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Shift the Risk of Your Long Term Care Expenses

Shift the Risk of Your Long Term Care Expenses

October 22, 2021

It is likely you will need long term care.  According to 2020 statistics from the U.S. Department of Health & Human Services’ Agency on Aging, turning age 65 today has an almost 70% probability of needing some type of long term care services and support in their remaining lifetime.   Women need care longer (3.7 years) than men (2.2 years) and 20% of today’s 65-year-olds will need it for longer than 5 years. 

How Will You Pay?

Long term care costs are rising and range from in-home assistance at $25 an hour ($300 a day) to over $15,000 a month for a private room in a skilled nursing facility.  Benefits from Medicare will cover only a fraction of the costs you can expect to incur (and have a very limited benefit period).  You

Americans are increasingly preparing for the likelihood of expensive care by purchasing long-term care insurance—shifting the risk to highly rated, major insurance carriers.  There are two main types of long-term care (LTC) insurance policies:

  1. Traditional LTC policies
  2. Hybrid LTC policies

Traditional LTC Insurance

With a traditional stand-alone policy, you elect your benefits at the outset:

  1. Monthly Benefit ($3,000-$12,000)
  2. Benefit Period (2 years, 3 years, 4 years, 5 years, 6 years, unlimited) (Individual or Shared)
  3. Inflation Protection (3%, 4%, 5% Compounded or Simple)
  4. Waiting Period (30 days - 90 days)

Your policy can be custom-tailored to suit your needs.  You may choose from a multitude of benefit periods, elimination periods and inflation protection options.

Your premium is guaranteed renewable, meaning that the insurance company may not cancel your coverage as long as you pay your premium.  Your premium is not guaranteed, however, and your insurance company may request a rate increase from the state insurance commissioner if needed.  Premiums are typically paid on a monthly or an annual basis.

Hybrid LTC Insurance

Growing in popularity, hybrid long term care insurance policies combine long term care benefits with a permanent life insurance policy such as whole life or universal life.

Unlike traditional policies that generally have a "pay-as-you-go" approach, hybrid asset-based insurance policies often are funded with a one-time single premium up-front such as $50,000 or $500,000, although these policies are becoming increasingly more flexible with their funding options.  With many policies today you can also make installment payments over 5 years, 10 years, 15 years or even to age 100.

Similar to the design of traditional LTC policies, most hybrid long term care policies will provide you the ability to elect your long-term care insurance benefits at the outset, i.e., monthly benefit, benefit period, and inflation protection.  The period of time between when you qualify and when payments begin, or the elimination period, will typically be fixed by the insurance company, usually between 0 days to 90 days.  

The appeal of the hybrid policies is the guarantee of return of premium should you never need to receive long term care or if you need premium back for your own use.  At a minimum, your beneficiary will receive an income tax-free life insurance benefit (less any LTC benefits paid), avoiding the inherent "use it or lose it" nature of the traditional LTC policies. 

Also, your premiums with hybrid LTC policies are fixed, and are guaranteed to never be increased, allowing you to be able to control the cost of your plan.

Tax Benefits

The payouts of tax-qualified long-term care insurance policies are generally received tax-free by the policyholder.  Your premiums may be federally tax-deductible and/or you may qualify for a state tax credit*.

All traditional LTC policies and some hybrid policies with separately identifiable LTC premium components offer tax deductibility.  As tax-qualified policies, they are considered medical expenses.  For an individual who itemizes income tax deductions, long-term care insurance premiums are tax deductible to the extent the premiums exceed 10% of an individual’s adjusted gross income.*

For owners of Sub-Chapter C Corporations, a 100% tax deduction as a business expense can be taken for the premium of a policy purchased on behalf of any of its employees, spouses or dependents*.

Self-employed individuals with pass-through business entities may deduct 100% of up to the 2021 age-based eligible premium amounts*:

Age 40 and below       $450

Age 41-50                    $850

Age 51-60                    $1690

Age 61-70                    $4520

Age 71 and over          $5640

Residents and employers in New York State receive a 20% tax credit for premiums paid for qualifying long-term care policies.  These residents are also permitted to carry over to future tax years any credit amount in excess of their tax liability for the year.*

*Seek council of your CPA or tax advisor.

LTC Policy Benefits

Long term care benefits are generally paid in one of two ways:

  1. As a reimbursement plan
  2. As an indemnity plan

A reimbursement plan pays the benefit directly to the care-giving organization or reimburses the policy owner for expenses already incurred.  Invoices or receipts must be submitted each month to the insurance company.  This means even though your policy has a maximum monthly benefit of say $10,000, if you incur less than that in documented care, only the actual expenses would be reimbursed. 

Also, a reimbursement plan will not work in an irrevocable trust because bills for the long-term care of the insured are submitted to the insurance company by the trust which owns the policy, but the insurance company reimburses for the actual care expenses of the insured.  This chain of events provides a direct monetary benefit from the trust to the insured and destroys the integrity of the trust.

An indemnity plan pays the full benefit directly to the policy owner.  For example, if an indemnity policy has a $10,000/month benefit, the full $10,000 is sent to the policy owner each month once a claim has been approved and becomes payable—regardless of actual LTC expenses incurred.  No bills or receipts need to be submitted.

Only an indemnity-style policy plan can work within an irrevocable trust because the long-term care benefit is sent directly to the trust as the owner of the policy.  The policy is essentially funding the trust with cash payments and the trustee has the ability to make preferred loans of this cash to the trust grantor (the care recipient).

Relieve Your Relatives (and Yourself)

Many long-term care policies include concierge care coordination services at no additional charge, giving you piece of mind that your family members will not be burdened.  Policy care coordinators, or care concierges, provide a number of valuable services including:

  • Helping you understand your policy benefits;
  • Guiding you through the claims process;
  • Assisting you in finding qualified services;
  • Offering caregiver training to your loved ones and/or designated beneficiaries; and,
  • Promptly closing claims upon recovery to preserve remaining policy benefits.

Shift the Risk to a Major Insurer and Count on Us to Help

It has never been easier to choose a long-term care solution to fit your specific needs.  At Cedar Point Financial LLC, we will review your circumstances and help you select a cost-effective policy that provides the benefits and flexibility to meet your future care expenses.  Qualifying requires good health so it is important you act today.  You may not qualify down the road if your health changes.