Who Should Not Buy Long Term Care Insurance

June 15, 2010

People with low income and net worth should not buy long term care insurance.  They have other, more immediate, priorities (food, shelter, etc.) and will likely soon qualify for Medicaid.  While the long term care services provided by Medicaid are not nearly of the high quality (fewer choices and fewer available resources) as private pay, Medicaid does provide a safety net.

What minimums do I use to financially qualify someone for long term care insurance?  As a general rule, a couple should have a combined annual income of at least$50,000 and a net worth of at least $150,000 before considering long term care insurance.  For a single person, the minimums are about$40,000 annual income and $50,000 net worth.

An exception would be a situation in which adult children can afford and are willing to pay the insurance premiums.  that can be a good way for adult children to remove the financial risk to themselves of ultimately paying for their parents long term care services.  One way or another, the children always pay the cost of their parents’ care…either as a result of a reduced inheritance because the parents did not have long term care insurance, or a reduced inheritance because of insurance premiums paid by someone.

In short, someone without much income or assets should not consider long term care insurance.

© Raymond Smith, The Long Term Care Specialist, 2010.

High Net Worth and Long Term Care Insurance

June 11, 2010

Should a person with $2.0 million net worth consider long term care insurance?  What about $10M?  $50M?  Bill and Melinda Gates?  I am often asked how much net worth a person needs to be able to self-insure against the risk of needing long term care services.  With at least $1.5M in assets, an individual ($3.0M for a couple) probably could self-insure.  There is no question that someone with $10 million of net worth could self-insure, but does it make good business sense to do so?

Successful people don’t acquire a high net worth by carrying significant risks on their own shoulders.  They have liability insurance.  They hedge business deals against bad outcomes.  They engage attorneys, CPAs, insurance agents and financial planners to provide good advice.  All of this to minimize risk.

Estate Planning: Why do high net worth people go through the time and expense of estate planning?  They don’t do it to reduce estate taxes (especially for calendar year 2010).  Taxes are merely a single piece of the puzzle.  The primary reason people do estate planning is to maximize what gets passed to who they want to receive their assets.  Yes, estate planning is done to keep financial affairs private and also to ensure that specific assets go to particular people, but mostly to maximize the amount of wealth that is transferred.

Family Relationships: Even with wealth, there is often the at least perceived obligation to provide hands-on care for parents.  This burde45ish mom and her 2 daughtersn usually falls disproportionately upon the adult daughter or daughter-in-law.  Providing hands-on care has a negative impact on careers, educational pursuits and personal relationships (more about this in a future posting).  Long term care insurance provides cash that can only be used for one thing…payment for professional long term care services*.  This changes the dynamic from daughter providing hands-on care to daughter (or other family member) being the manager of care.  “Manager of care” is far less a burden and thus results in far less intra-family stress.

Finally: If Bill and Melinda Gates were to respond to this article, I would advise them to at least consider long term care insurance.  Why?  So they could maximize the amount that will be left to their many good works.

*Cash benefit  or indemnity policies are exceptions.

© Raymond Smith, The Long Term Care Specialist, 2010. 

Must You Be Self-Employed To Deduct LTC Insurance Premiums?

November 29, 2017

People ask me this question all the time.  The answer: Almost always “yes”…but could sometimes be “no”.

Warning: Depending upon what ultimately happens with the currently proposed federal tax bill, none of the following may remain relevant.  Or it all could.  I couldn’t wait for the House of Representatives & the Senate to decide.  Life goes on anyway.

Three general rules apply to the federal tax deductibility of LTC insurance premiums.  Rule 1. If you are NOT self-employed, you cannot deduct any policy premiums (oops!).  Rule 2. If you are self-employed, you can deduct some or all of your policy premiums, the amount depending upon your age.  Rule 3. An employer can deduct all long term care insurance policy premiums paid on behalf of employees…remember that an owner of a regular (C-corp) corporation is usually also an employee of that business.

