Nobody relishes the idea of spending his or her sunset years in a nursing home. Nevertheless, it's something we all need to think about. Fact is, long-term care -- whether it's in a nursing home, assisted-living facility or even in our own home, is breathtakingly expensive, and without careful planning, you may exhaust your assets trying to pay the bills. These days, the average cost for one year's stay in a nursing home is $77,380 ($212 per day), according to the Metlife Mature Market Institute. And in some areas it can be much more than that. In Stamford, Conn., for example, the average cost is $143,810 ($394 per day). These figures are expected to almost triple over the next 20 years (assuming a 5% rate of inflation in long-term-care costs).
For some of us, the financial solution lies in long-term-care (LTC) insurance. Long-term-care policies charge a fixed monthly premium based (in part) on your age when you sign up. As long as you keep paying the bills, you're covered -- regardless of changes in your health and advancing age. The premiums are much lower if you buy the policy at a relatively young age (i.e., your late 50s to early 60s), since younger people are unlikely to incur long-term-care expenses anytime soon. But if you wait until an advanced age to buy a policy, you'll pay through the nose. And if you have a serious medical condition or bad medical history, you may be unable to find coverage at any price.
But not everyone should buy LTC insurance -- and that's where our LTC calculators come in. The first calculator helps you decide whether to buy long-term-care insurance or simply pay any future long-term-care costs out of your own pocket. This is based on how much you already have set aside for future care and how you think that stash will grow, as well as when you think you may need long-term care and for how long. We know: It's impossible to predict if and when you may need coverage, but by playing with the numbers, you'll get a sense of just how much money you need to set aside. If the amount seems overwhelming, an insurance policy might be the best way to fill the gap.
Our second calculator helps you evaluate a specific policy. The calculator compares the cost of the insurance coverage to the value of the insurance benefits you expect to receive in the future. The comparison is made on a future-value basis, taking into account several financial assumptions input by you. If the calculator shows that the future value of the premium costs exceeds the future value of the expected benefits, you should keep shopping for a better policy or consider investing the money you'd otherwise fork over to pay premiums. On the flip side, if the future value of the expected benefits exceeds the future value of the premiums, then buying the coverage makes sense, at least based on your assumptions. (Please note: With both calculators, if you're also considering buying coverage for your spouse, parent or parent-in-law, be sure to do a separate evaluation for each person.)
A Few Words About Taxes
Long-term-care policies come in two flavors: tax qualified and nonqualified. What's the difference? These days, most policies are qualified, which technically means they conform to the 1996 Health Insurance Portability and Accountability Act (HIPAA). For federal income-tax purposes, benefit payments received under a qualified long-term-care insurance policy are generally tax-free (same as benefit payments under a garden variety health-insurance policy). When coverage is under a nonqualified policy, the IRS could conceivably argue that your benefit payments are taxable. So far, however, the agency hasn't officially taken that position. Consequently, our calculators assume that your benefits are tax-free regardless of whether your plan is qualified or nonqualified.
Do qualified plans have any other tax benefits? In some cases, yes. Because a qualified policy is considered a form of health insurance, the premiums are considered medical expenses, which means that if you itemize your deductions, you could be entitled to a write-off (subject to the age-based limits listed below). If your total medical expenses exceed 7.5% of your adjusted gross income, you can write off the excess as an itemized deduction on Schedule A. (Premium costs for a nonqualified policy are totally nondeductible.) Unfortunately, though, few people have enough total medical expenses to meet the 7.5% rule. Therefore, our calculators don't give any weight to potential itemized deductions for long-term-care premiums.
For the 2011 tax year, the following age-based premium limits apply for deduction purposes:
|Age on 12/31/11||Maximum Amount Considered Health Ins. Premiums|
|40 or under||$340|
|41 to 50||$640|
|51 to 60||$1,270|
|61 to 70||$3,390|
Think you might qualify? Here's how it would work. Say, for example, you are 62 years old at the end of 2011. You can include $3,390 or the total amount you actually paid in premiums for qualified long-term-care insurance -- whichever is less -- in your medical expense pot. If the total pot exceeds 7.5% of your adjusted gross income, you can deduct the excess on your Schedule A.
Better Breaks for the Self-Employed
If you're self-employed, the tax breaks are decidedly better. If you're a sole proprietor, partner or LLC owner, you can deduct all of the premiums for a qualified long-term-care policy -- subject to the age-based limits listed above -- on page one of your 1040. This deduction is available whether or not you itemize. (Again, premium costs for a nonqualified policy are nondeductible.) Since this is a nice tax break for the self-employed, our LTC policy evaluator takes the value of this tax break into account.
|The LTC Savings Calculator|
Note: All figures must be entered as whole numbers
|Is This LTC Policy Worth It?|