Posted On: SEPTEMBER 2020
The Centers for Medicare and Medicaid Services has reported that nearly 70% of people over age 65 will need long-term care (LTC) services and support at some point in their lives. Needless to say, the cost of long-term home health care or an extended stay at a nursing home or assisted living facility can quickly erase your nest egg and derail your estate plan. Let’s look at three options available to help cover the costs of long-term care.
An LTC insurance policy supplements your traditional health insurance by covering services that assist you or a loved one with one or more activities of daily living (ADLs). Generally, ADLs include eating, bathing, dressing and transferring (in and out of bed, for example).
LTC coverage is relatively expensive, but it may be possible to reduce the cost by purchasing a tax-qualified policy. Generally, benefits paid in accordance with an LTC policy are tax-free. In addition, if a policy is tax-qualified, your premiums are deductible (as medical expenses) up to a specified limit.
It’s important to weigh the pros and cons of tax-qualified policies. The primary advantage is the premium deduction. But keep in mind that medical expenses are deductible only if you itemize and only to the extent they exceed 7.5% of your adjusted gross income (AGI), so some people may not have enough medical expenses to benefit from this advantage. It’s also important to weigh any potential tax benefits against the advantages of nonqualified policies, which may have less stringent eligibility requirements.
Also known as “asset-based” policies, hybrid policies combine LTC benefits with whole life insurance or annuity benefits. These policies have several advantages over standalone LTC policies. For example, their health-based underwriting requirements typically are less stringent, and their premiums are usually guaranteed — that is, they won’t increase over time. Most important, LTC benefits, which are tax-free, are funded from the death benefit or annuity value. So, if you never need to use the LTC benefits, those amounts are preserved for your beneficiaries.
Bear in mind that the features, terms and conditions of these policies can vary dramatically, so it’s important to shop around.
Employer-provided group LTC insurance plans offer significant advantages over individual policies, including discounted premiums and “guaranteed issue” coverage, which covers eligible employees (and, in some cases, their spouse and dependents) regardless of their health status. Group plans aren’t subject to nondiscrimination rules, so a business can offer employer-paid coverage to a select group of employees.
Employer plans also offer tax advantages. Generally, C corporations that pay LTC premiums for employees can deduct the entire amount as a business expense, even if it exceeds the deduction limit for individuals. And premium payments are excluded from employees’ wages for income and payroll tax purposes.
Too often, people planning their estates focus on tax and asset-protection issues and overlook long-term health care needs. But the high cost of LTC can quickly devour resources you need to maintain your lifestyle during retirement and provide for your children or other heirs. LTC insurance may be the answer. Contact us to learn more about the various LTC insurance options.