Where
Does Long-Term Care Insurance
Fit in Your Financial Plan?
As life expectancies in the
U.S. continue to rise each year, people can anticipate extended youth and longer
retirements. At the same time, the cost of any healthcare they may require
continues to increase. As a result, more and more people are looking at
long-term care insurance (LTC) as a way to protect their lifetime savings. The
decision to make long-term care insurance part of your financial plan is an
important one that you should approach much as you would any other major
spending decision.
How do you decide whether the
risk of needing long-term care is worth the price of coverage? The answer
depends on a number of factors including your age, financial condition, health
status, and family situation.
Let the Numbers Point the Way
The decision to purchase LTC
insurance must begin with a careful analysis of your financial position. For
some, LTC insurance is an affordable and attractive form of security. For
others, the cost makes it prohibitive. Generally, it is recommended that you
consider a long-term care policy if you have more than $75,000 in assets per
person in your household and an annual income of at least $30,000 per person. If
you don’t fall into these categories, it might make better financial sense to
plan to “spend down” your assets – that is, use your own resources to pay
for long-term care until your assets reach the point where Medicaid begins to
pick up the tab.
Of course, these figures
represent general parameters. People who feel strongly about leaving an
inheritance or who want to avoid relying on Medicaid, may still prefer to
purchase long-term care insurance. However, buying an LTC policy should not
cause financial hardship or require a significant change in your lifestyle. It
makes little sense to dip into your savings to pay premiums. Doing so depletes
the very asset you are trying to protect. Ideally, you should spend no more than
6 to 8 percent of your income on LTC premiums. In general, annual premiums can
range from a thousand dollars a year to over $3,000 depending on how old you are
when you purchase the policy and the benefits. Policies are typically less
expensive when you enter into them at a younger age.
In determining whether you can
afford LTC insurance, it’s important to look ahead. When the premiums start
adding up to several thousand dollars a year, many policyholders find they
simply cannot afford the premiums and abandon the policies.
Unfortunately, this
eventuality happens at a time when they are more likely to need the coverage.
Before committing to an LTC policy, it is important that you consider whether
you will still be able to afford the premiums 10 or 15 years from now.
Here’s to Your Health
The second factor in
determining whether to buy LTC insurance concerns the status of your health and
your family’s health history. Do you have relatives that farmed the fields
well into their nineties or a family history of heart disease that claimed the
lives of close relatives at an early age? Long-term care insurance might be more
strongly recommended for an individual with a family history of strokes, high
blood pressure, dementia, Parkinson’s disease, or other conditions likely to
require long-term care. If your genetic history has you leaning toward
purchasing LTC coverage, don’t wait too long -- the onset of a significant
medical condition may make it difficult to obtain insurance.
It’s a Family Affair
You may be a likely candidate
for LTC insurance if family members live too far away to provide you with
regular care. On the other hand, if you have a spouse or children who have
indicated their willingness to be caregivers, you may want to consider a policy
providing generous home health benefits. Keep in mind that there is no guarantee
that your spouse or children, devoted as they may be, could care for you for
very long, particularly if you are struck with Alzheimer’s disease or some
other serious medical condition that requires around-the-clock care.
Tax Breaks Available
If you’re considering a
long-term care policy you should familiarize yourself with two tax breaks and
determine if you qualify. First, any premiums you pay (subject to the
limitations outlined below) are considered qualified medical expenses which,
together with other medical expenses are deductible to the extent they exceed
7.5 percent of your adjusted gross income. The amount of your write-off depends
on your age. The deductible amounts for 1999 range from $210 per year if you are
age 40 or younger to $2,570 for those over age 70.
A second tax break is available to those already
receiving care. If your LTC policy reimburses you for actual expenses, your
benefits are now tax-free. If you’re paid a flat per diem rate, benefits of up
to $180 per day in 1998 or $190 in 1999 are tax-free.