If you own or are thinking of purchasing long-term care (LTC) insurance this year, you’re in luck. The IRS recently increased the size of the deduction you can take for LTC insurance premiums, effectively reducing your out-of-pocket cost for this coverage.
Before you get too excited, we should point out that this deduction only applies if your LTC premiums — combined with your other unreimbursed medical expenses — exceed 10% of your adjusted gross income, or 7.5% if you’re over age 65.
So here’s how it works: The deductions are bracketed by age, with the largest deduction going to those who are over age 70. The list below shows the maximum deductions based on age. The tier structure was designed to provide more benefit to those who are at or near retirement because they presumably have less income.
Maximum Long-Term Care Deductions by Age
|Over age 70||$5,640|
|60-70 years old||$4,520|
|50-60 years old||$1,690|
|40-50 years old||$850|
|under 40 years old||$450|
Do I Need Long-Term Care Insurance?
In case you’re not familiar with LTC insurance, let’s go over the benefits of owning such a policy. The coverage is designed to provide for the costs associated with LTC, if and when you qualify for them. Qualifying generally happens once you are unable to perform basic tasks, such as feeding yourself or using the bathroom. The insurance can provide for any type of care, ranging from full or part-time aides to assisted living to nursing home care.
Policies are typically priced using daily or monthly benefits. So let’s say an assisted living facility in your part of the country costs $8,000 per month. You could buy a policy that would reimburse you for those costs for the number of years you choose, typically in the range of three to five years.
LTC is interesting in that it protects you against a hazard that is fairly likely to occur. Most people experience some form of a health decline in their lifetime, and relying on family to help in these situations — nice as that may be in theory — can be somewhat unrealistic.
Similar to life insurance, LTC premiums are more affordable when you’re young and healthy. Due to the likelihood of a claim taking place, trying to buy this insurance for the first time at age 70 would be quite expensive. The sweet spot for purchasing this insurance is generally between the ages of 55 and 65, although it certainly can be purchased earlier or later.
As we’ve written about in the past, hybrid solutions exist to soothe the concern of paying all of these premiums and then never needing the insurance. For example, let’s say you pay $4,000 per year for 20 years and then die suddenly without any form of decline, you’ve just spent $80,000 on insurance that didn’t provide any benefit to your or your beneficiaries. Hybrid life policies combine some aspects of life insurance by offering a death benefit or return of premium option if the LTC is never triggered.
Many of the newer guaranteed fixed-indexed annuities offer income enhancements, often referred to as “income doublers,” if you can’t perform two out of six of the activities of daily living. These annuities can double the annual income for up to five years! If you don’t need the extra income. your annuity contract value will not be reduced.
So what’s the bottom line here? We feel that the tax deductibility of premiums in a dedicated long-term care policy is a really nice incentive for people who are on the fence about purchasing this type of policy. The reality is that nearly all of us can benefit from having an LTC policy, especially with increased lifespans and a cost of living that only seems to go up.
Even clients who are confident they can self-insure because they have a few million dollars may be good candidates for LTC. Why? Having the insurance in place can help you pass more money down to your beneficiaries rather than paying it out unnecessarily to assistants and various assisted living arrangements.
That being said, for many clients, the hybrid life and annuity contracts offer an excellent alternative that is far less taxing on the budget. Everyone’s situation is different, and professional advice can really help.
The advisors at Howard Kaye are determined to help you pass as much money along to your heirs as possible. A proper estate plan will often involve one or more life insurance policies, and also some form of LTC protection. Call 800-DIE-RICH to speak with one of our experts today and learn more about how LTC insurance can help put a big future risk behind you.