WHAT IS LONG-TERM CARE?
Long-term care (LTC) includes a variety of services designed to meet a person’s health or personal care needs; to help them live as independently and safely as possible when they can no longer perform “activities of daily living” (ADLs) – bathing, dressing, grooming, using the toilet, eating, and moving around. Most care is provided at home by unpaid family members and friends but it can also be provided in a facility (nursing home or assisted living) or in the community (adult day care, meal delivery). The need for care can arise suddenly, such as after a heart attack or bad fall; however, most often it develops gradually as people age and become frail or as an illness or disability gets worse.
Consider the following statistics from the U.S. Department of Health & Human Services:
- Nearly 70% of today’s 65 year-olds will require long-term care services at some point
- The average person needs long-term care for three years
- Women need care longer (3.7 years) than men (2.2 years)
- 20% of today’s 65 year olds will need long-term care for longer than five years
Long-term care is increasingly expensive as evident by the national median costs*:
- $260/day ($7,908/mo) for semi-private room in nursing home; $297/day ($9,034/mo) for private room
- $148/day ($4,500/mo) for one-bedroom unit in an assisted living facility
- $26/hr for a home health aide/homemaker services; $78/day for adult day health care center
* Genworth Cost of Care Survey 2021
LONG-TERM CARE INSURANCE
LTC insurance is increasingly important for an aging population that is living longer than ever, protecting hard-earned savings and other assets while also sparing family members from the financial and emotional stress of caregiving. It also provides peace of mind by putting the individual in control of their health decisions.
While many people believe they can “self-insure” against a long-term care event, due to affluence, good health, and/or family support, the reality is these factors actually increase the likelihood of needing long-term care due to improved mortality – in other words, the longer you live, the more likely you are to need long-term care. Even with a significant retirement nest egg there is no guarantee such an event will come at a time that is convenient to market performance, making risk transfer via insurance a wise strategy for most.
There are three types of long-term care products on the market today, each geared toward a specific client profile and budget:
Traditional LTC Insurance
Traditional, or standalone, long-term care insurance is the most affordable, comprehensive, and customizable type of coverage. As a “pay-as-you-go” approach, premiums are typically paid for life; are not guaranteed; and can increase over time. Traditional policies have no cash value; if coverage isn’t used or lapses there is no recovery of premiums. Some policies offer a Return of Premium rider that pays all or a portion of premiums paid to your heirs upon death. Traditional long-term care insurance is best for those who desire the lowest cost, most efficient method of covering LTC expenses. Ideal purchase age is 55–65.
Hybrid Life/LTC Insurance
Hybrid policies combine long-term care benefits with a cash value life insurance policy or annuity. Unlike traditional policies, these “asset-based” policies are funded with a one-time single premium or installment payments over 5, 10, 20 years or to age 65/100. Most hybrids allow you to select the monthly benefit, benefit period, inflation option, and elimination period. The primary appeal is the return of premium feature, should you never need care, as well as the guaranteed premium. Hybrid policies are a good option for people with liquid assets not needed for retirement that can be re-positioned for long-term care protection. Ideal purchase age is 50–65.
Life Insurance with LTC Rider
Many cash value life insurance policies offer a long-term care rider that allows the owner to accelerate a portion of the death benefit – generally 70–80% – tax-free to pay for long-term care expenses. To qualify for the rider, the insured must be unable to perform two of the six Activities of Daily Living (ADL), temporarily or permanently. There are two types of long-term care riders: reimbursement, which pays for the actual cost of care; and indemnity, which pays out a flat monthly amount. This option is attractive to individuals who need life insurance and find the long-term care component appealing. Ideal purchase age is 40–65.
TAX ADVANTAGES OF LONG-TERM CARE INSURANCE
- Any benefits received from a tax-qualified long-term care insurance policy are intended to be tax free as long as they do not exceed the greater of: actual qualified long-term care daily expenses OR the per-diem indemnity limitation ($390 for 2022).
- Individuals may deduct long-term care premiums as a medical expense to the extent their itemized deductions exceed 7.5% of Adjusted Gross Income (AGI). The deduction amount is limited based on an age-related table adjusted annually for inflation.
- Self-employed business owners – sole proprietors, partners, S-corp shareholders, LLC members – may deduct long-term care premiums up to the same age-related table mentioned previously. This is an “above-the-line” Self-Employed Health Insurance Deduction where itemization and the AGI threshold are not required.