If you or> a loved one needs long-term care, you don t want to see a huge chunk of hard-earned savings go down the drain to pay for it. That's where long-term-care (LTC) insurance comes in. These policies provide coverage for chronic illnesses or disabilities that are treated outside of a hospital, such as in a nursing home, assisted-living facility or in the patient's home. As an added bonus, qualified> LTC policies deliver tax breaks.
Starting with the basics here's what you need to know about long-term care policies and the tax advantages certain policies offer:
Long-Term Care Insurance Basics
Benefits paid under a long-term care insurance policy are usually stated as daily maximums ranging from $50 to $300. While lower benefits translate into lower premiums, it's important not to skimp too much. According to a recent survey by insurer John Hancock, the national average cost of a semi-private room in a nursing home in 2008 was $183 a day (which would amount to about $67,000 over a full year), and the average cost of a year in an assisted-living facility was about $35,500. Most long-term-care policies also cover at least a portion of home health-care costs as well. In 2008, home health-care aides charged a national average of $19 an hour. While these national numbers are interesting, the costs where you live are what really matter, and they can be significantly higher or lower.
You can buy policies 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 compounded inflation adjustment feature is expensive, but it could be money well spent since over time it will do a better job of keeping pace with the growing cost of care.
Benefit payments commence after the policy elimination period has been satisfied. (Policies with elimination periods of 90 to 100 days are by far the most popular choice.)
Finally, you can usually choose benefit periods ranging from two years to lifetime coverage. About two-thirds of policies sold in 2008 had benefit periods of three, four, or five years (according to the 2009 Sourcebook for Long-Term Care Insurance Information). FYI: The average length of a nursing home stay is about 2.4 years, but this statistic doesn t account for periods of home health care (according to a 2006 study cited in "The Next Step: A Kiplinger Workbook to Help You Plan Ahead for Long-Term Care").
When you sign up for long-term care 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 at age 55.) As long as you pay the premiums, your coverage will remain in force -- regardless of changes in health and advancing age.
One note of caution: While your insurance company can t raise your long-term-care premiums due to changes in your personal age or health, it can raise premiums for broad classes of policyholders when their financial results go south. Be sure to check the overall reputation and premium-raising history of any insurance company you re considering.
Tax Breaks for Qualified Policies
Qualified long-term-care policies are eligible for federal income tax breaks (and depending on where you live, maybe state income tax breaks, too). Qualified policies must be guaranteed renewable (meaning the insurer must give you a chance to renew your policy when it expires), and they cannot have any cash value. Most policies sold these days are qualified policies, but make sure before you sign up if you want to collect the tax breaks explained below.
Benefits From Qualified Policies Are Usually Federal-Income-Tax-Free
Benefits received under a qualified long-term-care policy are generally federal-income-tax-free (and usually state-income-tax-free, too) because they are considered insurance reimbursements for medical expenses. For 2009, this tax-free treatment automatically applies to benefits of up to $280 per day. (The tax-free cap is adjusted annually for inflation.) Even if you receive benefits above the cap, they are still federal-income-tax-free -- as long as they don t exceed your actual long-term-care costs.
If you collect long-term-care insurance benefits during the year, the total amount should 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, which you should attach to your Form 1040.
Within Aged-Based Limits, Premiums Count as Potentially Deductible Medical Expenses
Because a qualified long-term-care policy is considered health insurance for federal income tax purposes, the premiums are treated as medical expenses for itemized deduction purposes on your Schedule A. However, if your premiums exceed the age-based caps in the table 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 for the year).
|Age on 12/31/09||Capped Amount|
|40 or under||$320|
|41 to 50||$600|
|51 to 60||$1,190|
|61 to 70||$3,180|
Take your qualified long-term-care insurance premium amount (limited to the 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 total exceeds 7.5% of your adjusted gross income (AGI), you can write off the excess as an itemized medical expense deduction on Schedule A of Form 1040.
If you re self-employed, you can generally deduct premiums for qualified long-term-care insurance on page 1 of Form 1040 whether you itemize or not. However, the age-based cap will apply to you, too.
Unfortunately, premiums paid for nonqualified long-term-care insurance are considered nondeductible personal expenses.