THE BLOG
02/13/2017 11:12 am ET

Long Term Care Insurance: Here's What You Need to Know

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After seeing their parents need Long Term Care, Richard and Barbara Adams searched for answers.

It was the fall of 2008 when Richard and Barbara Adams, recent retirees from the Buffalo School District and a former sales executive at a local newspaper, were on a two-week vacation in the Smoky Mountains when they got the call that Richard's mom had suffered a fall and was being rushed to the hospital. While in the hospital, she suffered a series of complications, and ultimately left the hospital bound for a nursing home near their home town. It was at this moment that the cost of Long Term Care became real for Richard and Barbara; the cost of care in eastern Virginia was nearly $7,500 a month, and Richard's mom only had enough cash to last about four months.

To further complicate things, it turned out that the elder Mrs. Adams was diagnosed with dementia while in rehab. The prospect of selling the family home was front in center for Richard, so he knew he needed a plan for himself and Barbara so they didn't burden their two adult children. Richard set out to find a plan for his mom.

The solution to paying for Long Term Care that kept turning up was long-term care insurance (LTCI). Long-term care insurance unfortunately would not work for Richard's mom as one must have good health in order to qualify, and experts generally recommend buying between age 45 and 65. In the case of Richard and Barbara, they both had good health so they would have a good shot at getting approved for a policy so they could protect their retirement.

What is Long Term Care Insurance?

Long Term Care Insurance is a financial planning tool used to protect a person's assets from the high cost of receiving care at home, in an assisted living, adult day care or in a nursing home. This type of care can exceed $90,000 per year in some states so insuring against your risk might make sense for some people.

There are about ten Long Term Care Insurance companies to consider, so using a tool like LTCtree.com will allow you to compare competitive quotes from multiple companies quickly and easily. You won't pay more in premiums by using such a service, the premiums are regulated by the states and don't change from agent to agent or site to site.

Tax Benefits

Premiums for Long Term Care insurance average about $1,800 a year per person but can run as much as $3,000 per person, per year for a married couple, so finding tax advantages is always welcome. There are three major ways a typical consumer can benefit from owning a long-term care insurance policy:

HSA - Health Savings Accounts. Each year the IRS sets limits for how much premium can be paid via a health savings accounts, in 2017 up to $3,900 per person aged 61 and above can be paid, according to Publication 502 for the 2016 filing year. Even younger policyholders aged 51-60 can deduct up to $1,460 which is what a typical policy will cost.

Small Business Deduction. In some cases, if you file a Schedule C on your tax return, you can count the cost of a qualified LTC policy as a business expense much like other health insurance, but this may not apply to all filers, so be sure to consult a CPA if you take this route.
Qualified Medical Expenses. When your medical expenses exceed 10% of your AGI, you can include LTC premiums paid as part of that basket, but this is rare for healthy taxpayers as the 10% level can be prohibitively hard to reach, thankfully.

Combining LTCI with Life Insurance

So called "Hybrid" Long Term Care Insurance plans have been growing in popularity the past five years or so. The idea is to combine a life insurance policy (which pays a death benefit when you die) with accelerated benefits if you need long term care before death. These plans provide a premium guarantee where the insurance company can never come back and ask for a rate increase down the road unlike with traditional LTCI policies. Some hybrid long-term care policies even provide more Long Term Care than death benefit. An example policy with a $100,000 in a single premium payment (pay it once and you're done) would yield up to $1M in payments for Long Term Care services by age 80 for a healthy 45-year old.

Hybrid policies may be attractive, but there are dramatic differences in how these products are structured. Some hybrid LTCI products give the consumer a bigger death benefit, others give more long -term care benefits and while others will give an increasing cash value.

When Richard Adams' mom was of age and health to plan and buy a long-term care insurance policy they simply were not that popular and choices were limited. In today's world, there is no excuse to not plan for your potential long term care needs for your retirement. People are living longer as modern medicine is extending lives. The centenarian group is predicted to be one of the fastest growing groups by the year 2040 so if you have worked hard to save and build a nice nest egg, you may want to consider protecting it with a tool like long-term care insurance. Few viable alternatives exist to solves this problem, the insurance products have matured to a point where they are now recommended by most financial gurus.

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