In some respects, the facts of life are encouraging. The number of Americans over age 80 is expected to quadruple in the next 15 years, according to Alfred Clapp, Jr., president of Financial Strategies & Services Corporation in New York City.
Unfortunately, perhaps 40% of the men in that age group and 50% of the women will need custodial care, at home or in an institution. Moreover, little growth is expected in the number of caregivers.
As a result, the cost of care is likely to keep rising, as it has in the past. In the next 30 years, 3 years of private care may cost as much as $1 million in some high-cost areas of the United States. “That could be the price of a nursing home stay or two shifts of full-time home care,” says Clapp.
Relying on Insurance
In light of these facts, many people will want to prepare in order to avoid such a financial catastrophe. One answer is to buy long-term care (LTC) insurance.
These policies may not be perfect, but they can help pay the bills—if you look carefully for the most effective policies. There may be huge differences from one policy to another. “Some are very limiting,” says Clapp, “while others offer more flexibility.”
Home care
Many LTC policies pay benefits if you need to be in a nursing home. Most people, though, view a nursing home stay as a last resort. If possible, you probably would prefer to receive care at home. Therefore, it is vital to know whether an LTC policy will pay benefits for flexible home care. Home care coverage can vary. Many policies pay benefits only if care is provided through a licensed agency or by an independent certified home health aide.
The most flexible LTC policies will pay benefits when home care is provided by any private caregiver who is not a relative. Such a person might cost more than an agency employee, but the quality of care may improve.
Assisted living
There is a step between home care and nursing home care. Many seniors now live in assisted living facilities where they receive some support but continue to be more independent than they would be in a nursing home, often at a lower cost. Indeed, some continuing care communities have assisted living facilities in addition to independent-living residences and nursing homes. These communities, which usually have high entrance charges, permit seniors to move from one level of care to another as needed.
LTC policies might cover some of your expenses in an assisted living facility…but they may not. Typically, the facility will have to meet some criteria, such as being licensed by the state, in order for residents to be able to receive LTC insurance benefits.
Cost-Conscious
As stated above, LTC policies vary widely in the coverage they offer. Generally, the more coverage or flexibility, the more risk to the insurance company—and the higher your premiums. Premiums also can be higher if the policy has a feature that will automatically increase benefits. In addition, married couples and couples in long-term relationships have to cover two people, so they need more insurance. “Married couples, couples in significant relationships, and close relatives who live together may get a 30% discount on LTC insurance,” says Jay Bogen, a certified LTC specialist in Watertown, South Dakota. Even with a couple’s discount, however, the cost of carrying two LTC policies can be a significant budget item for a retired couple.
Inflation fighters
One way to hold down the cost of LTC insurance is to buy a policy when you’re relatively young. If you buy in your 60s (or especially in your 50s), you may find that yearly premiums are manageable. However, that might mean waiting 15, 25, or 35 years before collecting any benefits from an LTC policy. In the meantime, the cost of LTC will shoot up.
Most LTC policies offer you a rider that will automatically increase your daily benefit by 5% a year, compounded. With such a rider, a policy paying a $200 daily benefit in 2007 would pay around $400 per day in 2022, virtually doubling in about 15 years.
Such rider will greatly increase the cost of your coverage. However, buying it usually is the best way to have inflation protection. Don’t choose a “guaranteed purchase option,” which allows you to buy additional coverage periodically, unless you are well over age 70.
Tax Implications
Federal law offers tax benefits that may reduce the effective cost of LTC insurance. Some states provide tax benefits, too. On the federal level, the 1996 Federal Health Insurance Portability and Accountability Act (HIPAA) defined “tax-qualified” LTC policies.
Such policies may generate tax-free benefits and tax-deductible premiums. To qualify for tax-free benefits, the insured individual must be either: incapacitated or have serious problems performing two of six activities of daily living (ADLs): bathing, dressing, transferring from a bed, toileting, feeding, and continence; or seriously cognitively impaired, perhaps from Alzheimer’s disease or a stroke.
“According to HIPAA,” says Clapp, “for a tax-qualified policy to generate tax-favored benefits, a condition must be diagnosed as requiring care for over 90 days.”
Recovery from a hip replacement, for example, is not likely to qualify for tax-free benefits. Regardless of whether any benefits are received, some or all of an LTC policy’s premiums may be federally tax-deductible. That deduction depends on the insured person’s age group, the total of other deductible medical expenses, and adjusted gross income (AGI) for the year. Maximum deductions for various age groups increase from year to year.
Individuals can include LTC insurance premiums—up to the maximum for their age bracket—when calculating total medical expenses. If those total medical expenses exceed 7.5% of their AGI, they may be able to deduct all or some of their premiums. (For individuals who owe the alternative minimum tax, the threshold is 10% of AGI.)
“Self-employed individuals, LLC members, partners, and 2% shareholders of S corporations may be taxed on the amount of premiums paid on their behalf,” says Clapp, “but they can take deductions as indicated above.” C corporations can pay and deduct the full amount of LTC insurance paid.
No matter what your personal situation, our office can help you find the most tax-effective way of funding LTC insurance.
John Michael Williams, C.P.A.
Partner
Purvis, Gray and Company, LLP
