Florida Elder Law & Estate Planning Blog


Long-Term Care Insurance Can Safeguard Assets, and Premiums May Be Tax Deductible

November 13, 2020
long-term care insurance
The American Association for Long-Term Care Insurance reports that as of January 1, 2020,  7.5 million Americans have some form of long-term care insurance. If you are thinking about purchasing a long-term care insurance policy, you should take into consideration that the premium (for you and your spouse) is deductible as a medical expense from taxable income, so long as:
(1) your total medical expenses exceed 10% of adjusted gross income and
(2) the policy is a tax-qualified policy. (More on what constitutes a tax-qualified policy later in this post.)

 

The maximum deduction available to you is based on your attained age at the end of the tax year.  The Internal Revenue Service just announced the maximum deductions for 2021 as follows:

40 or less: $450 (was $430)

41 through 50: $850 (was $810)

51 through 60: $1,690 (was $1,630)

61 through 70: $4,520 (was $4,350)

71 and older: $5,640 (was $5,430)

What Is A Tax-Qualified Long-Term Care Insurance Policy?

In order for premiums to be deductible, your policy must be tax-qualified, meaning it must follow standards set by the National Association of Insurance Commissioners. Most traditional long-term care policies are tax-qualified, but be sure to confirm this with your insurance advisor. Among the key elements of a qualified policy are:

  • Must offer inflation protection.
  • Must offer nonforfeiture protection, which allows for a portion of benefits or a partial refund to be paid if the policy lapses due to non-payment of premium.
  • Must be guaranteed renewable, meaning the carrier cannot cancel your policy because of your age or changes in your health, so long as premiums are being paid.
  • Benefits start when insured requires help with 2 of 6 activities of daily living, or when there is severe cognitive impairment.

If the policy was purchased prior to 1997, it is grandfathered in and deemed qualified so long as it is approved by the insurance commissioner of the state in which the policy was sold.

Why Purchase Long-Term Care Insurance?

According to the Department of Health and Human Services, most people fail to understand the risk they face for needing those services as they age. According to the HHS website, someone who is turning age 65 today has a 52% chance of developing a disability serious enough to require long-term care, either at home or at a nursing home. One in seven adults will have the disability for more than five years. On average, women will require 3.7 years of long-term care; men, 2.2 years.

Long-term care insurance pays for personal and custodial services traditional health insurance and Medicare do not. Those services may be provided in a variety of settings, including your home, a day care facility, or a nursing home.

The cost of care has increased dramatically over the years, a trend that shows no sign of abating. According to the Genworth Financial 2019 Cost of Care Survey, the national annual median cost for a private room at a nursing home is $102,000. In-home skilled nursing clocks in at a cost of $87.50 per visit; a home health aide, $144 per day. Long-term care insurance can help safeguard your and your family’s assets from these expenses. Paying out of pocket for these services will wipe out the savings of most middle-class families in short order. If the person needing care is married, the spouse may be left with very little left to live on in the years ahead.  Medicaid may be an alternative, but only for nursing home care.

When Should You Purchase Long-Term Care Insurance?

Once your health declines or you are already receiving long-term care services, it is generally impossible to qualify for a policy. The younger you are, the less expensive the policy (although premiums may and do rise from year to year). Therefore, it is better to apply when you are still young enough to meet the medical requirements. A survey by The American Association of Long-Term Care Insurance indicates that most purchasers of insurance are between the ages of 55 and 65. Only 18% of those with policies purchase them over the age of 65.

Hybrid Policies Now Available

The long-term care insurance industry has been changing rapidly. There are less carriers today than there were years ago. Additionally, there are new hybrid policies available. Both life insurance policies and annuities can be purchased with a long-term care rider. Also, if you have an existing life insurance policy or annuity, you may be able to use the policy to purchase a new policy with a long-term care rider. If you want to cancel the policy, or if you never file a claim, you may be entitled to a return of premium on an annuity policy, or to a death benefit for a life insurance type policy. However, these hybrid policies do not get the same tax-favored status as traditional policies.

If you are interested in purchasing long-term care insurance, contact The Karp Law Firm at 561-625-1100 or klf@karplaw.com and we can direct you to an insurance professional who will help you explore your options.

For more detailed information about long-term care insurance, check these resources:

U.S. Dept. of Health and Human Services

American Association of Long-Term Care Insurance