Over $200 billion was spent in 2015 by Americans on long term care, a 51% increase since 2000.

You read that right, 200 billion dollars!

It’s no secret that America, along with much of the world, is aging. People are simply living longer than ever before.

And while that is a good thing, as people age, they tend to require more and more care, expensive care in the form of medical and daily assistance. 70% of individuals over 65 will require at least some type of long-term care during their lifetime.

Most Americans, when thinking of insurance from a financial planning perspective, ask that “what if” question about life insurance: if I die, what will happen to my family?

Few ever ask the question of what happens after they’re no longer the caregiver in the family. What if they become ill late in life with Alzheimer’s, a disability, or another debilitating disease that will require a lot of money and a lot of care?

Statistics show that we are far more likely to become disabled than die from an accident or illness. The question is, if I can no longer work and provide for myself, what will happen? What happens if my retirement funds are not extensive enough to cover my illness?

And what about those who become ill at a younger age? And are caregivers or providers for their families?

After all, long term care isn’t just for the elderly alone. 40% of long-term care is spent by those between the ages of 18 and 65.

Long term care isn’t cheap, however. It can cost between $30,000 to $100,000 per year, depending on the region and level of care provided.

As Medicare only pays for the costs of a stay after 100 days at a skilled nursing facility, LTC insurance can help cover the additional time needed for rehabilitative treatment or medical treatment in a skilled nursing facility.

So, the question is: what is long term care insurance?

Long Term Care Insurance

LTC insurance is a product designed to insure healthy citizens against the risk that they will become unable to perform two of the six “activities of daily living” known as ADLs. These are: dressing, bathing, eating, toileting, continence, transferring (getting in and out of a bed or chair), and walking.

Skilled nursing care, purely custodial care, home health care, adult day care, and respite care for family caregivers are all covered by LTC insurance, as long as the above qualifications are met.

There are two approaches to LTC insurance benefits. The first is, after an elimination period, the individual receives coverage for a range of two to five years, or life, depending on the plan.

The second is a “pool of money concept” in which the payments will last as long as the maximum amount of coverage has not been expended, regardless of the duration.

Different types of coverage will include custodial care, intermediate care, skilled nursing home care, home health care, assisted living, and hospice.

There are obviously quite a number of options to filter through when examining LTC insurance, but there’s also the matter of how it fits into our financial life!

How to Incorporate LTC Insurance into a Financial Plan

From a financial planning perspective, however, the question still arises: who should be looking at LTC insurance as a possible addition to their financial plan?

The first key to recognize is age-appropriateness. While the very young are less likely to need or qualify for LTC insurance, if an individual client waits until retirement to begin thinking about or applying for LTC, costs will rise dramatically. It’s important, first and foremost, to make sure the client has enough cash flow to actually afford the premiums associated with the insurance.

Those who are wealthy enough to self-insure will be able to do so, but middle-class Americans should definitely be examining their LTC insurance needs.

LTC insurance is similar to a lot of insurance policies in that they have deductibles (up to 180 days) and elimination periods, all of which go into the end premiums.

Longer elimination periods and higher deductibles will lead to lower premiums, which is why having a healthy and well-funded emergency fund is necessary. For our discussion of the emergency fund, click here to read that post.

They also tend to have “per diem” policies, which is a daily fixed amount (sometimes adjusted for inflation depending on the policy) and is excluded from gross income for tax purposes if they are qualified policies, meaning they have 1) no surrender value, 2) no loan provision, and 3) are guaranteed renewable.

LTC Insurance for Businesses

LTC insurance doesn’t have to be entirely private. A business can have a plan, incorporate it into a life insurance policy, and can keep the option available for employees.

Premiums for LTC insurance can come from the employer group plan, from an HSA (Health Savings Account), or can be paid from a tax-free exchange of permanent life insurance policy. Unfortunately, they cannot be funded from flexible spending accounts (FSAs) or cafeteria plans.

The Tax Implications of Long-Term Care Insurance

Premiums that are paid by the individual are deductible as a medical expense for itemized deduction purposes, though limited on the basis of the individual’s age.

Premiums paid by self-employed individuals are a deduction from adjusted gross income (AGI) as well. Benefits received from the plan are also excludable from gross income up to a maximum of $370 per day (for 2019).

Conclusions

As always in financial planning, it is important to recognize client needs first.

Who has a need for LTC insurance?

Can they afford the premiums?

As for those individuals still struggling with whether or not LTC insurance is right for you, consider reaching out to a financial planner such as Emergent Financial Services and set up a consultation to talk about LTC and other financial planning needs and requirements to get your financial life on track!


Nickolas Urpi