The increasing cost of long-term care is a major concern for many Americans. According to Genworth's 2023 Cost of Care Survey, the expense of long-term care services has continued to rise across all provider types. The most significant increases were seen in home health aide and homemaker services, driven by inflation and a shortage of skilled care workers. The survey, conducted in partnership with CareScout, has tracked these trends since 2004, highlighting the need for proper planning and understanding of long-term care options.
For example, the 2023 survey found that assisted living facility rates have risen to an annual national median cost of $64,200, an increase of 1.4% from the previous year. More strikingly, the cost of a home health aide increased by 10% to an annual median cost of $75,500. Homemaker services, which provide assistance with daily tasks like cooking and cleaning, saw a 7.1% increase, reaching an annual median cost of $68,600. The cost of a semi-private room in a skilled nursing facility rose by 4.4% to $104,000 annually, while a private room in a nursing home now costs a median of $116,800 per year, up by 4.9%.
At Cedar Point Financial Services LLC, we recognize these rising costs reiterate the importance of preparing for long-term care needs, which will likely be necessary for a significant portion of the population. With an estimated 10,000 Baby Boomers turning 65 every day until 2030, and seven out of ten of them expected to need long-term care at some point, planning for these costs has never been more crucial. This reality is driving the growing interest in long-term care insurance, particularly hybrid policies that combine life insurance with long-term care benefits.
Understanding Standalone Long-Term Care Insurance
Standalone long-term care (LTC) insurance policies are designed specifically to cover the costs associated with long-term care, such as nursing homes, assisted living facilities, or in-home care. These policies provide a daily benefit amount for care when policyholders can no longer perform activities of daily living (ADLs) independently, such as bathing, dressing, eating, toileting, continence, and transferring.
While standalone LTC insurance offers comprehensive coverage for long-term care needs, these policies have faced several challenges in recent years. Premiums for these policies (that are not guaranteed) can be expensive, and many insurers have increased rates or exited the market altogether due to the unpredictability of long-term care costs and claims. Additionally, if the policyholder never requires long-term care, the premiums paid into the policy do not provide any benefit, making it a less attractive option for some individuals.
The Rise of Hybrid Life Long-Term Care Insurance
In response to the limitations of standalone LTC insurance, many insurers have developed hybrid long-term care insurance. These hybrid policies combine benefits of life insurance with valuable long term care insurance features that are fully guaranteed. If the policyholder requires long-term care, they can access funds from the policy tax-free to cover those costs. There is a surrender value if cash is ever needed and, If they never need long-term care, there is a death benefit for their beneficiaries.
The planning team at Cedar Point Financial Services LLC works with clients and their advisors to explain the several advantages hybrid long term care insurance policies offer over standalone LTC insurance policies, including:
- Guaranteed Benefits: Hybrid policies guarantee a payout, either as cash surrender value, a death benefit, or for long-term care, ensuring that the premiums paid will provide a return.
- Flexible Use of Funds: many hybrid products offer cash indemnity benefits (rather than old-school reimbursement benefits proved by standalone LTC policies) providing flexibility in how the policy benefits are used.
- Stable Premiums: Unlike standalone LTC policies, which may experience premium increases, hybrid policies have guaranteed premiums and guaranteed premium schedules, providing predictable costs over time.
- Tax Advantages: Some hybrid policies that separate LTC vs life insurance premiums can offer significant tax benefits, especially for business owners.
Tax Benefits Long-Term Care Insurance
Both standalone LTC policies and hybrid LTC policies that separate LTC vs life insurance premiums offer unique tax advantages, particularly when paid through business entities. The tax treatment varies depending on the business structure:
- C Corporations: C corporations can deduct the LTC premiums for owners, employees, their spouses, and dependents. These premiums are not taxable to the owners (or their family members) personally.
- Sole Proprietors: Sole proprietors can deduct LTC premiums subject to age-based limits. There is a benefit to age as the deductible limit increases as the insured ages.
- Partnerships, LLCs, and S Corps: same treatment as sole proprietors.
For (non-business owner) individuals purchasing their own hybrid life insurance policies, LTC premiums may be deductible as a medical expense if the total medical expenses, including these premiums, exceed 7.5% of adjusted gross income (AGI). Premiums paid from Health Savings Accounts (HSAs) are not subject to AGI limits but must adhere to age-based limits. It's important to note that HCR premiums cannot be itemized or paid from HSAs.
Using Health Savings Accounts (HSAs) for Long-Term Care Premiums
HSAs offer a tax-advantaged way to pay for medical expenses, including long-term care premiums. Funds contributed to HSAs are tax-deductible, grow tax-free, and can be withdrawn tax-free for qualified medical expenses, including long-term care premiums. This makes HSAs a valuable tool for covering LTC insurance costs, especially for individuals seeking to maximize their tax efficiency.
At Cedar Point Financial Services LLC, we coordinate with our clients’ accounting professionals in securing the tax benefits that may be available from purchasing both standalone and hybrid long-term care coverage.
The Importance of Planning for Long-Term Care
As the Genworth 2023 Cost of Care Survey illustrates, the costs associated with long-term care are significant and rising. With the increasing likelihood that individuals will need some form of long-term care in their lifetimes, planning for these expenses is essential. Hybrid long term care insurance policies offer flexible, tax-advantaged solutions that ensure policyholders and their families are financially protected.
By leveraging these hybrid policies, individuals can feel confident knowing they are prepared for whatever the future holds. Whether through a business entity or individual purchase, understanding the tax advantages and cost-effective solutions available through hybrid long term care insurance policies is essential for securing long-term care coverage and safeguarding one’s assets.
We are Here to Help
Long-term care insurance is not just a consideration for the elderly; it is an essential component of financial planning for anyone concerned about protecting their assets and ensuring quality care in the future. The rise of hybrid long term care insurance policies provides compelling alternatives to traditional standalone LTC insurance, offering guaranteed benefits and premiums, flexible use of funds, and valuable tax advantages. As the costs of long-term care continue to climb, now is the time to explore these options and incorporate long-term care planning into your financial strategy. At Cedar Point Financial Services LLC, we work with clients’ legal, accounting, and other advisory professionals in developing and implementing strategies that optimize their clients’ individual and business financial plans.