7 Tips for Buying Long-Term Care Insurance
Contrary to popular belief, long-term care insurance is not nursing home insurance. Think of it this way, if you have a chronic illness or become disabled and can no longer care for yourself for an extended period of time, you’ll need long-term care services. Long-term care insurance can help you pay for the care you need, in the setting you’d prefer, such as your home. Here are some tips on getting coverage:
1. Buy with your spouse or partner. Long-term care insurance companies offer discounts to couples who are married or living together. You could save up to 30% if you apply with your partner. Most carriers will still give a partial discount even if only one of you is approved. The discount applies to married couples and domestic partners.
2. Consider shared care. One helpful feature of long-term care insurance policies is shared care. This is an extra feature you can purchase that allows a couple to share the benefits of each other’s policies. For example, Mr. and Mrs. Smith each purchase $200,000 in benefits. Mr. Smith becomes ill and uses all of his $200,000. Mrs. Smith’s policy is untouched. Because they have shared care, he can tap into her benefits for additional coverage. Shared care can be valuable for any couple, but particularly in cases where there is a large age difference.
3. Watch inflation coverage. Inflation coverage is a rider added to a policy that helps the benefit amount keep up with inflation. This is needed because the amount of coverage you buy today might not be adequate to cover your care when you are in your 80s, the average age of people who file claims. But inflation coverage can double the cost of your policy, so it’s important to choose wisely. An advisor who specializes in long-term care insurance can walk you through the various options that are available.
4. Buy before your birthday. You’ll save money if you buy before your next birthday because long-term care insurance rates are based on age. Another reason to avoid putting it off is that if you wait too long, your health could decline and you might not qualify for the insurance.
5. Find out about any possible tax write-off. Long-term care insurance premiums are tax deductible if you are a business owner or have high health care costs. If you have a part-time business, such as tutoring, you might be able to receive a write-off. Consult your tax advisor.
6. Know what an average plan looks like. If you’re like most consumers, you may be unsure of how much coverage to buy. An average plan might provide $5,000 per month in benefits up to a maximum of $180,000. A 55-year old couple might pay $185 per month for their coverage. Your needs may be different and an advisor can help design a plan based on your individual circumstances.
7. Seek expert advice. Most insurance agents sell very little long-term care insurance. Often they don’t have the expertise in this product to help you modify it to best meet your needs. After you’ve done your research, you will want to work with a long-term care specialist who will customize a plan for you.
Deciding whether, when, how much, and what kind of long-term care insurance to buy is a complex process that involves many unknowns. Will you be struck by a debilitating condition? How long will you be able to care for yourself? What level of daily assistance will you require?
To make the decision even more difficult, insurance companies, state law, and federal law all add their own glosses to the basic question of how to provide for your personal care if and when you can no longer care for yourself.
You might want to consider consulting with a lawyer or accountant who specializes in elder law and financial planning. In any case, having a basic understanding of the different types of long term care insurance will help you navigate that process—and gain insight into an what questions to ask.
Types of Long-term care
State Partnership Policies
At present, all states except Alaska, Hawaii, Illinois, Massachusetts, Mississippi, Utah, and Vermont participate in a federal program called the Long-Term Care Partnership Program.
The idea behind it was to encourage people to purchase long-term care insurance policies by raising the total value of the assets that people who participated in the plan could retain and still be eligible for Medicaid. The idea was that if more people bought their own long-term care policies, it would lessen the financial strain on Medicaid. It’s not entirely clear whether this result has been achieved.
Here’s, however, how the partnership works. Medicaid is a joint state/federal plan that pays for long-term care for people who have minimal income and assets. In order to qualify in most states, people are not allowed to have more than about $2,000 in personal assets. Under a partnership plan, however, this figure is effectively raised by the amount of benefits received under a private long-term care policy.
Suppose the state where you live requires you to have no more than $2,000 in assets to qualify for Medicaid. Without a partnership plan, you would be required to become almost destitute to receive Medicaid long-term care benefits. On the other hand, if you had a partnership plan that paid, say, $100,000 in long-term care benefits, you could have just under $102,000 in assets and still qualify for Medicaid.
