Long Term Care Insurance: Who Needs It?
Kelly Pelletier, Tax Manager
A companion personal story to this article can be found here. It shares the personal account of one of BNN’s own who experienced first-hand the difficulties associated with caring for a family member who requires significant care, but has no longer-term care insurance. Nothing can be done to eliminate the emotional cost and heartache placed on caregivers and family, but financial costs can be managed if addressed in advance, and this story hopefully will encourage readers to protect themselves (and their loved ones) financially with long term care insurance if at all possible.
The United States life expectancy has increased drastically over the last 100 years. Living longer comes with a myriad of benefits, but it also means handling the physical and health difficulties that accompany an extended period of aging. Many Americans—particularly the baby boomer generation—are reaching retirement and beyond, only to realize they are in need of long-term care.
Long-term care comprises a host of services, ranging from home care or adult day care to residential care in an assisted care facility. More specifically, long-term care is defined as services which provide assistance with activities of daily living (“ADLs”), such as eating, dressing, or bathing. One qualifies for long-term care when a doctor or other health professional certifies that he or she is unable to perform at least two ADLs without assistance. The costs of long-term care can be overwhelming and unaffordable for many, inviting the question: “how do I pay for long-term care?” Long-term care insurance (“LTCI”), unlike health insurance, is designed to help cover the costs of long-term care services and supports.
Why is LTC Insurance So Important?
The baby boomer generation, U.S. adults born between 1946 and 1964, totals 70 million people. The oldest of the baby boomers are less than a decade from reaching their 80s, the age at which many will begin needing assistance with daily activities. The Administration on Aging estimates that almost 70% of people turning 65 will need long-term care at some point in their lives. Applying this statistic to the baby boomer generation yields almost 50 million people from that generation in need of long-term care. It is estimated that 12 million Americans over the age of 65 will need long-term care by 2020. Yet, there are currently only about 8 million people across all age groups who have some kind of LTCI.
Long-term care is expensive. According to Genworth Financial, the cost of a room in a private nursing home cost is $92,378 for 2016. A home health aide averaged $46,332 for the year. Full time, round the clock, care can cost over $170,000 per year. The actual cost of care is affected by a number of factors, such as the time of day aide is utilized, extra charges for additional services beyond the cost of basic room and board at care facilities, and the area in which the patient lives. The staggering cost of care can be a huge pill to swallow (no pun intended) for many families.
Contrary to popular belief, health insurance and Medicare do not cover the cost of long-term care, because LTC is not considered to be a medical expense. Medicare will cover skilled nursing care and therapy after a hospital stay, but three quarters of people needing long-term care are not hospitalized prior to seeking care.
Considerations in Choosing LTCI
There are a number of options for paying for long-term care (e.g., health savings accounts, life insurance with an LTCI rider, or hoping to remain young and healthy forever). Some of these options are clearly more viable than others. This article focuses on LTCI alone.
Who should consider LTCI?
Relatively wealthy individuals may be able to pay for care out of pocket without the need for LTCI, and probably prefer to do so. On the opposite end of the spectrum, Medicaid will cover care for those who have exhausted all other resources and meet the government’s eligibility requirements. However, most Americans needing long-term care fall between these two extremes and should consider LTCI as a method to pay for needed care.
Deterrents to Purchasing LTCI
Unfortunately, as expensive as long-term care is, LTCI premiums can be just as cost-prohibitive. The premiums for a couple in their mid-50s can cost over $3,000 annually. Additionally, the LTCI industry is not heavily regulated, meaning that the cost of the premiums can increase by as much as 40 percent, as frequently as once a year, with no warning.
The second large deterrent that worries most consumers is the “use it or lose it” nature of these policies. One may invest tens, if not hundreds of thousands, into these policies over the years. If the policyholder never needs long-term care, there is no reimbursement for premiums paid in.
You may find it hard to pay the large expense and take the risk on a policy that you may never use. However, recent studies suggest that two out of three adults approaching retirement will need long-term care at some point in the future. In comparison, the risk of being in a car accident or losing a home to fire is more like one in four. Despite lower risk, you would not consider driving your car or living in your house without insurance on both.
