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Tax Guy: How to protect your savings if you or a family member requires long-term care

August 13
12:52 2019

If you or a loved one turns out to need long-term care, you don’t want to see a big chunk of hard-earned savings go down the drain to pay for it.

A long-term care (LTC) insurance policy can help. As a bonus, qualified LTC policies deliver some tax breaks. Here’s what you need to know:

How does LTC insurance work?

Benefits paid under an LTC policy are usually stated as daily maximums, typically ranging from $ 50 to $ 500. You choose the benefit level appropriate for your needs, and you are reimbursed up to the amount chosen. An LTC policy with a monthly benefit reimburses you for a stated amount per month, regardless of how many days you receive care or the cost for those days.

You can buy an LTC policy with or without automatic annual inflation adjustments to your benefit maximums. Usually, the annual inflation adjustment rate is 3% to 5%, and that rate can be compounded annually or not. Choosing a 5% compounded inflation adjustment feature is more expensive.

While lower benefits naturally translate into lower premiums, don’t get carried away with cost savings because long-term care can be expensive.

• The national average cost for a semi-private nursing home room in 2018 was $ 245 a day, which translates to $ 89,425 over a full year. A private room cost $ 275 a day, or $ 100,375 over a full year, according to a survey by Seniorliving.org.

• The average 2018 base rate for a year in an assisted living facility was $ 44,000, according to the National Center for Assisted Living.

• The average 2018 cost for non-medical home care provided by commercial agencies was $ 20.50 per hour with state averages ranging from $ 15 to $ 27.50 per hour. Private individuals can usually be hired to provide home care services for 20% to 30% less, per a survey by Payingforseniorcare.com.

Benefit payments commence after the policy waiting period has been satisfied. Policies with waiting periods of 90 to 100 days are the most popular.

Finally, you can usually choose benefit periods ranging from two years to lifetime coverage. Most policies have benefit periods of three, four, or five years. The average length of a nursing home stay is about 2.5 years, but this statistic doesn’t account for periods of home health care.

When should I sign up for LTC insurance?

Probably sooner rather than later. When you sign up for LTC insurance, the hope is that you’ll pay fixed monthly premiums. The premiums are based on your age and health factors at the time you enroll. Enrolling at age 65 could cost twice as much or more than enrolling at age 55.

Your overall health status needs to be good when you apply for coverage or you won’t be accepted at any age. After you obtain coverage, it will remain in force — regardless of changes in health and advancing age — as long as you pay the premiums.

Beware: While the LTC insurance company can’t raise your premiums due to changes in your personal age or health, it can raise premiums for broad classes of policyholders when financial results go south. This has turned out to be an all-too-often occurrence. Be sure to check the overall reputation and premium-raising history of any insurance company you’re considering for LTC coverage.

Are LTC insurance benefits tax-free?

Usually. Benefits received under qualified LTC policies (which means most policies issued these days) are generally federal-income-tax-free (and usually state-income-tax-free too) because the benefits are considered insurance reimbursements for medical expenses.

For 2019, this tax-free treatment automatically applies to benefits of up to $ 370 per day. The tax-free cap is adjusted annually for inflation.

Even if you receive benefits above the cap, they are still tax-free as long as they don’t exceed your actual LTC costs.

If you collect LTC insurance benefits during the year, the total amount will be reported to you on Form 1099-LTC, which you should receive early in the following year. You then calculate the taxable amount of benefits (probably zero) on Form 8853 (Archer MSAs and Long-Term Care Insurance Contracts). File Form 8853 with your Form 1040.

Can I deduct LTC insurance premiums?

Potentially. Because a qualified LTC policy is considered health insurance for federal income tax purposes, the premiums are treated as medical expenses for itemized medical-expense deduction purposes. However, if your premiums exceed the age-based caps listed below, you can only count the capped amount as a medical expense. Don’t forget to count premiums paid for coverage on your spouse as well as premiums paid for any other dependent relative. For this purpose, a dependent relative is someone for whom you pay over half the cost of support during the year.

Amounts you can treat as a medical expense based on your age as of Dec. 31, 2019: 40 or under ($ 420); 41 to 50 ($ 790); 51 to 60 ($ 1,580); 61 to 70 ($ 4,220); over 70 ($ 5,270).

Take your qualified LTC insurance premium amount (limited to the age-based cap if applicable) and combine that figure with your other medical expenses (health and dental insurance premiums, insurance co-payments, out-of-pocket prescription costs, and all your other unreimbursed medical outlays).

If the resulting total exceeds 10% of your adjusted gross income (AGI), you can write off the excess as an itemized medical-expense deduction (assuming you have enough other types of deductions to itemize). AGI includes all taxable income items and is reduced by certain write-offs such as deductible IRA contributions and alimony payments required by a pre-2019 divorce agreement.

If you’re self-employed, you can generally deduct premiums for qualified LTC insurance whether you itemize or not. However, the age-based deduction cap applies to you too.

Most LTC policies sold these days are qualified policies, but make certain before signing up if you want to collect the tax breaks explained in this column.

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