With statistics showing that one in five Americans over age 50 may need long-term-care in the next year, insurance that covers nursing home stays and home health services has become an important component of financial planning. If you're middle-aged and have considered purchasing a plan but have been dragging your feet, now may be a good time to take action.
The good news is that a new federal law offers a tax incentive to do so. Starting on Jan. 1, 1997, a portion of the money you spend for long-term-care services and insurance premiums will count as itemized medical expenses on your tax return. The maximum amount you can apply will depend on your age and will be indexed annually for inflation (table). Since in any year you are only allowed to deduct total medical costs in excess of 7.5% of your adjusted gross income, those long-term-care bills could help push you over the threshold for some tax relief.
COMMON PLOY. The new law gives consumers another incentive to consider insurance: If they don't have a private means of support down the road, the government won't necessarily be there to pick up the tab for long-term care. That's because a common ploy people long used to qualify for Medicaid assistance--literally impoverishing themselves on paper by divesting their assets through creative estate planning--is now illegal.
Long-term-care insurance helps ensure you receive the level of care you need, in the setting you choose, without losing your life savings. Today's policies run the gamut. Some make a daily payment for nursing home or alternative care; others cover hospice programs; and the newest, most flexible kind of policy offers a pool of money for you to spend on whatever services you choose. The younger and healthier you are, the more affordable it becomes. However, for most people, it doesn't make sense financially to buy before age 50.
According to the Health Insurance Assn. of America, a typical policy purchased by a 65-year-old costs about $93 per month and pays an average daily benefit of $86 for nursing home care and $80 for home services. It currently costs about $105 a day--or $38,000 a year--to live in a nursing home, according to the American Health Care Assn.
If you already own a comprehensive long-term-care policy, one that includes coverage for both nursing home and home care, there is no need to replace it. All state-approved policies issued before the new year will automatically qualify for the tax incentives. However, in some states, such as Montana and Florida, it's not certain whether policies good for nursing-home or home-care coverage alone will be grandfathered, says Greg Gurlik, vice-president and actuary of Fortis Long Term Care in Milwaukee, Wis.
But as of Jan. 1, to receive a tax break on the premiums, you must buy a "federally qualified" policy that complies with the new standards governing eligibility for benefits. For example, to start collecting from the insurance, you must be unable to perform--for 90 days--at least two of five or six "activities of daily living." These include bathing, dressing, eating, exercising continence, getting yourself to the bathroom, and transferring (moving from a bed to a chair). Or you must show signs of severe cognitive impairment, such as Alzheimer's disease, and the condition must be certified by a licensed health-care practitioner.
If you are seriously considering buying coverage, you may want to act sooner rather than later. That's because comprehensive policies on the market from now until the end of the year may be less restrictive when it comes to getting benefits than the new federally qualified plans, says Sam Morgante, vice-president for product development and government relations for GE Capital Assurance in San Rafael, Calif. For example, the insurance contracts in California and Texas include an activity of daily living not found in the federally qualified policies, mobility. And some insurers will allow policyholders access to benefits based solely on a "medical necessity." That means that you can still perform daily functions and think clearly, but you have an illness or condition that incapacitates you and requires specialized care. The more liberal policies will continue to be sold after Jan. 1, but they will not be eligible for tax breaks.
SHOP AROUND. Since the criteria for triggering coverage on the new federally qualified policies will be standardized, the only way to tell them apart is to compare the benefits themselves, says Martin McBirney, director of strategic initiatives for LTC Inc., a Seattle-based insurance consulting firm. For example, one policy may offer a higher degree of inflation protection; another, the services of a geriatric-care manager or adult day care.
If you currently own a long-term-care insurance policy or buy one before the end of the year, you get the best of both worlds. The benefits will be easier to trigger, and the premiums and out-of-pocket expenses will qualify for a tax break. After Jan. 1, you will be facing a more difficult choice. You can pick a federally-sanctioned policy that may give you some tax relief but also makes it harder for you to get reimbursed. Or you can forget the tax angle and simply go for the plan that pays up the fastest.