Long-Term Care Insurance

By Diamond, Pamela Ann | The CPA Journal, August 2001 | Go to article overview

Long-Term Care Insurance


Diamond, Pamela Ann, The CPA Journal


PERSONAL FINANCIAL PLANNING

Long-term care insurance (LTCI) can help provide for individuals when they are old and inf rm. Purchasing

LTCI can

* protect one's retirement and estate assets,

* preserve one's independence and avoid nursing home care,

* protect one's standard of living if longterm care services become necessary, and

* avoid dependence on welfare and other government programs.

Two out of five individuals age 65 can expect to spend some time in a nursing home. The average nursing home stay is 2.5 years, and one in four people stay more than three years. In 1999, the daily average rate in a New York State nursing home ranged from $183 upstate ($67,000 annually) to $255 in New York City ($93,000 annually). LTCI can be an effective hedge against these often unanticipated costs.

LTCI should be viewed within the context of an individual's overall financial plan. Alternate LTC financing strategies include self-insuring (best if net assets exceed $2-3 million), using a reverse mortgage or an outright sale of the personal residence, or relying on family members for care and support.

As a general rule, no more than 10% of one's income should be used for LTCI premiums. Reducing the daily or annual benefit (e.g., self-insuring up to 50% of costs), increasing the elimination (waiting) period, and reducing the maximum lifetime benefit all result in lower premiums. For example, coverage for only five or six years is usually as effective as expensive, full-lifetime coverage-unless the family has a history of certain diseases, such as Alzheimer's or Parkinson's. One national study determined that only one in 11 people that turned 65 in 1990 would spend five years or more in a nursing home. In addition, LTCI coverage for nursing home care is almost the same in all LTCI contracts: full room, food, and care costs. Home care coverage-which can include skilled nursing care; speech, physical, or occupational therapy; or home health aide services-varies greatly. A cost/benefit analysis of the services and facilities covered by the policy is essential.

Tax Treatment

In 1996, the federal government amended the IRC to allow favorable tax treatment of premiums paid for qualified long-term care policies [IRC section 312 (d)(10), Revenue Proceeding 99-42]. A portion of LTC premiums is deductible as medical expenses, depending upon age. For 2000, the inflation-adjusted maximum deductible amount ranged from $220 for someone age 40 or less to $2,750 for individuals age 70 or older. New York State allows similar tax treatment for federally qualified policies. Any LTCI policy approved in New York and issued before January 1, 1997, also qualifies for favorable tax treatment.

Effective January 1, 2002, a New York State tax credit will be allowed for LTCI premiums paid during the taxable year. The credit will equal 10% of the long-term premiums paid for the purchase of an LTCI policy approved by the Superintendent of Insurance. The credit may not reduce the tax below zero, although any unused credit may be carried forward indefinitely. …

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