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.