The Internal Revenue Code (Section 7702B(b)) treats tax-qualified long term care insurance as health insurance.  Personal tax-payers add non-reimbursed medical expenses to the cost of all health insurance (including LTC insurance).  A medical care deduction is allowed to the extent this sum exceeds 10% of Adjusted Gross Income (AGI).  However, the deduction for LTC insurance is then limited to the lesser of actual premiums paid or the Eligible LTC Insurance Premium.

Eligible LTC Insurance Premium (2017)
Age 40 or less:           $410
Age 41-50:                 $770
Age 51-60:              $1,530
Age 61-70:              $4,090
Age 71 or better:   $5,110

Example 1:  Take someone age 55, with an Adjusted Gross Income of $100,000.  Health insurance annual costs were $3,000, non-reimbursed medical expenses were $2,000, & the annual LTC insurance premium was $1,600.  10% of AGI was $10,000 compared with only $6,600 for combined medical expenses.  Since our example person’s medical expenses were less than 10% of AGI, nothing, including LTC insurance premiums could be deducted for medical care.

Example 2:  But what if our taxpayer had very large medical treatment expenses that were not covered by health insurance?  Let’s say an organ transplant with an out-of-pocket (not reimbursed) cost of $40,000?  Now we have combined potentially deductible expenses of $3,000 + $2,000 + $1,600 + $40,000 = $46,600.  Thus her deductible medical care amount appears to be $36,600 ($46,600 – 10% of her $100,000 AGI).

Oops again!  Because she is age 55, the most LTC insurance premium she can deduct on her 2017 tax return is $1,530.  Her deductible medical expense amount is now $3,000 + $2,000 + $1,530 + $40,000 – $10,000 AGI = $36,530.  Were you able to follow this?  If not, please call me at 303-699-4172 & I will try to better explain how this works.

Most of the time someone with a middle class (or higher) income does not have medical care expenses (including cost of health insurances) that exceeds 10% of AGI.  Thus as in Example 1, there is no deduction for LTC insurance.

When else can someone who is not self-employed (and not married to a self-employed person) deduct at least some of the LTC insurance premium?  The only other situation I can think of is when either spouse has very large non-reimbursed medical expenses thus pushing the combined medical expense + health insurance above the 10% of AGI threshold.

Here is another situation when someone who is not self-employed can still benefit from long term care insurance taxation (Rule 3): If you have the good fortune of being employed by a company that provides long term care insurance as a benefit, both you & your employer win.

  1. You: No need to worry about deducting the premium as it is paid by your employer.  This is even better than a deduction.  You are not taxed on cost of the insurance & the policy benefits are received tax-free.
  2. Your employer: Can fully deduct the premiums paid on your behalf.

Finally, let’s look at the multitude of taxpayers who can deduct some or all of their long term care insurance premiums: People who are self-employed (Rule 2).  Go back to the Eligible Long Term Care Insurance Premium (2017) table above.  Self-employed individuals & their spouses can generally deduct their LTC insurance premiums up to the amount indicated for their age…same table for self-employed, but without regard to the 10% AGI threshold.

Example 3: The age 61 sole-proprietor of Joe’s Auto Repair has an Adjusted Gross Income of $100,000.  His health insurance cost was $3,000 per year, Joe had no unreimbursed medical expenses, & his annual LTC insurance premium was $3,500.  Using the Eligible Long Term Care Insurance Premium (2017) table, Joe can fully deduct his $3,500 LTC insurance premium…without first having to subtract 10% of his AGI.

Deductibility of long term care insurance seems hopelessly complicated…but it doesn’t have to be.  Just apply the three rules: 1. If you are not self-employed, then you probably cannot deduct.  2. If you are self-employed, then you can deduct some or all of your premium.   3. If your employer pays your premium, then you have nothing to deduct.  It would not be the Internal Revenue Code if it was not loaded with exceptions.  So remember that I do not give tax advice & do consult with your professional tax advisor before claiming (or passing on) any deductions.

