Why are we purchasing Long Term Care?
Some significant trends are impacting the long-term care insurance industry.
Heightened consumer awareness, younger buyers, reformulated products and the intensification of multi-life sales –have led to a steady growth of long-term care insurance policies. The industry is benefiting from heightened positive coverage within consumer print and broadcast media about the importance of long term care planning. More importantly, many of the reports convey important information about the best ages to start planning (with a slant toward pre-retirement) and what constitutes appropriate and affordable coverage. News stories are actually telling consumers when and how to procure insurance protection.
Once primarily a senior product, buyers of long term care insurance continue to get younger. As recently as 2000, the average policy was written on a 67-year-old. Last year, according to Association studies, some 83 percent of all new individual applicants were under the age of 65, while the average age was 58. As a result of the significant demographic shift, leading insurers have retooled their product offerings to address the two primary concerns of younger buyers: affordability and the concern about paying many years for something that might not be needed.
The result has been the introduction of a variety of “life stage” long term care insurance policies that enable policyholders to lock-in their health insurability and purchase a more limited level of protection with the future ability to purchase additional coverage periodically in the future. Provisions for these policies vary, and it’s fair to recognize that the added coverage is purchased at attained-age rates.
Long Term Care insurance has never made more sense. The uncertainty of the financial and real estate markets is the exact reason an already shrewd purchase is now almost mandatory. Reality is about 50% of us will end up in a long-term care situation. We all know the statistics, so let’s concentrate on the logic of buying now. Most experts agree that, in time, our real estate values and our investments will recover. History tells us that is the case. The problem is our health can change in an instant, ready or not. Unexpected sicknesses and injuries happen every single day…Regardless of the economy. An uninsured LTC claim has always been a costly mistake, but never as costly as it would be today.
Suddenly, a loved one has a stroke and needs constant care at home or in a facility at an average cost of $70,000 per year. Where does that money come from? You guessed it, from your assets. Now, the uninsured family must liquidate their investments (and more than likely, lock in their loss) and use those reduced funds to pay for care. If the claim wipes out the investments, the house must be sold for a fraction of it’s real value, and those reduced funds used to pay the LTC expenses. The uninsured claim is no longer merely costly, it is catastrophic.
A properly designed policy from an experienced LTC planner will allow your investments to stay in the market and keep your home off the market. Healthy or on claim, you will have truly ensured your hard earned investments, and your real estate will be disposed at your discretion, not at a fire sale. Remember, the government has made it clear this is your bill. We will grow old (hopefully) and our health may falter, that is unavoidable. But a catastrophic situation, as mentioned above, is self-inflicted and totally preventable.
Although nearly 70% of today’s 65 year olds will eventually need elder-care services, only 10% have purchased long term care insurance to cover this major financial risk. Several hundred thousand dollars may not be enough savings to cover the cost of elder care expenses. Very few retirees today either want to or have the resources to purchase such insurance since its cost greatly increases as we age. Some misconceptions about the industry:
- Many people think Medicare will pay for long term care, but this is not true. Medicare is health insurance, and pays for a maximum of 100 days in a nursing home. You pay the rest.
- Many people have misconceptions about Medicaid, and what is required to receive it. Most people can shelter at least one-half to three-fourths of their assets & still receive Medicaid.
- There is a veteran’s benefit that pays for elder-care, but only 5% of eligible people are receiving this entitlement, due to misinformation. Benefits can be as much as $30,000 per year.
- There are new financial instruments and investments available which provide tax-free elder-care benefits in addition to tax-deferred interest and estate benefits. Every dollar invested in a cash account can provide 2 – 3 times as much in tax-free long term care or estate benefits.
- EXAMPLE: Joe and Mary are 65 years old. They move $100,000 from a low-interest, taxable CD into a tax-free cash account paying 4.6%. Under the terms of their new investment, if they don’t withdraw cash, they will have $200,000 of tax-free long term care benefits, to be used by either spouse. This can pay for Home Care, Assisted Living, or Nursing Care. If they don’t withdraw cash OR withdraw long term care benefits, their children receive at least $200,000 tax-free (probably much more) on the death of the second spouse.
Tax Benefits You Can Reap Now
Despite the impending train wreck, there are some tax benefits that have been approved thus far. If you are considering the purchase of LTCI you should know about them. Currently, most of the tax deduction benefits go to employers and the self-employed. If you do not fall into that category, Congress requires you to itemize your LTCI policy premiums along with all other health expenses during the year. Anything over 7.5% of your adjusted gross income can be used as a deduction. If you have a health savings account (also known as an HSA medical plan), however, you may be able to deduct more even if you are an employee or retired person. If you are a sole proprietor, a partner, or own an S corporation or LLC even if it is just a small business you can eliminate that 7.5% threshold and instead deduct premiums up to a certain maximum that increases with age.
If you own a C corporation, you are fortunate enough to be able to declare the entire premium as tax deductible. The amount of money you will save depends to a large degree on your tax bracket. Many self-employed folks in the 30% tax bracket who use the tax schedule mentioned above may be able to save 20% or more of their LTCI premiums in tax benefits. For those who can deduct the entire premium, even greater savings can be realized.
Many people think of long term care insurance as protection that is mainly for older folks. But that is simply not the case. In fact, almost 40% of those receiving long term care are younger than 65 years of age! This surprising statistic testifies to the unpredictability of such a need arising at almost any age. So, I suggest that the best age to purchase LTCI is at the earliest age that you can comfortably afford the premium or have enough income and/or assets to protect that it justifies the cost of the policy. Another sound reason for getting long-term care insurance earlier in life is that the premiums are much less and you will most likely easily qualify for coverage, perhaps even at a preferred rate that will save you considerable amounts of money throughout the life of the policy.
Unfortunately, as we age, most people stand a higher risk of developing health conditions that could cause them to become uninsurable at some point, or at least substantially drive up the cost of a good long-term care insurance policy. You can avoid these problems by investing in LTCI at a relatively early age if you can. And since the cost of long-term care is not covered by medical health insurance, it only makes sense to protect your assets against one of the most devastating threats to your personal finances. In most cases, the earlier you get coverage for long-term care, the better.