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Is long-term care insurance right for you?

Is Long-term Care Insurance right for you?

Is Long-term Care Insurance right for you?

Many of us are dealing with or know someone who is dealing with taking care of their elderly parent. With the life expectancy rates increasing due to medical advancements, many elders are living to their 90s and some are surpassing that and are over 100. Will you have enough money to pay for your care for the rest of your life? If not what, what will happen? Who will pay?

Because the life expectancy is increasing, we will all need more money to finance our retirement and care. As we all know, social security alone will not be enough to support us when we retire. Most of us have additional retirement in the form of IRAs and pensions. Our recommendation is to look into some form of long-term care insurance to supplement your financial situation and see if you can afford it. If you are unable to finance your care, the state has a welfare program, Medicaid.

Qualifying for Medicaid is not very easy since you must deplete all your assets to less than $2,000, meet the appropriate level of care, and meet the income requirement. For a married couple, the nursing home spouse must have less than $2,000 and the at-home spouse must have less than $125,600 (in 2018). Medicaid also has strict requirements on your level of care and will only pay if you meet those requirements. In Oregon, there is an income cap of $2,250 (for 2018). Medicaid will also lien your home upon your death, if you are single. If you are married, Medicaid will not lien your home if your spouse is not living in your residence. There are many other intricate rules that we will not go into at this time. The point is that it is not easy to qualify and there are strict rules.

The downside is that long-term care insurance is similar to car insurance where you might not use it. However, the odds of you needing long-term care is greater than you getting into a car accident. For the most part, it will alleviate the financial stress on your family and your agent when it is time for them to take over your finances. Recently, a hybrid insurance policy with features of both long-term care and life insurance have become available in the market. This product will provide for the money to be used for your long-term care and if you die, the cash value will go to your beneficiaries.

Tax advantages

The premiums you pay are deductible as an itemized deduction for medical expense but in order to take advantage of the medical deduction the total of your medical expenses must exceed 7.5% of your adjusted gross income (AGI). In addition, if you have a long-term insurance policy that is a hybrid policy that offer both life insurance and long-term care insurance, the premiums are not tax deductible since they are considered life insurance premium, not health insurance premiums. There are also limits on the deductibility of the premiums paid based on age.

2017 Limit 2018 Limit
40 or less $410 $420
More than 40 but not more than 50 $770 $780
More than 50 but not more than 60 $1,530 $1,560
More than 60 but not more than 70 $4,090 $4,160
More than 70 $5,110 $5,200

Taxability of long-term care payments received

Generally, the money you receive from the long-term insurance to pay for your care are non-taxable. However, it depends on whether you are paid by reimbursement or per diem and whether you have a qualified long-term care insurance policy. If your long-term insurance pays only actual expenses, benefits are non-taxable. If you receive a per diem, the amount you receive will be based on a fix amount per day or per month. Under per diem payment, if you are terminally ill, the benefits are non-taxable. However, if you are chronically ill, if you receive more than $330 per day, amounts over this limit will be taxable. A hybrid insurance policy is not a qualified long-term care insurance policy . See instructions to IRS Form 8853.

My father is 91 years old and his father lived to 103 years old. Both of my parents are in different care facilities because they both require different levels of care. Both of my parents applied for long-term care insurance when they were in their mid-70s. My father was denied because his CAT scan suggested he was at high risk for stoke. My mother was eligible and paid a hefty premium of $7,500 per year. However, she was able to use her long-term insurance for her assisted living facility for 3 years. She paid premiums for 9 years at $7,500 which totaled $67,500. Her policy paid $8,000 per month for 3 years, which was a total benefit of $288,000. The financial benefit was $220,500.

My husband and I purchased long-term care insurance. We both have a 4-year plan with spousal benefits. If I only use 2 years of my long-term care benefits and pass away, my husband can use my unused 2 years plus his 4 years to have a total of 6 years. Unfortunately for taxes, we are only able to deduct $1,540 each year per person of our annual premium of $2,300 and we are subject to the 7.5% threshold on AGI. Nonetheless, the chances of one of us needing long-term care is considerably high and the total benefit is $1 million dollars for both policies.
As you can see, long-term care insurance could supplement your financial situation, if purchased for the right reasons and if the premiums are affordable.

If you have any questions, please contact me at [email protected]

Wendy Miki Glaus, Oregon CPA, Certified elder law specialist with the designation Certified Elder Law Attorney by the National Elder Law Foundation and certified as an Estate Planning Law Specialist by the Estate Law Specialist Board, Inc., as well as the Supreme Court of Hawaii. The Supreme Court of Hawaii grants Hawaii certification only to lawyers in good standing who have successfully completed a specialty program accredited by the American Bar Association. Licensed in Hawaii.
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