Thank you,

Ray Smith, The Long Term Care Specialist

 

Notes:

  1. This article applies only to tax-qualified long term care policies.  Almost all traditional LTC insurance policies issued since 1/1/1997 are tax-qualified.
  2. This article does not apply to Hybrid, or asset-based policies that combine life insurance or annuities with long term care insurance.  Tax deductibility of these insurance products is a subject for another day.
  3. Dollar amounts in the Eligible LTC Insurance Premium table issued by the IRS are indexed.  This most often results in a small increase each year.  The “Age” in this table is the taxpayer’s actual age at the end (usually on 12/31) of the applicable tax year.
  4. Whenever this article speaks of someone being married, the assumption is that both are filing a joint tax return.
  5. The federal income tax deduction for medical care includes unreimbursed expenses of medical treatment (Doctors, hospitals, etc.) plus the cost of all health insurance policies.  Long term care insurance is specifically included.

Disclaimer: This eNewsletter and all links to other sources should not be construed as tax or legal advice because they are not either. Raymond Smith, The Long Term Care Specialist, does not give legal or tax advice. Consult your tax advisor or attorney for these matters.

© Raymond Smith, The Long Term Care Specialist, 2017

 

 

 

 

 

 

 

 

 

 

 

 

2017 Annual Genworth Cost of LTC Care Survey

October 17, 2017

The Genworth annual cost of long term care services survey went missing in 2016 (it was never released), but now we have the 2017 numbers.  Lots of care cost surveys out there, but this is the best.  Check out the methodology & how many years this survey has been done.  Click Here To See the Actual Survey …shows current cost of care around the U.S.

For Metro-Denver, CO the median (that’s half are more expensive & half are less expensive) cost of a private room in a nursing home has grown to $9,125 per month.  Do you have $9,000 per month to throw at a nursing home?  I don’t either.

The good news is that very few people who have done planning for long term care will need to spend time in a nursing home.  Most don’t need the nursing home level of care.  You see, nursing homes are filled with people who have not planned & thus find themselves depending on Medicaid after their money runs out.

So then why do I spend so much time talking about nursing home costs?  Well to use the Denver-Metro example again, $9,125 per month for a private room would instead provide 14 hours per day, seven days per week, of good, solid home care.  Fourteen hours per day of home care would permit most people needing care to remain where they want to stay…in their own homes!

For those of my readers who do not want to play with the interactive survey (you are missing all the LTC geek fun), let’s look at some of the other 2017 study findings:

Metro-Denver, CO mean (or median) amounts.  Note that I often quote “average” cost, but really intend the “mean”: Home Health Aid (standard home care from an agency), $21.50 per hour.  Adult Day Care, $67 per day.  Assisted Living Facility, $4,500 per month (probably understated as most residents add a la carte items such as medication management). Nursing Home semi-private room, $8,038 per month.  Nursing Home private room, $9,125 per month.

National mean (or median) amounts:  Home Health Aid from an agency, also $21.50 per hour.  Adult day Care, $70 per day.  Assisted Living facility, $3,750 per month.  Nursing Home semi-private room, $ 7,148 per month.  Nursing Home private room, $8,121 per month.

As you can see, Denver has about the same costs as the national “mean/median” (they mean the same thing, pun unintended) for Home Care & Adult Day Care, is about 20% more expensive than national for Assisted Living, & about 12% more expensive for both nursing home private & semi-private rooms.  Want to see the costs for your “neck of the woods”?  Easy.  Just click on the link near the top of this article.

Many of the premiums for long term care insurance (insurance to cover the above costs) are at least partially deductible for purposes of federal & (sometimes) state income tax.  Look for the 2018 deductible amounts to be published in near-future editions of this eNewsletter.

As always, your comments are welcomed.

 

Disclaimer: Ray Smith, The Long Term Care Specialist is neither a CPA nor an attorney.  He therefore does not give tax or legal advice.  Please consult with your accountant or attorney for those matters.

