Retirement Income Protection/Long Term Care insurance provides tax free money to protect your retirement Income, lifestyle,  assets, and peace of mind by providing the funds to pay for the cost of care in your home.  The home care benefits include: Adult Day Care, Transportation, delivered meals, Nursing services, therapy services, Home Health Aide services, and Homemaker services (cleaning, cooking, bill payments).  The policy will also provide tax free money to pay for care in a Residential Care Facility such as: a Residential Community Care Facility, Continuing Care Retirement Community, Assisted Living Facility, Nursing Home, or Board & Care home.

Under current tax laws, benefits from a Tax Qualified Long Term Care insurance policy are received income tax free.


Long-Term Care & Long-Term Care Insurance Issues To Think About


The following is a thumbnail discussion of some of the issues and questions my clients have asked me pertaining to long-term care and long-term care insurance.

Neither Medicare, Medicare Supplement insurance, nor health insurance policies will pay for the vast majority of long-term care related expenses. Medi-Cal (welfare) programs do pay for nursing home care, and in order to qualify, you must first meet State poverty guidelines with countable assets under $2,000.  You can find more information regarding Medi-Cal at the following website: http://www.dhs.ca.gov/cpltc/

Due to inflation, the real cost to you or your family to provide for this need would be greater than you may be planning for.

It isn’t really cost of care today that you have to worry about; it is the amount that you will need when you are likely to receive care in the future, that you should plan for.  The Social Security Administration reports that the rate of inflation in the medical services sector from 1990 – 2003 was more than two times the underlying rate of inflation in the economy.

Many do not think about what they need to earn, before taxes, so they have enough money set aside to pay for their long-term care. You should also think about how much money you would need to invest at an after-tax rate of return on investment, in the future, to have the money necessary to pay for your care so that your lifestyle is not negatively impacted.  While no one has a crystal ball, the majority of long-term care claims begin in the 80’s.  The chart provides some rough estimates of what I’m referring to.

These estimates of future long-term care costs are for illustration purposes only. They are projections on hypothetical situations.  They are not intended to be financial or legal advice, nor are they an illustration of any specific product or contract.  When applicable, contact your legal or tax advisor when making decisions regarding your particular situation.


The following is an example of the Future Costs of a Long Term Care Claim

If you are currently age 55 and you had a claim starting at the national average age of 81 that lasted the national average of 3 to 5 years.

Current

Age

Projected

age at claim

Annual

Inflation

Annual Cost age 81*
Typical

Claim

Total Cost of Claim*
55
81
5%
$256,008
3 to 5 years
$768,025  to $1,280,040

* You would need to have approximately $6,400,000 in assets invested at a 4% rate of return to provide for this annual cost.


How Does Long-Term Care Insurance Really Work ?

Most aspects of long-term care insurance have been standardized as a result of the Health Insurance Portability & Accountability Act of 1996 (HIPAA) and subsequent state regulations.  At the end of the day, the most important relationship to consider is the future value of the overall policy benefit (pool of money) and the premium.  This is the policy’s primary value proposition; how much money will you have to pay for your care when you are likely to need it.

However, there are some basics to consider.  The following is a discussion of those areas that I consider the most important.


How Do I Qualify For Benefits?

Federal and state laws have standardized the qualifying event for making a claim on all long-term care insurance policies now being sold.  You will qualify to receive benefits if; (1) You require stand-by or hands-on assistance in performing at least 2 of 6 of the activities of daily living, which include eating, dressing, bathing, toileting, transferring and continence.  You must be certified by a licensed health care practitioner that you will be unable to perform these activities of daily living for a period expected to be at least 90-days; or (2) you require continual supervision to protect yourself from threats to health or safety due to a serve cognitive impairment.  In either case a licensed health care practitioner must certify these qualifications at least every 12 months.


Once You Qualify For Benefits

With rare exception, most long-term care insurance policies utilize a process that includes an assessment and plan of care.  An assessment determines and documents your condition and level of disability.  A plan of care outlines the long-term care services that you require due to your disability. Both the assessment and plan of care must be performed by a licensed health care practitionerindependentof the insurance company.  Generally speaking your assessment and plan of care is created by a multi-disciplinary team that will include your doctor and other geriatric specialists.  The assessment and plan of care is paid for by the insurance company.


Method of Payment

When you qualify for benefits the policy will pay for services in one of three ways:


Other Important Components of Long-Term Care Insurance

Elimination Period

This is similar to a deductible on your health insurance plan, however, it is expressed as a number of days you are responsible for paying for your own care before the policy benefits begin.  Typically, you will see elimination period choices of 0, 30, 60, 90 or 180 days.  Generally speaking you need to incur the cost of long-term care services (as stipulated by your plan of care) for the number of days chosen prior to the policy paying benefits.  However, some companies offer variations on this theme.

