Thinking long term: Don’t overlook long-term care planning

Adler Pollock & Sheehan P.C.
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Adler Pollock & Sheehan P.C.

According to the 2017 Genworth Cost of Care Survey, the average annual cost of living in an assisted living facility is $45,000. The average annual cost of a private nursing home room is nearly $97,500.

If you or a loved one becomes ill and requires long-term care (LTC), the costs can quickly deplete your savings, thus derailing your estate plan. Insurance is a popular option to help cover LTC medical expenses.

Supplement to traditional health insurance

An LTC insurance policy supplements your traditional health insurance by covering services that assist you or a loved one with one or more activities of daily living (ADLs). Generally, ADLs include eating, bathing, dressing, toileting, and transferring (in and out of bed, for example).

LTC coverage is relatively expensive, but it may be possible to reduce the cost by purchasing a tax-qualified policy. Generally, benefits paid in accordance with an LTC policy are tax-free. In addition, if a policy is tax-qualified, your premiums are deductible (as medical expenses) up to a specified limit.

To qualify, a policy must:

  • Be guaranteed renewable and noncancelable regardless of health,
  • Not delay coverage of pre-existing conditions more than six months,
  • Not condition eligibility on prior hospitalization,
  • Not exclude coverage based on a diagnosis of Alzheimer’s disease, dementia, or similar conditions or illnesses, and
  • Require a physician’s certification that you’re either unable to perform at least two of six ADLs or you have a severe cognitive impairment and that this condition has lasted or is expected to last at least 90 days.

It’s important to weigh the pros and cons of tax-qualified policies. The primary advantage is the premium deduction. But keep in mind that medical expenses are deductible only if you itemize and only to the extent they exceed 10% of your adjusted gross income (AGI), so some people may not have enough medical expenses to benefit from this advantage. It’s also important to weigh any potential tax benefits against the advantages of nonqualified policies, which may have less stringent eligibility requirements.

Asset-based policies

These so-called “hybrid” policies combine LTC benefits with whole life insurance or annuity benefits. They have several advantages over standalone LTC policies. For example, their health-based underwriting requirements typically are less stringent and their premiums are usually guaranteed — that is, they won’t increase over time. Most important, LTC benefits, which are tax-free, are funded from the death benefit or annuity value. So, if you never need to use the LTC benefits, those amounts are preserved for your beneficiaries.

Bear in mind that the features, terms and conditions of these policies can vary dramatically, so it’s important to shop around.

Employer-provided group LTC plans

Employer-provided group LTC insurance plans offer significant advantages over individual policies, including discounted premiums and “guaranteed issue” coverage, which covers eligible employees (and, in some cases, their spouse and dependents) regardless of their health status. Group plans aren’t subject to nondiscrimination rules, so a business can offer employer-paid coverage to a select group of employees. Alternatively, a business might pay premiums for key executives and require other employees to pay their own premiums if they choose to participate.

Employer plans also offer tax advantages. Generally, C corporations that pay LTC premiums for employees can deduct the entire amount as a business expense, even if it exceeds the deduction limit for individuals. And premium payments are excluded from employees’ wages for income and payroll tax purposes.

Refocus your estate plan on LTC planning

Too often, people planning their estates focus on tax and asset-protection issues and overlook long-term health care needs. But the high cost of LTC can quickly devour resources you need to maintain your lifestyle during retirement and provide for your children or other heirs. Contact your estate planning advisor to learn more about the benefits of LTC insurance.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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