As the massive baby boomer generation makes its way toward retirement, it is estimated that approximately 10,000 people in the United States turn age 65 every day. While life expectancy is substantially longer now than it was even just a few decades ago, though, it does not necessarily mean that people are in good health for the remainder of their lifetimes.
In fact, in some cases, living longer could equate to a longer-term need for skilled and custodial care – and the cost of this type of care can quickly whittle away at your portfolio if you are not prepared financially ahead of time for it.
Depending on the strategy that you choose, though, you may find that there are benefits to be gained currently, such as tax deductions on long-term care insurance premiums, along with the coverage for care that is received in the future. This can provide a viable added incentive for obtaining this valuable financial protection now.
Although most people know someone who requires long-term care, it is difficult to imagine needing this type of care yourself. But it is something that must be planned for. Otherwise, the cost of long-term care could quickly deplete a lifetime of savings within a very short period.
According to U.S. government data, 70% of people who are age 65 or older will need at least some form of long-term care during their remaining lifetime, and 50% will require extensive services. Unfortunately, few people are financially prepared for the cost of such care.
In addition, many believe that their regular health insurance coverage and Medicare will pay for some or all of their long-term care services. But this is not the case. In fact, Medicare pays very little for care that is received in a skilled nursing facility – and even if you qualify, it is still possible to spend a significant amount of money out-of-pocket for coinsurance expenses, that is, unless you have some type of additional long-term care payment plan in place.
In order to qualify for home health care coverage through Medicare, you must be considered “homebound,” which means that you can only leave your home for important obligations like doctor’s appointments and/or religious services.
Another government program, Medicaid, may pay for long-term care expenses. But in this case, you must first “spend down” assets in order to qualify. Going this route can also force you to give up a lot of control, as you may not have a say in where you receive your care. Plus, if you are married, this program can have an impact on the finances of the “healthy” spouse, too.
Based on figures from the Administration for Community Living – a part of the U.S. Department of Health and Human Services – men typically require long-term care for 2.2 years, and women for 3.7 years.
But these are just averages. So, it is possible to need long-term care for many years – and without any type of protection in place, this alone could completely change your (and your spouse’s) retirement plans.
The good news is that long-term care insurance coverage could pay for a substantial amount of your care costs – regardless of whether these services take place at home, in a skilled nursing home or an assisted living facility.
In addition to protecting assets – and leaving funds in place for their originally intended purpose(s) – there could be some other benefits that come along with owning long-term care insurance, too, such as tax-deductible premiums.
There are several reasons why long-term care insurance should be considered as a part of your overall financial and retirement plan. The biggest of these involves the cost of care and the protection of assets.
Long-term care services can be expensive. This is the case, regardless of whether care is received in a facility or at home. While the exact amount can vary based on the type of care that is needed and your geographic location, a study conducted by Genworth showed that the median cost of just one month in a skilled nursing home facility (private room) in 2021 was more than $9,000.
While the average monthly cost of in-home care is less, the actual amount can vary, based on the extent of the services that are needed, as well as the length of time a caregiver spends with the patient in their home.
In addition to the potential depletion of assets, another downside to paying for long-term care out-of-pocket is the possible tax consequences that you can face when you make withdrawals from your portfolio.
For instance, if you pull money from personal savings, investments or traditional IRA or retirement plans, some or all of the funds will be taxable. This, in turn, reduces the amount of net spendable funds that you have to put toward the cost of your care. With that in mind, taxes (or the reduction or elimination of taxes) can have a lot to do with why owning long-term care insurance may be a smart strategy to consider.
There are several different ways in which long-term care insurance policies can be structured. In general, though, this type of coverage will typically pay out a certain amount of benefit for care that is received for qualifying physical and/or cognitive impairments.
Covered care can usually be received in a wide range of different settings, too, such as a(n):
As with other types of insurance, you will have to have a qualifying triggering event in order to start receiving a payout from the policy. This usually occurs when a doctor certifies that you are suffering from a cognitive impairment (such as Alzheimer’s disease) or that you are unable to perform – without assistance – two out of six activities of daily living. These include:
Long-term care insurance policies typically have a “deductible” that must first be satisfied before the benefits start paying. In this case, there is a pre-selected waiting period, referred to as the elimination period, such as 30 days, 60 days, 90 days or some other figure.
The policy’s benefits may be based on either the actual cost of your care (reimbursement) or alternatively, a certain dollar amount is paid, regardless of how much the care actually cost (indemnity).
A long-term care policy will also generally have a time limit for how long the benefits will be paid out. Depending on the plan and the insurer, these time frames could range from one to six years (or more).
Policies can also be either “qualified” or “non-qualified.” Under the Health Insurance Portability and Accountability Act of 1996, some long-term care insurance premiums and benefits can receive favorable tax treatment.
