As the pages of the calendar continue to turn and I get older, I am very thankful that I purchased long-term care insurance over a decade ago.
Most people think about insuring their house or their car, but few think about or even know what long-term care insurance means. With people living longer and longer and families becoming more spread out and smaller, the possible need for long-term care continues to increase.
Long-term care insurance provides supplemental income to cover care and needs associated with extended care. This care can be either in the home or in a facility such as a nursing home. Medicare and health insurance do not necessarily cover these costs for an extended period. In order to qualify for Medicaid you must meet certain income and asset requirements otherwise you are required to spend down your assets until you meet the requirements.
LTC is different from traditional medical care. It helps one live as he or she is now and may not help to improve or correct medical problems.
People without long-term care insurance are sometimes forced to sell their home and other assets in order to pay for the necessary care as they age. No one wants to have to be supported by someone else or sell off their nest egg for the necessary care, but the reality is that without long-term care insurance this is a real possibility.
A qualified long-term care insurance contract is an insurance contract that only provides coverage of qualified long-term care services.
The contract must meet all the following requirements.
• It must be guaranteed renewable.
• It must provide that refunds, other than refunds on the death of the insured or complete surrender cancellation of the contract, and dividends under the contract may be used only to reduce future premiums or increase future benefits.
• It generally must not pay or reimburse expenses incurred for services or items that would be reimbursed under Medicare, except where Medicare is a secondary payer or the contract makes per diem or other periodic payments without regards to expenses.
If you are self-employed you can deduct a portion of the cost of your long-term care premium on the front page of your tax return as part of your health insurance deduction. The amount that you can deduct is limited to your actual cost or an amount based on your age at the end of the year according to a table provided by the IRS.
If you are employed and receive a W-2, the deduction for long-term care insurance which you personally have purchased is on Schedule A as a medical expense deduction. These policy payments are separated between the taxpayer and the spouse. The amount you can deduct on schedule A is also limited to the greater of your actual cost incurred or the amount found in an age-based table provided by the IRS. The older a person is the larger the allowable deduction amount for long-term care coverage. The longer you wait though, the higher the premium will be for long-term care coverage as well.
When you receive payments under a long-term care insurance policy these payments are netted against your out-of-pocket costs to determine your medical expense deduction on Schedule A. In other words, payments received under a long-term care insurance contract reduce the amount that you can deduct as a medical expense as these expenses were paid by a third party and are not ultimately paid by the taxpayer.
As an effective way to protect your assets and to enjoy some tax benefits, you may want to consider obtaining a long-term care insurance policy. There are quite a number of factors to consider in evaluating these types of policies. I personally do not want to have to rely on my children to take care of me if I need extended assistance due to deterioration in health and ability to take care of myself. Who knows, my children may want to pay me back for how “mean” I was as a parent!
Paul Pahoresky is the owner of PRP & Associates. He can be reached at 440-974-1040 extension 214 or at paul@prpassoc.com. Consult your tax advisor for your specific situation for additional information and guidance on these topics.