© Raymond Smith, The Long Term Care Specialist, 2017

 

 

Good, Better, Best

September 26, 2017

At my first meeting with someone I usually bring a spreadsheet showing three possible long term care insurance policy designs (three from an infinite number of possible plans).

Why do I do this?  Mostly to educate people as to what long term care insurance actually does, and to put to bed the notion that long term care insurance has to be expensive.  Our in-person discussion at the initial meeting allows me to illustrate the various policy design elements & their impact on policy cost.  By means of the pre-initial-meeting telephone interview, we have already established whether or not:

  1. Long term care insurance can solve this person’s (or family’s) needs.
  2. The person likely can qualify for long term care insurance and, if so, at what rate class.
  3. Long term care insurance is affordable in this situation.

Let’s now look at the three examples tailored to the individual’s particular age, gender,  probable rate class, needs, and resources.

Good: Least expensive of the three.  Typically a $3,000 per month maximum benefit, about a $108,000 total benefit pool, and no inflation protection.

Better: Typically a $4,500 per month maximum monthly benefit, about a $216,000 total benefit pool, and 3% annually compounded inflation protection (3% compound applies to both the maximum monthly benefit and the total benefit pool).

Best: Typically a $6,000 per month maximum monthly benefit, about a $360,000 total benefit pool, and 3% annually compounded inflation protection.  Of course “Best” can be made even better if it is appropriate to do so.

So knowing that the average cost for a Denver-area nursing home private room is about $8,500 per month, why do I show the Good plan with only a $3,000 monthly benefit?  First, if you wind up in a nursing home would you rather write a check for $5,500 per month ($8,500 – $3,000 = $5,500) or $8,500 per month?  The answer is obvious.  Second, most people needing long term care services are not in a nursing home.  At an average metro-Denver cost of about $22 per hour for a home care aide from an established agency, $3,000 per month benefit equates to 4.5 hours of home care per day, seven days per week.

A number of years ago, I was quoted in the Wall Street Journal as saying “Almost any long term care insurance is better than no long term care insurance.” (also discussed in the April, 2017 eNewsletter).  This is as true today as it was when I was first quoted.¹  Think about it: Would even $1,500 per month ($50 per day) help a family taking care of a loved one at home?  That is more than two hours of professional home care each and every day…or 4+ hours every other day.  What could Momma do with those two hours if she was not effectively handcuffed to Dad?  As a side note, when I did a presentation about long term care planning to a caregiver support group, I asked the following: “What did you have to give up when you became a caregiver?”  I will never forget the answer that boomed from the rear of the room.  A harried middle-aged woman shouted “Everything!”  Would two hours per day to do chores, have lunch with a friend, watch a movie, or just relax over a cup of tea have made a difference in her life?

Returning to Good, Better, and Best:  Many of the people I meet with chose the Better plan or some variation.  Some select the Good plan, some the Best plan, and some decide to do nothing (at best, all I have done for this last group is made them aware of the harsh reality of depending upon Medicaid for care).

One more question and then I will stop:  From where do I (Ray Smith) get the numbers for my Good, Better, Best spreadsheets?  I subscribe to an online service that let’s me dial in the prospective client’s demographic information for virtually every insurance company offering long term care insurance.  Then I season the cost data with company financial strength, extra policy benefits, and reputation for quickly paying claims.  From all this, I select the insurance company offering the best value for my particular client.  Sometimes it is the same insurance company for Good, Better, and Best.  Sometimes it is more than one company.

Ray

Note ¹: The Wall Street Journal, 9/24/2012.  I will gladly send you a copy of the reprint if you merely ask for it.

 

Disclaimer: Actual policy language, rather than the contents of this eNewsletter, always takes precedence.  Long term care insurance policies vary widely from insurance company to insurance company and within the same company.  Raymond Smith, The Long Term Care Specialist, does not give legal or tax advice.  Consult your tax advisor for these matters.

© Raymond Smith, The Long Term Care Specialist, 2017