Why Purchasing Long Term Care Insurance Makes Sense

Long-term health care is generally not covered by medical insurance, by Medicare supplement plans or group insurance. For seniors on Medicare, the long-term care benefits are quite limited -- especially compared to the potential cost of a debilitating disease like Alzheimer's or just the greater need for months or years of care that occurs as we age.

That is why a growing number of Americans have purchased long-term care insurance that pays for home care, for assisted living or for care in a nursing home. Some 8.25 million Americans have this protection obtained either on an individual basis or through a plan offered by their employer, a group or association they belong to.

Fast Facts on Long Term care Insurance in the United States

• 8 Million Americans are protected with long-term care insurance.
• 400,000 new Americans obtain LTC insurance coverage in 2007.
• $3.5 Billion in LTC insurance claims paid (2007).
• 180,000 individuals received LTC insurance benefits (2007).
• $1 Million claim benefit for a single individual surpassed.

Long-Term Care Partnership Programs

The Long Term Care Partnership Program is where states "partner" with private insurance companies who offer LTC insurance that met certain state requirements.

The point of the partnership is to make LTC insurance less expensive to middle-income consumers. The premise is to buy a limited period of policy benefit (say 3 years) which would be far less costly than an unlimited or lifetime benefit.

If the consumer needs long-term care for a period of time longer than that covered by the Partnership-approved policy, the State would give the incentive of increasing the level of "exempt assets" counted when applying for Medicaid; thereby making it a win win. People are insured and not forced on to the public system for assistance..

New federal legislation makes it possible for all states to implement Partnership programs.

If You Have Limited Savings And Assets

The asset protection benefits of a Partnership policy are perfect for someone with limited assets and retirement income. You buy an affordable plan of long-term care insurance protection to protect some of the risk.

If you need long-term care and actually used the full value of your plan, the value of benefits paid would be included when calculating your eligibility for Medicaid. Keep in mind, you are going to need care years from now. Partnership plans include inflation growth so the value of what's protected will be much higher.

Finally, one of the primary reasons people purchase long-term care insurance is to receive care in your own home. Medicaid benefits for long-term care vary from state-to-state. Partnership plans are great. and there's no added cost for the added protection provided

Tax Treatment

Individual Policy Purchase

Tax-qualified LTCi premiums are considered a medical expense. For an individual who itemizes tax deductions, medical expenses are deductible to the extent that they exceed 7.5% of the individual's Adjusted Gross Income (AGI). The amount of the LTCi premium treated as a medical expense is limited to the eligible LTCi premiums, as defined by Internal Revenue Code 213(d), based on the age of the insured individual. That portion of the LTCi premium that exceeds the eligible LTCi premium is not included as a medical expense.

Individual taxpayers can treat premiums paid for tax-qualified long-term care insurance for themselves, their spouse or any tax dependents (such as parents) as a personal medical expense.

The yearly maximum deductible amount for each individual depends on the insured's attained age at the close of the taxable year.

Self-Employed

A self-employed individual can deduct 100% of his/her out-of-pocket long-term care insurance premiums, up to the Eligible Premium amounts. The portion of LTCi premiums that exceeds the Eligible Premium amount is not deductible as a medical expense. The deductible amount includes eligible premiums paid for spouses and dependents.

However, a self-employed individual may not deduct LTCi premiums during any calendar month in which he/she or his/her spouse is eligible to participate in a subsidized LTCi plan (where the employer pays all or part of the premiums for LTCi).

Partners is a partnership, members of an LLC that is taxed as a partnership, and shareholders/employees of Subchapter S Corporations who own more than 2% of the Corporation, are taxed as self-employed individuals. The partnership, LLC or Subchapter S Corporation pays the premium.

The partner, member or shareholder/employee includes the LTCi premium in his/her Adjusted Gross Income, but may deduct up to 100% of the age-based Eligible Premium. 

If the sole shareholder/employee purchases LTCi in his/her own name instead of that of the S Corporation, the S Corporation is not treated as a partnership and the shareholder is not treated as a partner. As such, the shareholder is not treated as self-employed and is only eligible to include his/her eligible LTCi premiums in his/her itemized deductions.

Subchapter C Corporation

When a business purchases a tax-qualified LTCi policy on behalf of any of its employees, or their spouses and dependents, the corporation is entitled to take a 100% deduction as a business expense on the total premium paid. The deduction is not limited to the aged-based Eligible Premiums.

The purchase of a tax-qualified LTCi policy is not subject to any non-discrimination rules, thus allowing an employer to be selective in the classification of employees it elects to cover.

Employer-Pay Contributory Arrangement on Behalf of an Employee

If an employer pays all or a portion of the tax-qualified LTCi premiums on behalf of an employee, the amount paid is deductible by the employer as a business expense. The deduction is not limited by the age-based limits. 

If the employer only pays a portion of the premium, the employee is able to apply the balance that he/she pays towards his/her medical expenses, up to the Eligible Premium amount.

Gift Tax Exclusion

In addition to the annual Gift Tax Exclusion of $13,000 per donee, a donor has the ability to pay for the medical expenses of the donee. If those medical expenses are tax-qualified LTCi premiums, the exclusion is subject to the age-based limits for Eligible Premium. An individual (donor) can purchase LTCi policies for family members (donees) and still maintain the annual Gift Tax Exclusion when selecting a Ten-Pay or Accelerated Payment Option.

Return of Premium

The refund is included in the beneficiary's gross income and is taxable, to the extent it was either excluded from the owner's income or deducted by the owner. It must be included as income in the year it is received.

Health Savings Account (HSA)

Tax-qualified LTCi premiums can be reimbursed through an HSA, tax-free up to the Eligible Premium amounts listed in Table 1, even if the HSA is offered through an employer-provided cafeteria plan.

Health Reimbursement Account (HRA)

Reimbursements for insurance covering medical care expenses, which includes qualified long-term care services and qualified long-term care insurance premiums are allowable under an HRA. Although employers pay for HRAs, an HRA cannot be provided by salary reduction or IRC The LTCi premiums cannot be paid on a pre-tax basis through an HRA

Cafeteria Plan

Tax-qualified LTCi premiums cannot be purchased with pre-tax dollars under an employer-provided cafeteria plan. However, LTCi premiums may be paid through an HSA that is offered under an employer-provided cafeteria plan.

Flexible Spending Account (FSA)

Tax-qualified LTCi premiums cannot be reimbursed under an FSA.

    Long Term Care Insurance may cover the cost of supplemental care, plan for the future: