According to Joseph Matthews of Nolo.com, long-term care insurance is a “lousy investment.” It’s expensive. Premium increases can make it even more expensive. And despite investing perhaps tens of thousands of dollars in its purchase, it may never pay a claim on your behalf.
What’s more, if you’re looking to provide for your care in the future, there are also other options that may suit you better.
With that being said, however, if you are seriously considering the purchase of long-term care insurance as part of your long-term financial plan, there are ways to leverage that purchase make the very most of your money.
Pay for it out of your Health Savings Account (HSA).
HSAs can be used to pay for long term care insurance premiums, subject to limits based on age, which are published by the IRS and are adjusted annually (see below). Best of all, contributions and withdrawals are tax-free for qualified expenses.
To open up an HSA, you must be covered under a high deductible health plan and meet certain other requirements.
An FSA, on the other hand, is an account established to pay for qualified out-of-pocket health care and dependent care expenses. According to section 125 of the Internal Revenue Code, you cannot use it to pay for long term care premiums.
Make sure that it is a “Tax-Qualified” plan.
Like to reduce your taxes even more? It’s possible if you purchase a Tax Qualified Plan. To become a Tax-Qualified Long Term Care plan, it must adhere to consumer-friendly rules established by the National Association of Insurance Commissioners (NAIC). For your protection, it must also specifically state that “this policy is intended to conform to IRS standards for Tax-Qualified Long Term Care Insurance.”
Though a Tax Qualified Plan, the benefit payments received under such policies are tax-free and you may be able to deduct the premiums off of your taxes. According to the Federal Long Term Care Insurance Program, you can deduct your long term care insurance premiums as medical expenses on your federal tax return to the extent that your total qualified medical expenses exceed 10% of your annual adjusted gross income.
The amount of long term care insurance premiums that you can include in your total medical expenses is subject to Internal Revenue Service (IRS) limits by age. Here are the current published IRS limits by age:
|Your age in years
before the close of the taxable year
|Maximum LTC insurance premiums for the tax year 2017||Maximum LTC insurance premiums for the tax year 2018|
|Age 40 or younger||$410||$420|
|Age 41 to 50||$770||$780|
|Age 51 to 60||$1,530||$1,560|
|Age 61 to 70||$4,090||$4,160|
|Age 71 or older||$5,110||$5,200|
Be aware that rates are subject to change each year as determined by the IRS. Please consult www.irs.gov for the latest tax deduction information.
You may also benefit from state tax incentives designed to encourage the purchase of long-term care insurance. If you would like to find out whether your state offers such incentives, please contact your state insurance department directly. You can find the contact information at the National Association of Insurance Commissioners website.
This information is not intended to provide tax advice. Always consult your tax attorney or certified public accountant when dealing with tax deduction considerations.
A Tax-Qualified Plan also makes shopping for a policy easier.
In addition to saving you money on taxes, a Tax Qualified Plan makes shopping for a long-term care plan easier, as well. That’s because all Qualified plans are specifically designed to offer many of the same things in common—simplifying any comparison shopping you may do. According to LTCTREE, these commonalities include:
Services and Benefit
- The policy pays benefits only for qualified LTC services. Qualified services are defined as necessary diagnostic, preventative, therapeutic, treating, mitigating and rehabilitative services, and personal care and maintenance services that are required by a “chronically ill” individual.
- The services must be provided in line with the plan of care prescribed by a licensed health-care practitioner (the insured’s doctor).
- The policy must offer buyers the choice of inflation protection and non-forfeiture protection; however, the buyer can choose not to add on these features to their Long Term Care Insurance policy.
How You Qualify
- The policy must provide that activities of daily living and cognitive impairment are both triggers to access benefits. The Long Term Care Insurance policy cannot stipulate a medical necessity trigger.
- Under an Activities of Daily Living(ADLs) benefit trigger, the Long Term Care Insurance policy must pay benefits when the insured is unable to perform at least two of six specified ADLs when certified by a licensed health practitioner and that the need for help with the ADLs is expected to continue for at least 90 days. The HIPAA rule standardized the ADLs that are to be specified in a qualified policy: eating, bathing, dressing, toileting, transferring, and maintaining continence.
- Under a cognitive impairment trigger, coverage begins when the individual has been certified as requiring substantial supervision to protect him or her from threats to health and safety.
Other Consumer Protections
- The policy must be issued as guaranteed renewable or non-cancelable.
- The policy must include a third-party notification or another measure for lapse protection.
While these commonalities don’t mean the policies would be identical, they would be similar in many areas.
Purchase your policy through a state “Partnership” plan.
The Long-Term Care Partnership Program is a Federally-supported, state-operated initiative that allows individuals who purchase a qualified long term care insurance policy or coverage to protect a portion of their assets that they would typically need to spend down prior to qualifying for Medicaid coverage.
If you purchase a Partnership Qualified (PQ) policy and use some or all of the policy benefits, the amount of the policy benefits used will be disregarded for purposes of calculating eligibility for Medicaid. This means that you are able to keep your assets up to the amount of the policy benefits that were paid under your policy or coverage—while normally (as a single person) you would have to spend down your assets to $2,000 to be eligible for Medicaid in most states.
The American Association for Long-Term Care Insurance gives an example: Stephanie buys a PQ policy and needs care one day. Her policy pays out $150,000 of insurance claim benefits. Stephanie earns a Medicaid asset disregard that allows her to keep an additional $150,000 over the asset level she would otherwise have to meet in order to be eligible for Medicaid coverage. The Partnership Program also protects those assets after death from Medicaid estate recovery.
States are not required to participate. Insurance companies are also free to decide if they will offer Partnership policies. If so, the policies must be certified as qualifying as Partnership policies. Participating states generally have reciprocity with each other, though there are exceptions.
Most states require Partnership policies to offer comprehensive benefits (cover institutional and home services), be Tax Qualified, provide certain specific consumer protections, and include state-specific provisions for inflation protection.
You can visit the U.S. Department of Health and Human Services website, The Federal Long Term Care Insurance Program or the American Association of Long Term Care Insurance for up-to-date information on state participation.
It is important to note that the purchase of coverage does not automatically qualify the coverage holder for Medicaid. In addition, all other Medicaid eligibility criteria and requirements will apply at the time an individual applies for Medicaid.
While long-term care insurance may not be the right option for you, you at least have to consider it as part of a financial plan as you begin your journey along the gray mile. If you decide that it would be wise to include it in your plans, there are ways to reduce the costs—if you study all of your options.