In order to take advantage of the partnership program, you must live in a participating state and must purchase a qualifying long-term care policy. States have some leeway in determining what a qualifying policy is, so if you want to enroll in the partnership, you should make absolutely sure that the long-term care policy you are considering meets your state’s requirements.
Another factor to consider is whether your state honors insurance partnership plans that are begun in a different state.
If you buy a partnership-qualifying long-term care policy in Minnesota and later move to Maine, will Maine grant you the same asset protection that you had in Minnesota? The answer is generally yes, with one big exception. California’s partnership program does not offer reciprocity, which means that if you move there after enrolling in a partnership plan in a different state, California requires that you spend down your assets to below its own Medicaid maximum in order to receive Medicaid benefits. Of course, the seven states that don’t participate at all in the partnership program won’t honor an out-of-state partnership plan.
Tax Qualified Policies
When people consider purchasing long-term care insurance, they often have two related questions. Are the premiums that you pay for the coverage tax-deductible? And are the benefits you receive under those policies taxable?
In general, medical expenses are tax deductible to the extent that, all together, they exceed 10% of your gross adjusted income (or 7.5% of your adjusted gross income if you or your spouse were born before January 2, 1952). Premium payments for qualified long-term care insurance counts as a medical expense under these rules. However, the IRS places limits on the annual amount spent on long-term care insurance that can be deducted. For the 2017 fiscal year, these limits are as follows:
Age 40 or under: $410
Age 41 to 50: $770
Age 51 to 60: 1,530
Age 61 to 70: $4,090
Age 71 or over: $5,110
Another way to exempt long-term care insurance premiums from taxation is to pay them out of a Health Savings Account (HSA).
However, to be eligible to set up an HSA, you must have a high-deductible health insurance policy and meet other requirements that may subject you to more out-of-pocket medical expenses. Long-term care insurance premiums cannot be paid out of a Flexible Spending Account (FSA).
What about the benefits paid out under long-term policies? They are not considered as income insofar as they are less than $360 a day. However, in many situations, home health aides and other long-term care providers provide round the clock care and earn more than $15 an hour, which would take the daily care expense over that figure. Benefits in excess of $360 a day are taxable as income, and that figure is surprisingly easy to exceed.
Life Insurance Policies with Long Term Care Riders
A newer form of long-term care insurance is a combination between a whole life policy and a long-term care coverage.
One way to look at these hybrid policies is as insurance that will pay out if you need long term care and then pay any remaining benefits to your beneficiaries when you die.
The chief advantage to these policies is that they pay out no matter what happens to you. This differs from standard long-term care insurance policies, which only cover care and assistance with activities of daily living.
The only issue is financial, as these policies can be wildly expensive, with lump-sum premiums starting at about $75,000 and going up from there. At that price, the target market for such policies are people who are approaching retirement age and have built up substantial retirement assets which can be used to pay the premium. Despite their cost, these plans are increasingly popular.
Group and Employer Policies
As with most other insurance purchases, there are advantages to buying long-term care insurance as part of a group or through your employer’s benefits plan. The chief advantage is a cost savings. Insurance companies can afford to charge less per policy if they sell 50 of them than if they just sell one at a time. And frequently employers will contribute a portion of long-term care premiums, further reducing expense for the individual employee.
Another advantage to buying long-term care coverage through your workplace is the enforced discipline of having premium payments deducted from your paycheck. It’s a lot less tempting to decide to spend that money elsewhere when you never see it in your bank account.
The downside to such plans is a loss of flexibility. Typically, an employer or organization strikes a deal with one company to be its “official” long-term care insurer. This limits your ability to shop around for the best deal and coverage for your situation.
Additionally, your employer’s insurer of choice may not make its full range of plans available to group members, further restricting your choice.
Because of the complexities involving long-term care benefit provisions, taxation issues, and your overall financial and estate plans, long-term care insurance should never be an impulse buy.
Even insurance professionals spend a lot of time figuring out which policy is best for them and their families. The above guide may help you compile a list of issues to think about and questions to ask.