Long Term Care Insurance:The best Coverage for your Money

Here are some suggestions for the best coverage for your money when we talk about Long Term Care Insurance:

Elimination period/deductibles

• Avoid very low deductibles or elimination periods (EP), since lower deductibles have a much higher premium cost. Also, Medicare and a Medicare supplement policy may help defray the cost up to 100 days at the start of a long-term care (LTC) episode. That coverage often counts toward satisfying the elimination period.
• Recommend calendar-day EP over service-day EP.

Benefit length

• Avoid unlimited and very long benefit lengths. The best option is a 5-year policy.
• Concerning limited versus unlimited or lifetime coverage, based on buying at age 55, unlimited costs 40% more, on average, than 5 years of coverage.
• Over 90% of chronic LTC episodes will be fully covered by a policy offering 5 years of benefits.
• A 5year policy usually lasts longer than 5 years of use. The reason is that policies use the benefit pool or pot of money concept. The unused daily benefit is carried over for future use.
• If your client is very concerned about a 20-year Alzheimer’s episode, you can recommend longer coverage terms, shared care riders, higher daily benefits, or a state’s LTC Partnership program.

Other ways to prolong the life of the policy and/or reduce costs

• Shared care is often more cost effective than unlimited. But depending on the company, the additional cost can run from 10% to 22% for that rider. That is still less expensive than unlimited coverage.
• Use a higher daily benefit amount to expand the useful life of the policy
• Consider a state’s Partnership policy, especially in New York where unlimited asset protection is available.
• Avoid almost all other riders (i.e., survivorship, non-forfeiture, return of premium, etc.). They are expensive add-ons that may do nothing to enhance coverage.
• Encourage annual premium payment modes (especially at today’s interest rates).

The facts of a case will affect the analysis; I personally prefer a lifetime benefit length if there is a history of Alzheimer’s in the family, and particularly if the client is female. But it's good to recognize that benefits that are perfect for some may be less important to others.

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Long Term Care Insurance in New York Free Quote

New York Long Term Care Insurance Partnership Program

The New York State Partnership for Long Term Care is a partnership program between private insurance companies and Medicaid to finance Long Term Care of the people of the State of New York. Medicaid program under the Partnership is known as Medicaid Extended Coverage. Under the Partnership program, New Yorkers may be able to apply for Medicaid assistance without exhausting their assets and resources. Medicaid Extended Coverage allows eligible policyholders to protect all of their assets through Total Asset Protection Plan, or some, through Dollar for Dollar Asset Protection Plan. With these alternatives, New Yorkers are assured of their continued care after using up the benefits provided by their private insurance policies, without losing their life savings and their dignity. 

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Understand Florida Partnership for Long Term Care

A Florida Partnership for Long-Term Care qualified policy provides you, as the purchaser, with the right to apply for Medicaid under modified eligibility rules that include a special feature called an ‘asset disregard’. This allows you to keep assets that would otherwise not be allowed if you need to apply, and qualify, for Medicaid in order to receive additional long-term care services. The amount of assets Medicaid will disregard is equal to the amount of the benefits you actually receive under your long term care Partnership qualified policy.

Since these policies must include inflation protection, the amount of the benefits you receive can be higher than the amount of insurance protection you originally purchased. If you have a Partnership-qualified long term care insurance policy and receive $200,000 in benefits, you can apply for Medicaid and, if eligible, retain $200,000 worth of assets over and above the State’s Medicaid asset threshold. In most states the asset threshold is $2,000 for a single person. Asset thresholds for married couples are typically more generous.

The following is an example of how a Florida Partnership for Long-Term Care Qualified policy works. Let's say John, a single man, purchases a Florida Partnership for Long-Term Care policy with a value of $200,000. Some years later he receives benefits under that policy up to the policy’s lifetime maximum coverage (adjusted for inflation) equaling $250,000. John eventually requires more long-term care services, and applies for Medicaid. If John's policy was not a Partnership-qualified policy, in order to qualify for Medicaid, he would be entitled to keep only $2,000 in assets. He would have to spend down any assets over and above this amount. However, because John bought a Partnership-qualified policy, if he needs to apply for Medicaid and is deemed eligible, he can keep $252,000 in assets and the State will not recover those funds after his death. However, any assets John has over and above the $252,000 would have to be spent in order for him to be eligible for Medicaid. 

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Tax Treatment of Long Term Care Insurance

Tax Treatment of Long Term Care Insurance

There are numerous compelling reasons  to consider the purchase of long term care insurance.  Although the distinct tax benefits of these policies is not the most significant of these, a discussion of potential tax advantages may serve as a motivational tool.  I'll outline the key tax implications of long term care insurance policies – but of course - you should consult with your own tax advisors.

TAX IMPLICATIONS OF TAX QUALIFIED POLICIES:

In general there are two types of long term care policies that are available- tax qualified policies (TQ) and non tax qualified plans.  Although the IRS has not ruled definitively on the taxability of benefits received from a non tax qualified policy, they have definitely determined the preferential treatment of tax qualified LTCI policies. 

