1. What is long-term care?

Long-term care refers to the ongo­ing ser­vices and sup­port need­ed by peo­ple who have chron­ic health con­di­tions or dis­abil­i­ties. There are three lev­els of long-term care:

    • Skilled care: Gen­er­al­ly round-the-clock care that’s giv­en by pro­fes­sion­al health care providers such as nurs­es, ther­a­pists, or aides under a doc­tor’s super­vi­sion.
    • Inter­me­di­ate care: Also pro­vid­ed by pro­fes­sion­al health care providers but on a less fre­quent basis than skilled care.
    • Cus­to­di­al care: Per­son­al care that’s often giv­en by fam­i­ly care­givers, nurs­es’ aides, or home health work­ers who pro­vide assis­tance with what are called “activ­i­ties of dai­ly liv­ing” such as bathing, eat­ing, and dress­ing.

Long-term care is not just pro­vid­ed in nurs­ing homes–in fact, the most com­mon type of long-term care is home-based care. Long-term care ser­vices may also be pro­vid­ed in a vari­ety of oth­er set­tings, such as assist­ed liv­ing facil­i­ties and adult day care cen­ters.

 

2. Why is it impor­tant to plan for long-term care?

No one expects to need long-term care, but it’s impor­tant to plan for it nonethe­less. Here are two impor­tant rea­sons why:
The odds of need­ing long-term care are high:

    • Approx­i­mate­ly 40% of peo­ple will need long-term care at some point dur­ing their life­times after reach­ing age 65*
    • Approx­i­mate­ly 14% of peo­ple age 71 and old­er have Alzheimer’s dis­ease, a dis­or­der that often leads to the need for nurs­ing home care**
    • Younger peo­ple may need long-term care too, as a result of a dis­abling acci­dent or ill­ness

The cost of long-term care is ris­ing:
Cur­rent­ly, the aver­age annu­al cost of a 1‑year nurs­ing home stay is $74,820* and in many states the cost is much high­er. In the future, long-term care is like­ly to be even more expen­sive. If costs rise at just 3% a year (a con­ser­v­a­tive esti­mate), in 20 years, a 1‑year nurs­ing home stay will cost approx­i­mate­ly $135,133.

*Nation­al Clear­ing­house for Long-Term Care Infor­ma­tion, U.S. Depart­ment of Health and Human Ser­vices, 2011
**Alzheimer’s Asso­ci­a­tion, 2012

 

3. Does­n’t Medicare pay for long-term care?

Many peo­ple mis­tak­en­ly believe that Medicare, the fed­er­al health insur­ance pro­gram for old­er Amer­i­cans, will pay for long-term care. But Medicare pro­vides only lim­it­ed cov­er­age for long-term care ser­vices such as skilled nurs­ing care or phys­i­cal ther­a­py. And although Medicare pro­vides some home health care ben­e­fits, it does­n’t cov­er cus­to­di­al care, the type of care old­er indi­vid­u­als most often need.

Med­ic­aid, which is often con­fused with Medicare, is the joint fed­er­al-state pro­gram that two-thirds of nurs­ing home res­i­dents cur­rent­ly rely on to pay some of their long-term care expens­es. But to qual­i­fy for Med­ic­aid, you must have lim­it­ed income and assets, and although Med­ic­aid gen­er­al­ly cov­ers nurs­ing home care, it pro­vides only lim­it­ed cov­er­age for home health care in cer­tain states.

 

4. Can’t I pay for care out of pock­et?

The major advan­tage to using income, sav­ings, invest­ments, and assets (such as your home) to pay for long-term care is that you have the most con­trol over where and how you receive care. But because the cost of long-term care is high, you may have trou­ble afford­ing extend­ed care if you need it.

 

5. Should I buy long-term care insur­ance?

Like oth­er types of insur­ance, long-term care insur­ance pro­tects you against a spe­cif­ic finan­cial risk–in this case, the chance that long-term care will cost more than you can afford. In exchange for your pre­mi­um pay­ments, the insur­ance com­pa­ny promis­es to cov­er part of your future long-term care costs. Long-term care insur­ance can help you pre­serve your assets and guar­an­tee that you’ll have access to a range of care options. How­ev­er, it can be expen­sive, so before you pur­chase a pol­i­cy, make sure you can afford the pre­mi­ums both now and in the future.

