Seventy percent of individuals over age 65 will require some type of long-term care services during their lifetime; more than 40 percent will need care in a nursing home for some period of time. Are you prepared?
For some, long-term care insurance (LTCI) is the solution when a person requires someone else to help him or her with physical or emotional needs over an extended period of time. Help may be required for many of the activities that healthy, active people take for granted. All tax-qualified, long-term care (LTC) policies are activated once the policyholder needs substantial assistance with two of six activities of daily living (ADL) and/or with a cognitive impairment such as Alzheimer’s disease or dementia. This assessment must be made by a licensed health care professional (typically, the insured’s primary physician). ADLs are things we all take for granted in healthy times. The standard definitions for the six types of ADLs are: eating, bathing, dressing, toileting, transferring (moving in and out of bed, a chair and so on) and maintaining continence.
Advances in medicine mean longer life spans and better quality of health, yet 70 percent of individuals over age 65 will require some type of long-term care services during their lifetime; more than 40 percent will need care in a nursing home for some period of time. LTC includes a broad range of health and support services that people may need as they age or if they become disabled. The majority of these services involve personal care or assistance with ADLs. Many families start off being able to provide all or some of this help, for free, but as support needs increase, paid care is usually necessary to supplement family-provided services, provide respite to family caregivers or to pay for more extensive services in a nursing home or assisted living facility.
Costs vary based on the type and amount of care needed, the provider chosen and location. In 2009, the average cost of LTC in the San Francisco Bay Area averaged $212 per day for a semi-private room in a nursing home; $274 per day for a private room in a nursing home; $3,668 per month for care in an assisted living facility (for a one-bedroom unit); $34 per hour for a home health aide; $24 per hour for homemaker services; and $73 per day for care in an adult day health care center. If a person can remain in his or her own home with part-time, paid caretakers, it could be affordable, but many people would quickly deplete their life savings if they had to spend $38,000 to $100,000 annually on nursing home care (facility costs vary dramatically).
It’s difficult to predict how much or what type of care any one person might need. The need for long-term care may only last for a few weeks (or months) or it may go on for years, depending on the reasons for needing care. On average, someone age 65 today will need some level of long-term care services for three years at some point in their life. Service and support needs vary from one person to the next and often change over time. Women need care for longer (3.7 years on average) than do men (2.2 years on average). And while about one-third of today’s 65-year-olds may never need long-term care services, 20 percent will need care for more than five years. LTC isn’t just for the elderly either—younger adults can be involved in accidents or suffer from illnesses that may also need care, which can prove to be a financial burden to a spouse or parents.
Jack Schmitz is president and CEO of DI (Disability Insurance) and LTC Insurance Services, a San Rafael-based company that provides training, marketing support and administrative backroom services for DI and LTCI products to agents, brokers, financial planners and marketing partners. Schmitz says there are numerous products on the market today to fit a variety of client needs. He sees more employers offering LTCI as a part of their benefits packages, including small businesses and universities; even AARP offers a plan. One benefit for employers is a reduction in the absenteeism rate for a worker who has LTCI for an ill or aged parent. Still, the majority of the population doesn’t have LTCI.
“Families can be broken apart by LTC disasters,” says Schmitz. He’s seen circumstances that were especially difficult when a new stepmother or stepfather was involved. “If you’re not really wealthy, the consequences of going without LTC can hit a family really hard. It’s pretty brutal to see,” says the disability and LTC insurance expert. He advises people to buy DI when their potential earnings are more than their retirement savings. “If the numbers are close, then you need both but you might be able to get by with a less expensive DI policy,” says Schmitz, adding that LTCI is still critically important to a full financial portfolio.
Tax advantages
LTCI policies are either IRS tax-qualified or non-tax-qualified. Most policies sold today are tax-qualified, meaning the insurance contracts conform to the 1996 Health Insurance Portability and Accountability Act (HIPAA) as well as IRS rules. The HIPAA rule declared that qualified LTCI must receive the same tax treatment as accident and health insurance in the eyes of the IRS. LTCI policies issued before January 1, 1997, automatically qualify under the new HIPAA rule. They’re grandfathered in and treated as qualified plans as long as the insurance commissioner of the state in which they’re sold has approved them. Most individual policies must receive approval from the state insurance commissioner, while most group policies don’t require this approval. Policies issued on or after January 1, 1997, must meet federal standards to qualify. To be a qualified LTC plan, it must adhere to specific regulations established by the National Association of Insurance Commissioners (NAIC). Your filing status will determine the rules for your federal income tax deduction.