Most, but not all, of the plans being offered by insurance companies today are TQ policies. 

There are differences that should be noted between the two types of plans:

Non-Tax Qualified policies.  The contract wording of non-tax qualified policies is generally a bit more liberal than the TQ plans.  With a non TQ policy, benefits may be paid when any one of three triggers happens:

·      Care is medically necessary, or

·      Inability to perform 2 of 6 activities of daily living, or

·      Cognitive impairment

Tax Qualified Policies.  With the Tax Qualified policies, the first trigger (medically necessary care) is eliminated.  In addition, a health care professional must certify that the care is likely to last 90 days (i.e. it is truly long term care);  in addition, the wording of the two triggers is a bit more stringent (although somewhat unclear)

·        Need for SUBSTANTIAL assistance with 2 of 6 activities of daily living, or

·        Require SUBSTANTIAL supervision due to presence of SEVERE cognitive impairment

The Health Portability and Accountability Act of 1996 enabled the IRS to treat TQ long term care insurance policies like accident and health insurance and are treated as a deductible medical expense under Code Section 213(d).  

Medical expenses are currently limited to the excess over 7.5% of a taxpayer's adjusted gross income. (IRC sec. 213 (a) ). 

Qualified LTCI premiums are premiums that do not exceed the age-based limits established by the IRS as listed below.  These limits are adjusted annually for inflation.

Eligible Long Term Care Insurance Premiums

Age attained before                      2007 Maximum Deduction

Close of Tax Year                        Per Individual

40 or less                                         $   290

41-50                                               $   550

51-60                                               $1,110

61-70                                               $2,950

71 and older                                     $3,680

Many states offer tax credit or an income tax deduction for LTCI premiums paid.

In addition, long term care benefits are received tax-free up to $260 per day in 2007 (IRC sec. 7702B(d) ) and may be tax free for more than that if the actual expenses exceed that amount.

Self-employed

A self-employed individual may deduct 100% of the eligible premium for a qualified LTCI policy as an above-the-line business expense if:

·        The business pays the premium, and

·        The individual is not covered by a LTCI policy maintained by the individual's or spouse's employer (whether or not the individual or spouse actually participates).

Corporations, Professional Corporations and  Profit Organizations

C Corporations may deduct all premiums for tax-qualified LTCI for its employees, their spouses, and eligible dependents (IRC sec. 152). 

Even premiums in excess of the age-based limits described above are deductible. 

A plan may be selective, covering one or more employees/spouses and there may be different plans for different employees or classes of employees/spouses.

Partnership and limited liability coMPANIES

Generally, a partnership or LLC may deduct all premiums it pays for LTCI for its employees, their spouses and eligible dependents (IRC sec. 152 and 162).  

The premium is not included in the employee's income.  

The partnership may pay the premiums for partners. 

As long as the LTCI premiums are paid without regard to partnership income, they will be considered "guaranteed" payments under IRC sec. 707(c).  

Therefore, they will be deductible by the partnership and includable in the partners' incomes.  

The partners are then treated by the IRS as self-employed persons and follow the guidelines for self-employed persons with LTCI.

 

S Corporations

The tax treatment for S Corporations depends upon whether or not the participating employee owns more or less than 2% interest in the S Corporation. 

If the participating employee does not own more than 2% interest on any day during the tax year, the entire TQ LTCI premium for the employee, spouse and dependents is deductible by the business as long as the premium is paid by the business.

The premium is not included in the employee's income.

If the participating employee does own more than 2% interest in the S Corporation, the employee is treated like a partner of a partnership, i.e. premiums are deductible by the corporation and included in the employee's income.  The employee is then treated by the IRS as a self-employed person and follows the guidelines for a self-employed person with LTCI.

 

Contributory arrangements

If an employer and employee split the cost of a long term care insurance policy, the employer receives the same federal income tax treatment on the portion of the LTCI premium it pays that it does on the entire premium in a situation where the employer pays the entire premium.

Health Savings Accounts and Long Term Care Insurance

The Medicare Act of 2003 which enables individuals to create HSAs , allows contributions to an HSA to be made on a pre-tax basis. 

In addition, withdrawals for qualified medical expenses are made tax-free. 

TQ LTCI premiums are a qualified medical expense (IRS Notice 2004-50, Q and A 41).  As such, an individual may withdraw money tax-free from their HSA to pay TQ LTCI premiums (with the age-based limitations listed above).

CONCLUSION:

There are significant reasons why you should consider long-term care coverage – and many distinctive tax advantages associated with the purchase and utilization of long term care insurance.  Ask your advisor the pros and cons of long-term care coverage and when it can provide an appropriate  measure of protection for hard earned assets.

 In some situations it may be wise for children to pay premiums on such coverage for their parents – particularly if the burden would be shifted to the children in the event care is needed but not affordable by their parents. 

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