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  • Kimberly Stone

Long-Term Care Insurance 101

In recent years, employers have started to offer long-term care insurance as an optional employee benefit, and most insurance companies offer individual policies. Long-term care insurance has the same tax-favored status as regular health insurance.

The need for long-term care insurance

Long-term care insurance typically covers the cost of extended care in a nursing home, or in your own home if you become chronically ill or disabled and unable to care for yourself. The costs of such care over an extended period can be overwhelming and can rapidly wipe out your retirement savings.

Regular health insurance usually doesn't cover prolonged nursing care or home assistance, and Medicare only provides coverage for a few months of nursing care after you have been hospitalized. Medicaid will cover such costs, but only if you've exhausted virtually all of your assets.

Long-term care insurance is not for everyone. You should consider it if you are not wealthy enough to pay for long-term care as you need it. You may also want to consider what your family health history suggests about your longevity.

The tax breaks

  • Both the premiums you pay for qualified long-term care insurance and the benefits you receive enjoy favorable tax treatment.

  • Benefits received under a qualified policy that pays only actual expenses are tax-free. In contrast, part of the benefits from policies that pay a set dollar amount (per diem) may be taxable.

  • The premiums you pay for long-term care insurance may be deductible as unreimbursed medical expenses if you itemize deductions. There is a limit on the amount of annual premiums you can deduct, depending on your age. Also, it's important to remember that unreimbursed medical expenses are deductible only to the extent that the total exceeds 10% of your adjusted gross income in 2019 and beyond.

  • If you're self-employed, you may deduct the same percentage of long-term care premiums that applies to regular health insurance premiums.

What to look for in a policy

  • If you decide to buy a policy, determine whether it qualifies for favorable tax treatment, and look carefully at factors such as eligibility for benefits, the types of care it covers, and whether it contains inflation protection.

  • Some policies offer lifetime coverage while others are for a fixed term. If you choose the latter, look into restrictions on renewability.

  • In addition, most policies have a form of deductibility, called an "elimination period," which is the number of days before coverage begins. The longer the elimination period, the lower the premium. Match the elimination period to what you can afford, remembering that Medicare may cover your costs for an initial period.

  • And finally, these policies are not cheap, so take your time and do your homework before you commit.

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