As many of us get older, there is a strong chance there will be a need at some point for at-home care, assisted-living, or nursing home care. According to LongTermCare.gov, a website of the U.S. Department of Health and Human Services, nearly 70% of Americans age 65 or older will need some type of long-term care during their lives. Unfortunately, this type of care can be very expensive, often wiping out one’s life savings and financial independence.
Once you turn 65 years of age, Medicare covers many of your health costs, but does not cover everything. Many Americans will have a chronic or disabling condition that requires supervision. Long-term care refers to a host of services that aren’t covered by regular health insurance, such as assistance with routine daily activities, like bathing, dressing or getting in and out of bed.
About half of 65-year-olds today eventually develop a disability and require some long-term care services, according to a study revised in 2016 by the Urban Institute and the U.S. Department of Health & Human Services. Most need services for less than two years, but about 14% will require care for more than five years.
While many parents hope their family will take care of them as they get older, it may not be feasible economically or physically. Children often relocate to different cities, or have to support their own growing families. Having long term care insurance relieves the burden of caregiving from adult children. Families can then manage the caregiving duties, while the care professionals can provide the needed care.
What exactly is long term care insurance
Long-term care (LTC) specific insurance coverage covers many of the costs associated with treating chronic illnesses or other ailments in old age, such as at-home care for Alzheimer’s patients or nursing home costs for people unable to live alone.
While LTC covers many of these costs, it doesn’t cover costs of surgeries, prescription drugs and doctors’ visits—those are covered by your health insurance, or Medicare for seniors over the age of 65. Coverage varies by policy, but often includes such things as:
Coverage varies but often includes:
- Extended nursing home stays
- Assisted living communities
- Alzheimer’s or memory care facilities
- Adult day care centers
- Home health provided by a professional
- Home care
- Respite care
Why Purchase Long Term Care Coverage
As part of good retirement planning, costs such as health care are an important consideration to determine, about whether you can afford and have enough of a nest egg for your senior years. Your retirement savings may cover the cost of living — but the cost of long-term care is something else entirely.
The main reasons people get LTC are:
- To protect savings. Long-term care costs can deplete your retirement nest egg quickly. The cost of a stay in a facility can be well over $100k a year.
- To relieve the burden of care from your loved ones. With a LTC policy, you have the freedom of options, and not rely upon family (most likely, don’t have the ability to provide the detailed care necessary for you).
- To help preserve your quality of life. With LTC, you can choose when and where to receive care, and ensure the care you get will be appropriate to your needs.
Costs and Benefit
Traditional insurance policies (car, health, home, life) are all necessary and highly recommended by financial advisors. They are all easily understood by the public as providing protection against very expensive and unlikely events. LTC coverage is different in the way that it is somewhat predictable. We all get old, and at some point we will need some care. Finding that care through a site like Care.com or at an assisted living facility or runs the gamut from moderately costly to very expensive, and LTC is designed to defray that cost.
In addition, LTC policies have many different benefit periods, waiting times, and premium costs. So, any other insurance policy is attractive because the monthly premiums are known in advance and therefore can be built into a budget.
There are many different types of plans, which can provide flexibility and can be structured to meet a variety of needs. Plans can cover the costs of in-home care, adult day care, assisted living, skilled nursing or all of them. You may choose a policy with a daily or monthly care allowance. For example, a plan can payout $75 / day if the individual resides at home and $200 / day if they are in residential care. Alternatively, one may choose coverage areas, like skilled nursing but not assisted living.
There are a number of factors that affect the cost of LTC coverage and depends on your personal situation. These include:
- Age and health. The older you are and the more health issues you have, the more expensive your premiums will be.
- Gender. Because women typically live longer than men and therefore are more likely to make a long-term care claim, so their premiums are usually higher.
- Care allowance. This is the amount of money the insurance provider would pay for your long-term care (for example, $100,000 per year). The higher the level of allowance, the higher the premium
- Payout duration. What is the length of time for coverage? Many policies pay for a specified length of time (1/2/5 years). The more years your plan covers, the premium cost will multiply.
- Elimination period. Like a short/long term disability insurance, this is the amount of time before your insurance kicks in and starts paying. For LTC insurance, it’s usually between 30 and 180 days.
- Policy cancellation. This section specifies whether or not there is an option to get money back if the policy is cancelled?
- Inflation protection option. This is an optional feature that protects your benefit amount from inflation, so if your care gets more expensive each year, your benefit amount increases as well.
Tax advantages of buying long-term care insurance
There are significant federal tax benefits in purchasing long-term care insurance, and many states also provide tax incentives for the purchase of LTC insurance. However, there are very specific rules to qualify.
In 1996, the Health Insurance Portability and Accountability Act (commonly referred to as HIPAA) allowed for premiums paid on LTC policies to be a qualified medical expense. Thereby, enabling deductions of the premium paid, provided:
- The policy is considered to be “tax qualified”, which most are
- You need to itemize deductions on your taxes to claim the medical deductions that were paid out of pocket.
- The qualifier is that you can only deduct the amount of medical expenses that exceed 7.5% of your adjusted gross income.
- The amount of premium paid that can be claimed is dependent on your age.
If you’re self-employed, you might be able to write off long-term care premiums as a business expense rather than an itemized medical expense (again, if you meet certain criteria). However, your age still affects the amount that you can deduct.
In 2021, the IRS limits to the deductible amount will be adjusted for inflation. Similar tax advantages exist at the state level, but each state treats the subject differently.
You need to consult with your accountant or financial planner to review the options and analyze the tax benefits.
If you are younger (under 60) the immediate tax benefits might not be as advantageous as if you are older and retired. This is because it will be easier to reach the 7.5% of adjusted gross income threshold for deducting medical expenses – as your deductibility limit will be higher and your income will most likely be lower.
There are also significant tax advantages when you actually receive benefits from a qualified LTC policy. According to the Internal Revenue Service (Publication 525), long-term care insurance is treated much like health insurance. In order to be qualified your LTC policy must have these features:
- Be guaranteed renewable.
- Not provide for a cash surrender value or other money that can be paid, assigned, pledged or borrowed.
- Not pay for or reimburse expenses that would be reimbursed under Medicare.
The dollar amounts you receive from the policy for specific LTC costs are tax deductible (provided they are qualified expenses). So, those benefits aren’t treated as income, which won’t affect your tax bill.
Creating a more secure future
At the end of the day, thinking about growing older and potentially needing long term care is a difficult discussion to have with your spouse or your parents. Caregiving can take an emotional and financial toll on you and your loved ones if you don’t have a plan in place. If you are interested in long term care insurance, you should consult with your trusted financial advisor and/or an independent long term care insurance specialist, to discuss how to make this an important part of your current retirement strategy.