The cost of a long-term care pol­i­cy depends pri­mar­i­ly on your age (in gen­er­al, the younger you are when you pur­chase a pol­i­cy, the low­er your pre­mi­um will be), but it also depends on the ben­e­fits you choose. If you decide to pur­chase long-term care insur­ance, here are some of the key fea­tures to con­sid­er:

    • Ben­e­fit amount: The dai­ly ben­e­fit amount is the max­i­mum your pol­i­cy will pay for your care each day, and gen­er­al­ly ranges from $50 to $350.
    • Ben­e­fit peri­od: The length of time your pol­i­cy will pay ben­e­fits (e.g., 2 years, 4 years, life­time).
    • Elim­i­na­tion peri­od: The num­ber of days you must pay for your own care before the pol­i­cy begins pay­ing ben­e­fits (e.g., 20 days, 90 days).
    • Types of facil­i­ties includ­ed: Many poli­cies cov­er care in a vari­ety of set­tings includ­ing your own home, assist­ed liv­ing facil­i­ties, adult day care cen­ters, and nurs­ing homes.
    • Infla­tion pro­tec­tion: With infla­tion pro­tec­tion, your ben­e­fit will increase by a cer­tain per­cent­age each year. It’s an option­al fea­ture avail­able at addi­tion­al cost, but hav­ing it will enable your cov­er­age to keep pace with ris­ing prices.

Your insur­ance agent or a finan­cial pro­fes­sion­al can help you com­pare long-term care insur­ance poli­cies and answer any ques­tions you may have.

 

6. Are my insur­ance pre­mi­ums tax deductible?

Yes. With approx­i­mate­ly 70 mil­lion retir­ing baby boomers on the way toward retire­ment, fed­er­al and state gov­ern­ments are offer­ing tax incen­tives to poten­tial­ly alle­vi­ate the impact on Medicare. There are cur­rent­ly six long-term care insur­ance tax breaks that may affect your deci­sion.

 

    • Indi­vid­ual deduc­tion: The IRS con­sid­ers tax-qual­i­fied long-term care pre­mi­ums a med­ical expense. If you work for some­one else and item­ize your deduc­tions, you can deduct your long-term care pre­mi­ums under med­ical expens­es on Sched­ule A. If you use this option, deduc­tions are restrict­ed based on your age (see table below). 
    • Self-employed deduc­tion: Regard­less of whether you work full time or part time, you can take this deduc­tion. Instead of list­ing your pre­mi­ums on Sched­ule A, input them on line 29; “Self-employed health insur­ance deduc­tion” on Form 1040. 
    • C cor­po­ra­tion deduc­tion: Own­ing or belong­ing to a C cor­po­ra­tion can pro­vide the great­est tax deduc­tion as you can deduct 100 per­cent of the LTC pre­mi­ums and they are not sub­ject to the age-based lim­its. 
    • Cash-val­ue life insur­ance and non-qual­i­fied annu­ities deduc­tion: The IRS cre­at­ed these tax incen­tives to get peo­ple to shift mon­ey from exist­ing poli­cies into long-term care insur­ance. Inter­est with­drawn from a cash-val­ue life or annu­ity is nor­mal­ly taxed. But, if you use that inter­est to pay your LTC pre­mi­um, you pay no tax­es on the inter­est that is with­drawn. Addi­tion­al­ly, own­ers of old cash-val­ue life poli­cies can do a tax-free trans­fer into a sin­gle-pay long-term care pol­i­cy with­out hav­ing to pay tax on the gains with­in the life pol­i­cy. 
    • State income tax cred­its: Half of that states offer some form of tax cred­it or state income tax deduc­tion as an incen­tive to pur­chase long-term care insur­ance, with some rang­ing as high as 25 per­cent of the total long-term care insur­ance pre­mi­um paid dur­ing the tax­able year. 
    • HSA/MSA pre­mi­um pay­ments: If you have a health sav­ings account or Medicare med­ical sav­ings account, you can use the mon­ey in your account to pay for most or all of your long-term care insur­ance on a pre­tax basis.

 

age-based deductions for long term care insurance premiums