Making Provisions for Long-Term-Care Costs

Some people are worried that they will wind up in a nursing home with their life savings wiped out. But that doesn’t have to be the case. You can buy some peace of mind with long-term care insurance.

But caveat emptor: These policies can be expensive, complicated and they don’t always cover all the costs involved.

First, the good news: If you purchase long-term care insurance, you may be able to get a limited tax deduction. Plus, benefits received under a “qualified” long-term care policy are generally tax-free. However, like most tax breaks, Uncle Sam imposes several limitations:

• Premiums paid for qualified long-term care insurance are deductible only up to an annual amount, based on the age of the insured person.
• Long-term care insurance is considered a medical expense for tax purposes (but the dollar amount is limited by the age of the insured). To be deductible on your return, medical expenses must exceed 7.5 percent of your adjusted gross income. This makes it difficult to qualify for a write-off unless you have a lot of other health costs that aren’t reimbursed by insurance.

What’s Covered? Life expectancies have increased significantly and are expected to continue to increase in the future. As people age, they’re more likely to develop conditions that limit their ability to live independently. It’s a good idea to review your options for dealing with these costs before you need care. Five considerations:

1. Health insurance policies usually don’t pay for nursing home care.

2. Medicare only pays for 100 days of skilled nursing home care if an admission follows a hospital stay.

3. Medicaid pays a significant portion of all nursing home costs, but the government has enacted tougher rules to qualify for assistance. Typically, you need to deplete most of your assets before you qualify.

4. Many elderly people move in with family members and rely on them for help, but the personal toll can be huge.

5. Currently, long-term-care insurance pays a small percentage of all long-term medical costs. That may increase in the future as more people become aware of the risks and look to insurance as a way to fund the costs.

The current tax deductions aren’t usually valuable enough to justify buying long-term care insurance primarily for tax purposes. As you get older, the costs increase and you could wind up paying more in premiums than you’re trying to protect in assets. Keep in mind that most people will never have to live in a nursing home for years on end. Many stays only occur for a short time after hospitalization. And Medicare pays all or part of the cost of skilled nursing facilities for the first 100 days.

 What Policy Options Should You Look for?

If you’re interested in long-term-care insurance, you should look into the coverage before you need it — perhaps when you are in your 40s, 50s or early 60s. Choose a highly rated insurance company. Shop around and review the policies for the following features: The benefit amount should be adequate. Most policies pay a specified amount per day, so you will have to pay the difference. Benefits should increase with inflation. You may not receive benefits for many years, so it’s important to make sure that the amount increases with inflation. Covered services should include skilled care, intermediate care, custodial care, home health care, and adult day care.   There should not be a requirement that you must first be hospitalized to receive benefits. There should also be no requirement that you must first receive skilled nursing home care to receive intermediate or custodial care, or that you must first receive nursing home care to receive home care. Benefits should be payable when you can’t perform two or three activities of daily living such as bathing, dressing, eating, walking, transferring from a bed to a chair, using the bathroom, or remaining continent. Another condition that should qualify is cognitive impairment. Specific coverage should exist for Alzheimer’s disease and other organic-based mental illness. Some policies exclude these conditions. The policy should be guaranteed renewable, meaning the policy can’t be canceled due to age or deterioration in health. Select a reasonable waiting period and a benefit period you are comfortable with. The longer you wait before benefits begin, the lower your premiums.