Should You Have Long-Term Care Insurance?

Should You Have Long-Term Care Insurance? The prospect of running out of assets or not having enough income to live on in old age is a scary one. Even individuals who have saved diligently for retirement may find themselves in a financial crisis if they end up needing an extended period of long-term care because of cognitive and/or physical impairments. Having long-term care insurance can help preserve assets for a person\’s spouse and children should long-term care services be required at home or in an assisted living or skilled nursing facility. Long-term care insurance benefits can also help a person manage financially until he or she qualifies for Medicaid. Despite its cost, long-term care insurance may be an option worth considering.

More on Medicaid

Unlike Medicare, Medicaid will pay for custodial care in a nursing home or assisted living facility. However, only needy individuals with extremely limited income and next to no assets can qualify for Medicaid. Even when Medicaid\’s income and asset tests are met on the date of application, there is a penalty period of ineligibility for Medicaid if the applicant made gifts during the 60-month (five-year) period before the application date. The penalty period is calculated by dividing the total transfers made by the average monthly cost of a nursing home in the state (determined by Medicaid).

Example. Ted transfers assets worth $300,000 to his family during the five years preceding his Medicaid application. The average monthly cost of a nursing home in Ted\’s state is $6,000. Because of the transfers, Ted is ineligible for Medicaid for 50 months ($300,000 divided by $6,000).

Check Policy Particulars

Long-term care insurance policies are issued by private insurance companies. They guarantee fixed monthly cash payments when the insured meets certain requirements, such as not being able to perform specified activities of daily living (such as bathing) without assistance.

The typical policy has an elimination period during which no benefits are provided. Once the elimination period has expired, benefits are paid under the policy\’s terms. Since policies can vary considerably, individuals who are considering a purchase of long-term care insurance should compare features, benefits, and costs carefully. Some states offer partnership long-term care insurance policies. Under these programs, the long-term care insurance beneficiary\’s assets or resources are disregarded for Medicaid qualification purposes to the extent of the insurance benefit payments made to or on behalf of the beneficiary.

Tax Incentives

Federal law provides certain tax incentives to individuals who purchase \”qualified\” long-term care insurance (insurance that meets certain standards). Subject to a dollar cap, premiums are treated as medical expenses eligible to be deducted as an itemized deduction. The deduction is generally limited to the amount of medical expenses in excess of 10% of the taxpayer\’s adjusted gross income (AGI). Through 2016, taxpayers who are at least age 65 may use a 7.5%- of-AGI floor. For 2013, the premium dollar caps are as follows:

• Age 40 or less – $360
• Age 41-50 – $680
• Age 51-60 -$1,360
• Age 61-70 – $3,640
• Age 71+ -$4,550

Benefit payments mad in 2013 under a qualified long-term care insurance policy are generally excluded from income for tax purposes up to $320 per day ($116,800 on an annual basis). Exceptions may apply. The $320-per-day limit is subject to annual inflation adjustment.