LTCI premiums may be deducted as a medical expense, but only if you aren’t self-employed, itemizing on form 1040 Schedule A. Your total amount of medical expenses added to the allowable amount of your LTCI premium must exceed 7.5 percent of your adjusted gross income. The amount in excess of 7.5 percent can then be deducted from your adjusted gross income.
Self-employed individuals, S-corporations and LLCs can deduct LTCI premiums for policies purchased for owners and others, including employees’ relatives. The deduction is taken as a health insurance premium expense, so the premium is deductible regardless of whether or not you itemize deductions. The tax deductions are still limited to the maximum allowable premium deduction and are subject to self-employment tax. C-Corporations enjoy the most favorable tax break and can pay all or a portion of LTC insurance premiums for employees. Employers who pay the premium for their employees can choose which employees receive the benefit, and there’s no requirement to purchase coverage for every employee. They can deduct the full amount of the company’s portion of the premium as a reasonable business expense. If the employee pays part or the entire premium, he or she is subject to the rules for non-self-employed individuals for their portion of the premium paid.
LTC doesn’t qualify as a benefit under Section 125, Cafeteria Plan status. As a result, you can’t purchase LTCI with pre-tax dollars under an employer-provided benefits plan. This could be why more employers don’t offer LTCI as an employee benefit. LTC insurance premiums can’t be paid with funds from an IRA or 401K plan, but they can be paid with funds in a health savings account (HSA) or medical savings account (MSA). It’s always best to talk to a qualified tax preparer and an insurance broker or agent to make sure you’re getting the most current information regarding tax benefits of a LTCI purchase.
LTC options
If you aren’t independently wealthy, the three most common ways to fund LTC are through LTCI or other types of investment vehicles, Medicare or Medicaid (Medi-Cal in California). Here’s a brief snapshot of each:
LTCI. In exchange for monthly premiums, LTCI covers nursing home care or other LTC services. Premiums generally increase with the person’s age, and coverage benefits vary significantly. Buyers need to make sure their policy covers any pre-existing conditions as well as conditions that could develop later, such as dementia. You might also want to check whether you can reduce coverage if the premiums become too expensive. Other options may include reverse mortgages, annuities or trust funds for LTC.
Medicare. is a federal health insurance program for people age 65 or older, some disabled people under age 65 and people of all ages with end-stage renal disease (permanent kidney failure treated with dialysis or a transplant). Although Medicare doesn’t generally pay for LTC, it may cover nursing home care for a certain number of days in specific situations. Medicare may cover some types of home care services as well, but Medicare doesn’t cover assisted living.
Medi-Cal is a combined federal and California state program designed to help pay for medical care for public assistance recipients and other low-income persons. Although Medi-Cal recipients may receive Medicare, the two aren’t related. Medi-Cal is a need-based program and is funded jointly with state and federal Medicaid funds.
LTCI can offer more than just financial stability
Ed Ritch of Ritch Insurance Services, a family-owned business that’s been serving Sonoma County more than 25 years, has a division called Long Term Care 4 California. The company webpage cites 50 percent of all individuals risk incurring LTC costs themselves and, by comparison, only one in 1,200 people have the chance of losing a home by fire or accident—and everyone has fire insurance. “LTC is a major financial burden for lots of folks today, who are paying for kids to go to college and trying to take care of their parents at the same time. However, money isn’t the only part of the equation to consider,” says Ritch.
Ritch’s mother was diagnosed with terminal cancer and his father with incurable heart disease within six months of each other. His mother wanted to care for his father, but when that became too much for her, his sister stepped in. After two weeks, his sister was emotionally drained. She and her mother had always been best friends, but at this critical time, the relationship was becoming strained. Because his parents had purchased LTCI, they were able to hire a 24-hour-per-day caregiver, and both parents were able to remain in their home until the final days of their lives (when they were moved to the hospital).
“It was about my parent’s dignity—staying in their home and not being a burden to my sister or myself,” says Ritch. His dad would sometimes ask him how much the care was costing, and Ritch could tell him not to worry about it because the LTCI was covering most of the costs. It relieved his father’s stress about money during the last months of his life.
To know what your options are and what type of policy might be right for you is a discussion that should involve your tax preparer, insurance agent or broker and your financial adviser. It’s best to talk about LTC before care is imminent, so you receive the type of care you want and need, when and if the time comes. It’s never too early to get prepared.
