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October 5, 2021

Estate Planning Options for Long-Term Care

estate planning

Many people focus on issues of tax and asset-protection when planning their estate—but there’s good reason to plan ahead for your long-term health care needs. The costs of long-term care (LTC) can add up quickly and eat through the savings you rely on to maintain your lifestyle in retirement. They may also deplete the resources you plan to pass on to your children or other heirs. These insurance options can help you cover the costs of long-term care.

Long-term care insurance policies

As a supplement to your traditional health insurance, LTC insurance policies help to cover services that assist with activities of daily living, or ADLs, such as eating, dressing, bathing, and transferring in and out of bed.

Although LTC coverage tends to be relatively costly, purchasing a tax-qualified policy may allow you to reduce the cost. Benefits are typically tax-free when paid in accordance with an LTC, and tax-qualified policies may allow you to deduct your premiums as medical expenses up to a specified limit.

Tax-qualified policies require a physician’s certification that you either have severe cognitive impairment that has lasted or is expected to last at least 90 days or are unable to perform at least two of six ADLs. Policies must also be guaranteed renewable and noncancelable regardless of health in order to qualify. In addition, tax-qualified policies must not delay coverage of pre-existing conditions by more than six months, condition eligibility on prior hospitalization, or exclude coverage based on a diagnosis of dementia, Alzheimer’s disease, or similar conditions or illnesses.

While tax-qualified policies offer the advantage of a premium deduction, it’s worthwhile to consider their pros and cons. Since medical expenses are only deductible if you itemize and can only be deducted to the extent they exceed 7.5% of your adjusted gross income, or AGI, those who do not have enough medical expenses may not see any benefit. 

You should also compare the potential tax benefits of tax-qualified policies against the benefits of nonqualified policies, as nonqualified policies may have less stringent requirements for eligibility.

Employer-provided group LTC policies

Group LTC insurance plans may also be provided by employers and offer certain advantages over individual policies. For instance, employer-provided plans allow for discounted premiums and “guaranteed issue” coverage, which guarantees that eligible employees—as well as their spouse and dependents in some cases—will be covered regardless of their health status. Businesses are allowed to offer employer-paid coverage to a select group of employees, since group plans don’t fall under nondiscrimination rules.

There are also tax advantages to employer-provided plans. C corporations paying LTC premiums for employees are usually able to deduct the entire amount as a business expense, even if these payments exceed the deduction limit for individuals.

Asset-based policies

Hybrid (or “asset-based”) policies provide LTC benefits combined with whole life insurance or annuity benefits, and offer a number of advantages over standalone LTC policies. They typically have less stringent requirements for health-based underwriting, and the premiums for these policies are usually guaranteed, meaning that they won’t increase over time. Even more importantly, hybrid policies fund the tax-free LTC benefits from the death benefit or annuity value—which means that if the LTC benefits are never needed, those amounts will be preserved for your beneficiaries.

If you have further questions about the various LTC insurance options, contact us.

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