Long-term care insurance: A financial planning tool

By Melissa Barnickel, CPA, CSA

Americans are living longer than ever. With health care costs skyrocketing, an increasing number of us face the possibility that we, or someone close to us, will require long-term care at some point in our lives.

There is a greater probability of a long-term care event resulting in a loss of more than $100,000 (one in four people of all ages and one in two people older than 65) than a house fire (1 in 1,200), auto accident (1 in 240) or health problem (1 in 15). By allocating a portion of a nest-egg to pay the long-term care insurance premium, a safety net can be created. People are healthy until they are not.

There are tax advantages on tax-qualified, long-term care insurance premiums paid for individuals and business owners. C corporations can discriminate as to plan participants and deduct the full premiums as a health insurance expense. Individual long-term care insurance premiums, subject to age-based limitations, can be itemized medical expenses and self-employed health insurance (IRS Revenue Procedure 2002-70). The self-employed are permitted to take the deduction for age-based premium limitation for the taxpayer, his spouse and dependents (IRC Section 162 (1)). In addition, there is an income tax credit for some states. In Maryland, the credit for first-time buyers of tax-qualified insurance is an amount equal to 100 percent of eligible age-based premium, not to exceed $500 (Chapter 242, Section 10-718).

Products continue to evolve that enable coverage to be tailored to the needs of a particular individual. The cost of a long-term care event is the same with or without insurance, but the economic costs vary significantly.

Costs included "with insurance" are as follows:

premium;
self-paid care (costs above policy limits and all costs during the elimination period);
loss of investment opportunity on both of the above.

Consider this example: A client is 55 and needs three years of LTC, beginning in year 28 of a 30-year estate plan. The estimated care cost, in today's dollars, is $200 a day. The plan also includes a five-year benefit length multiplier and an automatic 5 percent compound benefit annual increase. With a 30-day elimination period, the cost for a three-year care event would be $177,000. By selecting a 90-day EP, the impact jumps to $208,000 ($208,000 - $177,000 = $31,000 more asset erosion). Without insurance, the cost is approximately $930,000.

Based on the analysis above, the best value would be a 30-day elimination period.

Use of an analytical tool such as this enables the financial advisor to focus on optimum benefit design instead of premium.

The importance of reading the specimen contracts cannot be stressed enough. The time of claim is not the time to discover that the policy will not pay benefits. Products vary most significantly in the areas of home-health care benefits, survivorship and waiver of premium.

Survivorship

Survivorship is an excellent feature for couples who expect to have both policies in force for 10 or more years without a claim. When one spouse dies, the survivor has a paid-up policy.

Elimination period (deductible or waiting period)

This is the number of days for which the insured must pay for care before the policy begins paying benefits. The premium is lower when the elimination period is longer. A 20- to 30-day elimination is recommended unless there is first-day coverage for home care, which counts to reduce the nursing facility elimination period.

Benefit period

A policy should provide sufficient benefits for a long stay, usually with a minimum three- to four-year benefit length.

Recommendations are as follows:

Ages 40-69: Five years to lifetime with 5 percent compound inflation
Ages 70-74: Four or five years with 5 percent simple inflation
Ages 75 and older: Three to five years, selecting a higher daily benefit if no inflation factor is used

Waiver of premium benefit

The waiver of premium should apply to both nursing facilities and home and community care.

Indemnity benefit vs. cost-incurred benefit

An indemnity daily benefit pays the maximum regardless of the actual costs of care. A cost-incurred benefit reimburses for actual costs up to the stated maximum daily benefit.

Financially stable company

It is important to choose an insurance company that will pay benefits when you need them. A.M. Best, Fitch, Standard and Poor's, and Moody's are companies that specialize in evaluating the financial condition of life and health insurance companies.

Requirements to access benefits of a tax-qualified plan

Activities of daily living: Those covered require help with at least two activities of daily living, with the expectation that care will last for at least 90 days.
Cognitive impairment: Those covered need assistance to protect themselves from threats of health or safety.

Government and long-term care expense

Medicare coverage is limited. Medicaid removes choice. Medicare, Medicare Supplements and major medical health policies specifically exclude custodial care.

Other specific instances in which long-term care insurance is an important piece of financial planning include the following:

prior to a divorce;
contemplating or entering a second marriage;
a spouse is already receiving care;
if Alzheimer's runs on the maternal side of the family.

A properly structured long-term care insurance policy is critical to sound financial planning. Once the decision is made to use long-term care insurance as a means to help protect assets, preserve choices and maintain the family's lifestyle, it is important to obtain coverage at the earliest possible time.

The cost of waiting is high. Underwriting is based on age and health at the time of application. Health can change at any time. There is a possibility of becoming uninsurable or having a less favorable health rating. In addition, an age change can increase the premium amount.

Melissa Barnickel, CPA, CSA, is a long-term care insurance specialist in Monkton. She can be reached at melissa.barnickel@mhbassociates.com.

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