You should also consider the reality of your long-term care needs. While family members may be able to provide some caregiving services, a family caregiver may be hindered by distance, lack of technical expertise, or inadequate health or strength (e.g., older spousal caregivers). Hiring a home care aide or moving into a skilled nursing facility may be the only way to ensure that you receive the care that you need.
- Make sure you can afford to keep up with the premiums, now and in the future. Keep in mind that premium increases can be steep. If you find yourself unable to pay the premiums, even after holding the policy for ten years, you may have to forfeit the policy and lose the benefits for which you have already paid. However, some states, including Maine, New Hampshire, and Massachusetts, require policies to have a nonforfeiture benefit or option, which allows you to receive reduced benefits based on the premiums you have already paid.
- Buy young. It costs less to buy coverage when you are younger. Currently, the average age of consumers purchasing LTCI is about 60 years old.
- Do not buy too little, and do not buy more than you think you will need. Many insurance companies offer online calculators to help you estimate your needs. Look for one that allows you to specify your home state. Most LTCI policyholders receive benefits for less than five years, so keep in mind that your policy does not have to cover ten or fifteen years of long-term care. When in doubt, just remember that you can usually decrease your coverage, but it is much more difficult to increase your coverage (especially if you are no longer healthy).
- Read your policy carefully, and make sure you buy one that covers the types of facilities, programs, and services that you want. It is also important to know what the policy’s “benefit triggers” are, meaning the conditions which need to occur in order for you to qualify to receive your benefits.
- Shop around and research your options. Consider a joint policy with your spouse, as such policies often offer flexibility in allocating benefits and cost savings.
- Make sure your policy includes inflation protection. This adds to your premiums, but ensures that your benefits grow alongside inflation.
When considering the tax rules related to your LTCI policy, you must first determine whether the policy is qualified or non-qualified. The requirements for a qualified LTCI policy are described in 26 U.S.C. § 7702B(b). Qualified and non-qualified policies are treated differently for tax purposes, both in regards to premiums paid and benefits received. A qualified policy receives more favorable tax treatment. Benefits received from a qualified plan are tax free, and the premiums paid for those plans are deductible as medical expenses (subject to some limitations). By contrast, the benefits received from a non-qualified policy are fully taxable as ordinary income. Additionally, premiums paid on non-qualified plans are not deductible. For more information on qualified vs. non-qualified plans, see this article from a previous BNN newsletter.
Assuming your LTCI policy is tax qualified, here are several tax breaks to consider:
- Individual deduction for LTCI premiums: If you itemize your deductions, you can deduct your premiums as medical expenses on Schedule A of your Form 1040. This may or may not be advantageous, because the deductible portion of your premiums is capped by age, and you can only deduct your medical expenses to the extent they are more than 10% of your adjusted gross income (currently 7.5% if you are age 65 or older). Medical expenses tend to increase as we age, causing a greater portion of costs to be deductible.
- Self-employed deduction: Self-employed individuals can deduct their premiums (and those of their spouse and dependents) “above the line,” meaning it comes off the top of their income. They are limited only by the amount of their self-employed income. Utilizing the self-employed health insurance deduction allows these taxpayers to reduce their taxable income substantially.
- Life insurance and annuities: Although the details are beyond the scope of this article, some favorable tax rules allow certain insurance and annuity assets to be diverted to or exchanged for LTCI with little or no tax impact. Hybrid policies are also available.
- State income tax credits: Half of the states offer additional tax deductions or credits as an incentive to buy LTCI. Most New England states do not offer these tax incentives, but Maine does offer a state income tax deduction for premiums paid on a qualified policy.
- HSA/MSA premium payments: You can use your HSA to pay a portion of your LTCI premiums on a pretax basis. If you max out your HSA each year that you are employed, you may have enough in your account to pay your premiums every year that you are retired.
Long-term care insurance is expensive, there is no way around it. There are many factors to consider when making the decision to purchase or not purchase. With careful planning and utilization of available tax benefits, you can make LTCI more affordable and ensure that you will receive the care you require should the need ever arise.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.