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Money April 2012

Dollar Sense

Your Future Comfort Could Depend on Long-Term Care Insurance

By Teresa Ambord

Also ask the agent what the effect of inflation on your policy will be. There could be a long gap of time between purchasing the policy and using it. Obviously benefits that are eaten up by inflation will be of little use.

As the new year rolls out, it’s time to think about the future and make sure your ducks are in a row. Whether or not you are rapidly approaching the day when you may need some kind of nursing home, it pays to consider insurance that can help when the time comes. True, we’re living longer. But as life expectancy rises, so do costs. And more than four out of ten people, age 65 and older, do enter some sort of nursing facility.

A 2011 Genworth Financial study shows that the average cost of a semi-private room in a nursing home is about $70,445 for one year. In some states, the cost is far more. And the average stay for those entering long term care is 2 ½ years. Unless you can easily cover that cost, you might want to give serious thought to purchasing long-term care insurance. The later you wait to initiate a long-term care policy, the more expensive the premiums will be. And, if you should develop serious health issues in the meantime, you may be unable to purchase this insurance at all.

 

Don’t Forget the Tax Benefits

If your long-term care policy is “qualified,” the premiums you pay may be deductible for federal tax purposes, subject to limits.

The maximum amount you can deduct for 2012 is:

  • $350 if you are age 40 or under.
  • $660 if you are age 41 to 50.
  • $1,310 if you are age 51 to 60.
  • $3,500 if you are age 61 to 70.
  • $4,370 if you are over age 70.

Be sure to include these amounts in your total medical expenses when you talk to your tax advisor. Once you determine the deductible amount based on your age, you must combine that with other medical expenses (such as health and dental premiums, insurance co-pays, out-of-pocket prescription costs, etc.). If the total exceeds 7.5 percent of your adjusted gross income, you can write off the excess as an itemized medical expense on your Schedule A. Otherwise, there is no tax savings for your long-term care insurance costs.

 

What Is a Qualified Policy?

A qualified plan vs. nonqualified is mostly determined by what conditions trigger benefits. For example, a plan must cover assistance for the activities of daily living (ADL). ADL are eating, toileting, transferring, bathing, dressing, and continence. If your policy includes an ADL trigger, you have met the trigger if you require help with at least two ADL. Another trigger is cognitive impairment. If you are judged to be cognitively impaired, that means you need substantial supervision to protect yourself from health and safety threats brought on by that impairment. In addition, there must be a medical certification indicating that assistance will likely be required for at least 90 days.

 

What else should you consider when purchasing long-term care insurance?

  • If tax benefits are important to you, be sure your agent knows you need a qualified policy.
  • Also ask the agent what the effect of inflation on your policy will be. There could be a long gap of time between purchasing the policy and using it. Obviously benefits that are eaten up by inflation will be of little use.
  • Be clear on what the waiting period is between initiating the policy and being able to get
  • benefits. Even if you are relatively young now, an accident could render you in need of long-term care at any age, so the waiting period should be reasonable.
  • Don’t buy a policy without checking the reputation and stability of the insurer. After all, there could be decades between buying a policy and using it so you need insurance from a companythat will be around for the long haul.
  • Ask for details about how benefits will be paid. Will your insurer pay actual costs or only what is customary and reasonable? What must you do to prove your need for benefits?
  • Finally, if you are married and wish to insure your spouse as well, ask your agent about the possibilities. Some companies offer policies that allow you to take advantage of the unused benefits of your spouse, and other interesting alternatives.

 

Teresa Ambord is a former accountant and Enrolled Agent with the IRS. Now she writes full time from her home, mostly for business, and about family when the inspiration strikes.

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