\Bill Bischoff for MarketWatch writes: If you or a loved one turns out to need long-term care, you don’t want to see a big chunk of hard-earned savings go down the drain to pay for it. Long-term care (LTC) insurance can help. As a bonus, qualified LTC policies deliver some tax breaks. Before getting to the tax angles, let’s first cover the basics on LTC insurance.
Long-Term Care Insurance Basics
Benefits paid under a long-term care insurance policy are usually stated as daily maximums ranging from $50 to $300. While lower benefits translate into lower premiums, don’t get carried away. According to a recent MetLife survey, the national average cost for a semi-private nursing home room in 2012 was $222 a day, which translates to about $81,000 over a full year. The average base rate for a year in an assisted living facility was about $44,000, and additional services cost extra. Most LTC policies also cover at least a portion of home health-care costs, which came to about $21 per hour last year. While these national numbers are interesting, the costs where you live are what really matter, and they can be significantly higher or lower.
You can buy a LTC policy with or without automatic annual inflation adjustments to your benefit maximums. Usually, the annual inflation adjustment rate is 3% to 5%, and that rate can be compounded annually or not. Choosing a 5% compounded inflation adjustment feature is more expensive, but it could be money well spent.
Benefit payments commence after the policy waiting period has been satisfied. Policies with waiting periods of 90-100 days are the most popular.
Finally, you can usually choose benefit periods ranging from two years to lifetime coverage. Most policies have benefit periods of three, four, or five years. The average length of a nursing home stay is about two and a half years, but this statistic doesn’t account for periods of home health care.
When you sign up for LTC insurance, the hope is that you’ll pay fixed monthly premiums. The premiums are based on your age and health factors at the time you enroll. Enrolling at age 65 could cost twice as much or more than enrolling at age 55. Your overall health status needs to be good when you apply for coverage or you won’t be accepted at any age. After you obtain coverage, it will remain in force—regardless of changes in health and advancing age—as long as you pay the premiums. Beware: while the insurance company can’t raise your LTC premiums due to changes in your personal age or health, it can raise premiums for broad classes of policyholders when financial results go south. This has turned out to be an all-too-often occurrence. So be sure to check the overall reputation and premium-raising history of any insurance company you’re considering for LTC coverage.
Tax Breaks for Qualified Policies
Qualified LTC policies are eligible for federal income tax breaks (and maybe state income tax breaks too depending on where you live). Qualified policies must be guaranteed renewable, and they cannot have any cash value. Most policies sold these days are qualified policies, but make certain before signing up if you want to collect the tax breaks I’m about to explain.
Tax-Free Benefits: Benefits received under a qualified LTC policy are generally federal-income-tax-free (and usually state-income-tax-free too) because they are considered insurance reimbursements for medical expenses. For 2013, this tax-free treatment automatically applies to benefits of up to $320 per day. (The tax-free cap is adjusted annually for inflation.) Even if you receive benefits above the cap, they are still tax-free as long as they don’t exceed your actual LTC costs. If you collect LTC insurance benefits during the year, the total amount will be reported to you on Form 1099-LTC, which you should receive early in the following year. You then calculate the taxable amount of benefits (probably zero) on Form 8853, which is attached to your Form 1040.
Tax Deductions for Premiums: Because a qualified LTC policy is considered health insurance for federal income tax purposes, the premiums are treated as medical expenses for itemized medical expense deduction purposes. However, if your premiums exceed the age-based caps listed below, you can only count the capped amount as a medical expense. Don’t forget to count premiums paid for coverage on your spouse as well as premiums paid for any other dependent relative (for this purpose, a dependent relative is someone for whom you pay over half the cost of support during the year).
| Age on Dec. 31, 2013 | Amount you can treat as medical expense |
| 40 or under | $360 |
| 41 to 50 | $680 |
| 51 to 60 | $1,360 |
| 61 to 70 | $3,640 |
| Over 70 | $4,550 |
Take your qualified LTC insurance premium amount (limited to the age-based cap if applicable) and combine that figure with your other medical expenses (health and dental insurance premiums, insurance co-payments, out-of-pocket prescription costs, and all your other unreimbursed medical outlays). If the resulting total exceeds 10% of your adjusted gross income (AGI), you can write off the excess as an itemized medical expense deduction. If you or your spouse will be age 65 or older as of Dec. 31, 2013, you can write off medical expenses to the extent they exceed 7.5% of AGI. (AGI is the number at the bottom of Page 1 of your Form 1040; it includes all taxable income items and is reduced by certain write-offs such as deductible IRA contributions and alimony payments to an ex-spouse.)
If you’re self employed, you can generally deduct premiums for qualified LTC insurance on page 1 of Form 1040 whether you itemize or not. However, the age-based deduction cap applies to you too.
Long term care insurance rates may seem difficult to understand as it is the most common thing that consumers avoid. It is very well said that before signing up you must look up into the details such as the tax matters, this is indeed must be followed. The table shows very informative details which I think people will understand more.
ReplyDelete