Long-Term Care Insurance – The Anti-Nursing Home Solution – Part I

Many of the 80 million Baby Boomers heading toward retirement now see long-term care insurance as an integral part of their core financial plan. More than 9 million people will use long-term care services this year and this number is estimated to increase to more than 12 million by 2020. Meanwhile, the cost of medical care continues to rise, mostly driven by advanced medical technology and pharmaceuticals.

Our government recognizes the potential for a healthcare crisis and is encouraging people to purchase long-term care insurance by offering financial incentives including tax-free receipt up to $260 per day of benefits from long-term care policies. Also, premiums paid by individuals are deductible as medical expenses for itemized deduction purposes and the amount you can deduct is age bracketed. As with other unreimbursed medical expenses, long-term care expenses exceeding 7 ½% of adjusted gross income are deductible. “The most significant tax advantage is for business owners. Businesses that are organized as an LLC, Sub-chapter S or Partnership can deduct long term care premiums for the business owner up to a certain limit that is determined by the owner’s age. Businesses that are organized as a C-corporation can take a full deduction of the premium irrespective of the owner’s age,” says Babs Hart, a long-term care specialist and owner of The Hart Group based in Tuscaloosa, Alabama. Employer payments for group premiums are tax deductible to the employer and not taxable income to the employee.

What does long-term care insurance cover? Long term care insurance covers nursing and non-medical care for people who have a chronic illness or disability. This care is generally related to assisting people with “custodial care” which includes daily living activities like dressing, bathing, toileting and eating. “In addition, long-term care insurance covers severe cognitive impairment such as dementia or Alzheimer’s disease, which is separate from the activities of daily living”, says Ms. Hart. Health insurance covers short-term illnesses and doesn’t pay for extended care. Medicare covers only a limited amount of post-hospital care and does not pay for any custodial care. Medicaid is a state and federal government program that provides extended care benefits, but only to low income individuals with very limited assets.

The average cost of long-term care services exceeds $58,000 per year and costs are expected to continue rising. That’s why long term care planning needs to be included as part of everyone’s retirement planning. Long term care insurance policies allow you to customize your benefits based on your needs and desires, whether you choose services at an assisted living facility or at in-home services.

I used to advise our clients who had a net worth exceeding $2 million to ‘self insure’. But what I have found is that people, particularly people of wealth, are adamant that they remain in their homes rather than enter a nursing home facility. This means 24-7 nursing at astronomical cost. In one recent case, both the husband and wife required round-the-clock professional care by two separate teams which cost a whopping $180,000 annually! In fact, long term care insurance is often called “anti-nursing home insurance.”

Stewart H. Welch, III, CFP, AEP, has been recognized by Money, Worth, Mutual Funds Magazine and Medical Economics as one of the top financial advisors in the country. He is the co-author of The Complete Idiot’s Guide to Getting Rich (Alpha Books) and J.K. Lasser’s New Rules for Estate and Tax Planning (John Wiley & Sons, Inc.). Consult your financial advisor before acting on this advice.