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Long-term care insurance has the same tax-favored status as regular health insurance.
In recent years, a number of employers have started to offer long-term care insurance as an optional employee benefit, and most insurance companies offer individual policies.
Insurance typically covers the cost of extended care in a nursing home, or in your own home if you become chronically ill or disabled and unable to care for yourself. The costs of such care over an extended period can be overwhelming and can rapidly wipe out your retirement savings.
Regular health insurance usually doesn't cover prolonged nursing care or home assistance, and Medicare only provides coverage for a few months of nursing care after you have been hospitalized. Medicaid will cover such costs, but only if you've exhausted virtually all of your assets.
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The tax breaks |
Both the premiums you pay for qualified long-term care insurance and the benefits you receive enjoy favorable tax treatment.
If you are reimbursed for your actual expenses, the reimbursements will be tax-free. If you're reimbursed at a flat daily rate, up to $175 per day will be tax-free. Reimbursements above $175 will also be free of tax up to the amount of your actual expenses.
The premiums you pay for long-term care insurance may be deductible as unreimbursed medical expenses if you itemize deductions. There is a limit on the amount of annual premiums you can deduct, depending on your age. Also, it's important to remember that unreimbursed medical expenses are deductible only to the extent that the total exceeds 7.5% of your adjusted gross income.
If you're self-employed, you may deduct the same percentage of long-term care premiums that applies to regular health insurance premiums.
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Strict requirements for deductibility |
In order to qualify for these tax advantages, your policy must meet strict federal guidelines on when you are eligible for benefits.
To qualify, you must be certified within the previous twelve months as "chronically ill." In general, this means that for at least 90 days you require assistance to perform two or more of the so-called "activities of daily living," which include eating, bathing, dressing, continence, toileting, and transferring. This requirement may be tougher than your policy requirements, so check before you claim the tax deduction.
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The need for long-term care insurance |
Long-term care insurance is not for everyone. You should consider it if your estate is in the range of $250,000 to $2 million, and you want to preserve assets for your heirs. If you are wealthier than that, you may be better off paying for long-term care as you need it. And if you have few assets to protect, you may qualify for Medicaid.
You may also want to consider whether your family health history suggests you'll die relatively early or live to old age.
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What to look for in a policy |
If you decide to buy a policy, determine whether it qualifies for favorable tax treatment, and look carefully at factors such as eligibility for benefits, the types of care it covers, and whether it contains inflation protection.
Some policies offer lifetime coverage while others are for a fixed term. If you choose the latter, look into restrictions on renewability.
In addition, most policies have a form of deductible, called an "elimination period," which is the number of days before coverage begins. The longer the elimination period, the lower the premium. Match the elimination period to what you can afford, remembering that Medicare may cover your costs for an initial period.
And finally, these policies are not cheap, so take your time and do your homework before you commit.
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If you'd like help in reviewing your insurance needs, give us a call, or send your questions to us via email. |
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