For example, if a policy meets certain federal standards (or if it was purchased prior to January 1, 1997), the premiums may be tax deductible (in full or in part), and the benefits that are received from the policy are not treated as taxable income. These are known as qualified long-term care insurance policies.
Alternatively, non-qualified long-term care insurance policies offer no tax deductions for the premiums that are paid. With these policies, the benefits may also be considered as taxable income to the recipient.
Having the ability to pay for care services through a long-term care insurance policy can also provide you with more choices regarding where care is received. In addition, by being able to obtain care from professionals, your family and other loved ones won’t have to take time away from work or other obligations to provide caregiving. This can allow for more enjoyable and quality time spent together.
Because the premiums that are paid and the benefit payouts from qualified long-term care insurance policies can be high, receiving tax advantages on both can provide additional reasons to purchase this type of coverage.
The tax-related incentives for owning long-term care insurance can differ somewhat, though, based on whether the policy is purchased by an individual, a self-employed business owner, and LLC or a corporation.
For the 2021 income tax year, the breakdowns were as follows:
Because long-term care insurance premiums are considered to be a medical expense, those who itemize their income tax deductions may deduct these costs to the extent that they (i.e., the premiums) exceed 7.5% of the individual’s adjusted gross income.
So, according to the IRS, a 70-year-old couple who both have the right type of long-term care insurance could be able to deduct as much as $11,280 on their 2021 income tax return. The age and tax deduction limits for the 2021 tax year are:
A self-employed business owner may deduct 100% of their long-term care insurance premium, based on the same age limits and dollar figures for individuals. As with individual taxpayers, the benefits that are received from qualified long-term care coverage by a self-employed business owner are tax-free.
Qualified long-term care insurance policy premiums can also be deductible by owners of corporations, and the benefits can be free from income taxation. The actual figures can differ, however, based on whether the company is a C-Corp, an S-Corp, a partnership or a limited liability company (LLC), as well as whether the entity or the individual pays the premium for the coverage.
For example, LLC members, partners in a partnership and shareholders who have a greater than 2% ownership in a Subchapter S-Corporation are taxed as self-employed individuals. Therefore, if the entity pays the premium for the long-term care coverage, then the partner, member or shareholder will include the amount of that premium in their adjusted gross income for the year. They may then deduct the age-based eligible amount of the premium on their own tax return.
If a C-Corporation pays the premium for long-term care insurance on behalf of its employees (as well as their employees’ spouses and/or other eligible dependents), the corporation may take a 100% tax deduction as a business expense on the total of the premiums that are paid.
In this case, the tax deduction on the long-term care insurance premium will not be subject to the age-based limitations that are outlined in the table above. It is important to note that the employer is not required to cover all of its employees with long-term care insurance. Rather, the company may pick and choose those who it wishes to have these benefits.
In addition to receiving a possible federal tax deduction on long-term care insurance premiums, there are also some states that allow deductions and tax credits for the purchase of this coverage.
As of the 2021 income tax year, these states included:
To determine the amount of total tax credits and/or deductions that you may be eligible for, it is recommended that you first talk with a financial professional who is well-versed in long-term care insurance.
Because long-term care coverage is a type of health insurance, it will be necessary for you to qualify, based on your health condition at the time that you apply for a policy. If you already have certain health conditions, it may be too late to purchase a plan, as is the case with other types of health insurance.
If you are unable to qualify for stand-alone long-term care insurance based on your health, though, one possible alternative could be to obtain an annuity. These financial vehicles are designed for paying out an income stream in return for one or more contributions.
This income may be received on a regular basis for a pre-set amount of time, such as 10 or 20 years. Or, the income may continue for the remainder of your lifetime, no matter how long that may be.
Depending on the type of annuity you purchase, you may also be able to obtain tax-deferred growth in the account. This means that there is no tax on the gain in the account until the time of withdrawal.
While annuities are not considered to be a substitute for a long-term care insurance policy, they could provide you with a back-up alternative if it is not possible to obtain a stand-alone long-term care insurance plan.
Having a plan in place to cover potential long-term care expenses can help you to keep your savings and other assets in place for their originally intended purposes. This, in turn, can better ensure that your retirement plan remains intact.
This type of insurance coverage can come with other nice benefits, too, such as deducibility of the premiums and/or no income taxes incurred on the benefit payouts. Therefore, long-term care coverage can provide more than just a way to pay for care services that are received.
Because there are many different long-term care insurance policies available in the marketplace, it is recommended that you discuss your specific goals and objectives with a specialist in retirement and long-term care planning before you move forward.
An Alliance America financial professional can help. If you have questions regarding how long-term care needs can be paid for, as well as how to create and “customize” a plan that is best for you, feel free to contact us and set up a time to chat virtually or in person.
Alliance America is an insurance and financial services company dedicated to the art of personal financial planning. Our financial professionals can assist you in maximizing your retirement resources and achieving your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling (833) 219-6884 today.