A person’s earning power is the most powerful asset they own. When both adults in a family are contributing to the family income, the results can be astounding. For example, if a 30-year-old couple makes a combined income of $100,000 per year without any raises, in the course of 30 years, they will earn over $3 million.
Thus, it’s important to utilize this asset to prepare for anything that may arise in retirement, such as long-term care.
Long-Term Health Care Costs
Even if a couple invests and saves wisely for those 30 years, it can slip away quickly with an illness or disability that requires long-term health care. There are some facts pertaining to long-term health care that many people may not realize:
- Almost 70% of those who turn 65 will need some type of long-term health care service at some point in their life.
- Women make up the majority of those who need long-term or assisted living care.
- The median daily rate for a private room in a nursing home facility was $253 per day in 2016.
- The average length of stay in a nursing home is over 2 years and 3 months.
- With the combined daily cost an average length of stay, the costs of long-term care can skyrocket to well over $200,000, making it unaffordable for many Americans.
- Medicare does not pay for long-term care services.
Long-Term Health Care Solutions
Long-term care insurance purchased in advance takes the worry out of draining retirement savings. Financial security is well deserved during retirement and can be obtained with long-term care insurance. Daily activities needed by those with chronic illnesses or disabilities, such as help with dressing, bathing, and eating are covered under a long-term care insurance policy. Services covered by a long-term care policy include:
- Assistance with in-home assistance with daily activities, such as bathing, dressing, meal preparation, and housekeeping services.
- Payment to visiting nurses and home health aides.
- Services in the community, such as adult day care.
- Assisted living community costs.
- Nursing home care.
Since people are living longer, the odds of someone needing long-term care services is also growing. Without long-term care insurance in place to help with long-term care services, the risk of depleting a lifetime of savings is high. With long-term care insurance, people are put in a better financial position to make their own choice of what long-term care services are received and where they are received. In addition, qualified long-term care insurance receives favorable income tax treatment.
Long-Term Care Insurance Income Tax Treatment
There are several requirements that a qualified long-term care insurance policy meets:
- Providing services to a policyholder who needs help with two or more daily living activities, such as bathing or dressing
- Supervision for a policyholder who requires supervision a result of a cognitive impairment, such as dementia or Alzheimer’s disease
- Inflation protection that increases benefits over time
- Non-forfeiture benefits that preserve certain coverage items if premium payments are stopped
Eligible Long-Term Care Insurance Premiums
Federal income tax returns require a 7.5% “floor” for medical expenses in order to claim as a deduction. Depending on the age of a policyholder, the amount of eligible long-term care premium that can be applied to these deductions varies. For example:
- Age 40 or less – The maximum eligible long-term premium for tax deduction purposes in 2017 is $410.
- Age 41 – 50 – The maximum eligible long-term premium for tax deduction purposes in 2017 is $770.
- Age 51 – 60 – The maximum eligible long-term premium for tax deduction purposes in 2017 is $1,530.
- Age 61 – 70 – The maximum eligible long-term premium for tax deduction purposes in 2017 is $4,090.
- Age 70 or more – The maximum eligible long-term premium for tax deduction purposes in 2017 is $5,110.
Each year the maximum amount is adjusted for inflation.
If an employer provides a worker with long-term care insurance under an accident and health plan for employees, the full premium may be deducted by the employer. In addition, premiums paid by the employer will not be considered as taxable income to the employees.
For a partnership or S-corporation shareholder-employee, long-term care insurance premiums paid by the business are taxable income to the owner(s). However, the premiums paid are not to exceed the maximum eligible long-term care premium for tax deduction purposes.
Long-term care insurance benefits are not considered taxable income to the recipient up to the per diem limit of $360 in 2017. This limit is adjusted annually for inflation.
Finally, annuities with long-term care riders can be used to pay for services such as assisted living or nursing home care. The proceeds of the annuity are not subject to federal income tax if they are used to pay for long-term care services.
Long-Term Care Insurance Checklist
The coverage of a long-term care insurance policy should meet the needs and preferences of the policyholder. As a person evaluates the various policy features and benefits, they should keep in mind that the choices they make can affect the premiums paid and the benefits they are entitled to receive. Some questions that should be addressed before purchasing a policy include:
- Covered Services – What are the covered services of the policy? Does the policy offer services that can be shared by two people?
- Benefit Amount – What is the daily benefit amount? Is it payable only for nursing home care, or is there a payable benefit for home health care? Is there a maximum lifetime benefit?
- Benefit Period – How long are benefits payable in a nursing home, at home, or in an assisted living facility?
- Elimination Period – When do benefits begin for nursing home care, home health care, and assisted living facilities?
- Maximum Lifetime Benefit – If there is a maximum lifetime benefit, what is the amount?
- Pre-Existing Conditions – Are pre-existing conditions covered? If not, is there a waiting period before they are covered?
- Excluded Conditions – Are there any conditions that are excluded from coverage?
- Inflation – Are benefit amounts adjusted for increasing long-term care costs? If so, how are these benefits adjusted?
- Prior Hospital Stay – Is a prior hospital stay required in order to receive benefits? Are medical certifications required in order to receive benefits?
- Spousal Discount – Are discounts offered when both spouses purchase long-term care insurance policies?
- Premiums Waived – Are premiums waived after a person begins to receive benefits? If so, when?
- Guaranteed Renewable – As long as the premiums are paid when due, can the policy be renewed for the life of the policyholder?
- Premium Increases – How often can premiums be increased and under what conditions?
With the extensive differences in policy coverage, consulting with a qualified financial planner will ensure that the perfect long-term care insurance policy is available.