department of Health and Human Services)
The AARP website
As your financial and tax advisor, we can assist you in evaluating your long-term care needs as part of your overall financial, retirement, or estate plan―and review any long-term care policies you may be considering.
Because we do not accept commissions or fees from any source, and we do not sell financial or insurance products, we can provide an independent perspective.
