The Benefits of Long-Term Care Insurance
Most people will require some form of care or assistance later in life, and buying long-term care insurance (LTC) can help prepare for that eventuality. Long term care insurance policies are private policies that cover at least some of the costs of in-home, assisted living, or nursing home care. As mentioned in our introductory article on the subject, long-term care insurance helps pay for services that Medicare and employer-provided health insurance do not cover. While it can be expensive, having long-term care insurance can be greatly beneficial and can help take some of the worry out of an already difficult situation.
Protecting One’s Savings
Those who choose to purchase LTC insurance typically do so for two main reasons. The first is to help protect their savings, as paying for long-term care entirely out of pocket can quickly deplete a retirement nest egg. Most people who need long-term care will require it for less than two years. However, one in seven of today’s 65-year-olds will require more than five years of long-term care. If you end up falling into the latter group and do not have long-term care insurance to help cover the costs, the results can be financially devastating. Having long-term care insurance lets you rest easy knowing that no matter how long you need care or how much it may end up costing, you will have money available to help cover at least part of the bill. While long-term care insurance is itself expensive, its cost is spread out over a period of many years, which helps to soften its financial impact.
The other reason many people opt to buy long-term care insurance is that it gives them a wider range of choices when it comes to care and services compared to what they’d see with Medicare or Medicaid. Those with LTC insurance will also typically have access to higher quality care than they would through one of those two programs. If you are interested in learning more about the range of services that can be covered by a long-term care insurance plan, see our article on the subject.
Another positive aspect of long-term care insurance is that the benefits that these policies pay out are typically excluded from income, which means that they aren’t subject to income taxes. However, there are exceptions to this, including plans that pay a set dollar amount per day. Such plans can become taxable if these per-day benefits exceed a certain threshold.
Premiums paid for LTC insurance may also be eligible for tax deductions as a form of medical expense. In order to qualify for this kind of deduction, your LTC insurance premiums and other unreimbursed medical expenses must exceed 10% of your adjusted gross income.
You will also need to itemize your deductions. The maximum amount of premiums that you can deduct for a given year depends on your age and will increase over time. In 2017, the limit on how much could be deducted ranged from $410 for those 40 or younger all the way up to $5,110 for people 71 and older.
It should be noted that these deductions are only possible with LTC insurance plans that are tax-qualified (TQ). Such plans must meet certain federal standards and are required to be labeled as such when they are offered. The majority of LTC insurance plans on the market today are tax-qualified. If you are unsure whether the plan you are looking at is a TQ plan, contact your agent or the insurance company. Tax-qualified versus non-tax-qualified plans are discussed in further detail in our article “Things to Look out for When Choosing a Policy”.
Most long-term care insurance plans also offer riders that protect against inflation. These can be greatly beneficial, as most people buy LTC insurance 10-30 years before receiving their benefits, and that long stretch of time makes inflation a major concern. Inflation protection will increase your benefit by a specific percent, with 3-5% being a commonly recommended amount. You can choose to get either simple inflation protection (which increases the benefit only one time) or compound inflation protection (which increases the benefit annually). If you are under 70 when you make the purchase, compound is generally considered the best choice, as simple generally can’t keep up with inflation rates and rising costs of care over longer periods of time. Having a long-term care policy with inflation protection helps to ensure that the money you put aside for long-term care when you’re young retains its value when the time comes for you to finally use it.
The long-term care insurance industry has had its share of problems over the years, with insurers making poor predictions that led to massive increases in long term care insurance premiums later on and ended up forcing many companies to drop out of the LTC insurance market entirely. It isn’t all bad, though – these issues have forced the industry to adapt and offer new choices and more reliable rates. Today, LTC insurance premiums are more stable than they have ever been before. While this is hopefully a sign that the companies providing these policies have learned from the past and will not need to do any major price hikes in the future, increases are still possible and it is recommended that you budget for your premium to go up by as much as 50% at some point down the line.
While getting long-term care insurance can certainly have its advantages, it also comes with some disadvantages that are worth noting, including the aforementioned potential for increased premiums. To learn more, see our article on “The Drawbacks of Long-Term Care Insurance”, and if you want to learn even more about long-term care insurance, check out our other articles on costs, where it can be purchased, how it works, and more.
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Services Covered by An LTC Insurance Policy