Pool of Money

The central economic value of a long-term care insurance policy is the integrated pool of money.  This is the amount of money you have in your policy to pay for your long-term care expenses.  There are two primary components that go into calculating the pool of money:

Here is an example of how all of this comes together. Let’s say you purchase a policy with a $200 daily benefit with a five year benefit period.  The pool of money that created is $365,000 ($200 x 1,825 days = $365,000).  This is your initial pool of money.  If you purchase a reimbursement plan you are allowed to spend up to $200 per day for your care.  If you only use $100 per day, your policy will last for 10 years.  If you only receive three days of care per week and you spend the entire $200 per day, the policy will last for more than 11 years. Therefore, instead of viewing your policy as a finite resource think of it as a “bank account” that is available to utilize for your qualified long-term care expenses.


Inflation Protection Options

As discussed earlier, inflation is one of your biggest considerations when planning for your long-term care expense needs.  Again, it is not so much the cost today that you need to be focused on, it is the amount of money you will need when you are likely to go on claim when you reach your 80s.  With this in mind, my recommendation is to always to purchase a long-term care insurance policy with an automatic 5% compounded inflation protection rider.  Other options include automatic 5% simple inflation rider and guaranteed future purchase options.  These latter two options are not likely to be adequate for your needs.


How Does The Inflation Protection Option Affect The Pool Of Money ?

This is one of the most important questions you could ask.  By purchasing your long-term care insurance policy with the automatic 5% compounded inflation option, your policy’s pool of money will begin increasing at a 5% compounded rate beginning in the second year of the policy. This way, whenever you go on claim, your pool of money will have grown beyond its original amount and will provide you with inflation-adjusted coverage that closely approximates the actual rate of inflation.

With this in mind, if you are in your mid-50’s the $365,000 pool of money that we discussed earlier would grow to approximately a $1.5 million dollar pool of money when you are likely to go on claim in your 80’s.  This important long-term care insurance feature is essential for assuring the lifestyle you want in retirement.


Tax-Free Benefits & Tax Deductible Premiums

The enactment of the Health Insurance Portability & Accountability Act of 1996 (HIPAA) ushered in the modern era of long-term care insurance.  Aside from the important policy standardization already discussed, Congress made it clear that individuals need to plan for their own long-term care needs.  The passage of the Deficit Reduction Act of 2005 also sends a message to the vast majority of Americans that they cannot rely on the government to pay for their long-term care expenses through the Medi-Cal (welfare) system.

The primary tax result of HIPAA was that the policy benefit paid by qualified long-term care insurance policies will be received tax-free.  Therefore, for every long-term care insurance purchaser, there is an assurance that their policy benefits will not be encumbered by additional taxes (please see my earlier discussion of the before and after-tax issues of providing for your long-term care expenses).

In addition, Congress memorialized the fact that qualified long-term care insurance is akin to medical insurance policies.  The implication of this is that generally speaking, the same rules that apply to the deductibility of medical insurance policy premiums also apply to qualified long-term care insurance policies.

The result is that individuals can, under certain circumstances, receive a tax deduction for their long-term care insurance premiums.


Deductibility of Premiums

Premiums paid by a C Corporation are 100% Deductible

If you own a C corporation, premiums are deductible providing the proper paperwork is completed.  Premiums on long term care policies paid by a C corporation are being deducted under the HIPAA Legislation, IRS code section 7702(b) of the tax code.  This code section states that Long Term Care Insurance premiums can be considered as health insurance premiums by corporations, and, in addition, are not subject to other ERISA requirements.  Since this is not subject to ERISA, an owner can discriminate as to which employee(s) are eligible for coverage.   In order to provide for this deduction, a corporate resolution should be completed which states what class of employee(s) will be provided with Long Term Care insurance.  The benefits still flow to the beneficiary tax free, as long as the policy is a tax qualified policy.*

Business Owners Other than C Corporations

Other Business entities can still deduct premiums provided the proper paperwork is completed.  The deduction is limited to the lesser of the actual premium or the amount on an age-related table of maximum deductible premium which is adjusted annually for inflation.  The premium amounts that can be deducted for an owner of an AS@ Corp., Partnership, LLC, or Sole Proprietorship are:*

Age
2012 Maximum Deduction*
Age 40 or Younger
$350.00
Age 41 to 50
$660.00
Age 51 to 60
$1,310.00
Age 61 to 70
$3,500.00
Age 71 & Older
$4,370.00

If married, the total for each person is the total deduction allowed.  As an example, if husband and wife are insured and both are in their 60’s, and the proper paperwork is completed, the total allowable deduction would be $7,000 (2X $3,500 for 2012).

Individuals and Non business owners

An individual with no business can only deduct the amount on the above age-related table of maximum deductible premium which is adjusted annually for inflation.  The individual can only deduct the above amounts that are in excess of 10% of adjusted gross income.

* I am not trying to give tax or legal advice.Applicable laws and regulations are subject to change.  For legal and tax advice concerning your situation, please consult your attorney or tax advisor.

You do not need to be examined for this coverage.  You need only complete an application.  The insurance company will obtain the medical information from your physicians.  You will receive a phone call from an examination service hired by the insurance company that will ask some general questions.