Last Updated: February 1, 2008
With Baby Boomers marching en masse into their senior years, the question of whether or not to buy long-term care (LTC) insurance is taking center stage.
The first move is to take a look at current annual long-term care costs in your area and ask yourself if you had to spend anywhere from one to three years in the worst-case scenario – needing 24/7 nursing home care – could you afford it out-of-pocket based on today's figures? Depending on where you live, such a burden might be well over $120,000 a year.
This is where a meeting with a financial expert comes in handy. Your age, your current finances and your family health history are variables that should be discussed in planning a health care safety net, and not just for your end-of-life years. (Long-term care needs can surface on an intermediate basis as we age as well.) As LTC insurance products have matured, they have generally gotten better for most individuals, but they still require expertise to choose the coverage that matches the individual. A basic LTC insurance policy pays for assistance with activities of daily living including eating, dressing, bathing, toileting, incontinence and transferring (bed to chair, etc.). Each policy lists the types of services that are covered under nursing home care and under home health care. Homemaker services are generally covered and other services as listed in the policy.
But within the specific discussion of long-term care insurance, potential buyers should also know the tax ramifications of buying such policies as well. LTC policies come in two varieties – tax-qualified and nonqualified. Today, most LTC policies are qualified, which means they follow the 1996 Health Insurance Portability and Accountability Act (HIPAA) and therefore any payments made on those policies are tax-free, the same as benefits under a traditional health insurance policy. It always makes sense to ask – and see the language guaranteeing the policy's tax status – so you know you're not at risk of the Internal Revenue System (IRS) declaring those benefits as ordinary income.
Also, in some cases, tax-qualified LTC policies may be declared a form of health insurance, which means that the premiums may be declared as part of your overall medical expenses and if you itemize you may be entitled to a deduction based on your age and if your total medical expenses exceed 7.5 percent of your adjusted gross income. Premiums on nonqualified policies are completely nondeductible.
For qualified LTC policies the tax-deductible portion of the yearly premium is inflation adjusted. For 2007, $290 is deductible at age 40 or less, $550 at age 41 through 50, $1,110 at age 51 to 60, $2,950 at age 61 through 70 and $3,680 at age 71 and older. It's good to have a discussion with your tax and financial adviser to make sure you're not subject to the alternative minimum tax (AMT).
For self-employed individuals, LTC tax breaks are more attractive. For LLC owners, partners or sole proprietors, all the premiums can be deducted for a qualified long-term care policy subject to certain age-based limits.
This is why it's a particularly good idea for self-employed individuals – or individuals planning to become self-employed after they retire from their current jobs – to ask their tax and financial experts about LTC insurance after they reach age 50.