Health Care

Last time we investigated whether long term care insurance (LTCI) is a smart idea for consumers. Assuming you decide to acquire LTCI, what options offer the best value for your premium dollar?

When Should I Buy LTCI? 

• Age is the single largest element in determining the LTCI premium.
• The best time to buy LTCI is when you are healthy enough to qualify and you are in a place financially that you can comfortably afford the cost. Most buyers are in their late forties, fifties or early sixties.
• The biggest mistake is waiting too long and then getting a medical diagnosis or condition that makes you uninsurable.
• The good news is that once you are insured, your premiums cannot go up simply because you age, your health changes, or you file a claim.

 How Much Coverage Do I Need and For How Long? 

• Coverage can range from $50 to $500 per day.
• Estimate the amount you may need: 
  • Start with the average cost of care in the area where you will retire, both in-home and institutional skilled nursing care. The national median daily rate for a private room in a nursing home is $250 according to Genworth, the largest LTCI insurer.
  • Then calculate how much you will be able to afford from retirement or personal savings. The cost could be more for a married couple where one will be living in skilled nursing while the other remains in the home.
  • Buy LTCI coverage for the gap. If you plan to stay in the home and supplement family-provided nursing care, you need less benefit than if you are in the memory care wing of a nursing home.
• Most LTCI policies are for three to five years, but they can extend for life. Time periods run from the start date of benefit payments.
• The total lifetime benefit is the per day benefit multiplied by the duration of the policy. A three year policy at $250 per day would pay $275,000 (before inflation adjustments).

 How Long is the Elimination Period (Deductible)? 

• LTCI policies start the clock as soon as you need help with two activities of daily living (such as bathing, dressing or feeding yourself) or are certified to have cognitive impairment.
• Around 90% of LTCI policies have 90 day elimination periods, although you can pay a great deal more for zero days.
• For budgeting purposes, if you had a 90-day elimination period and were paying $250/day, you would be responsible for the first $22,500 of nursing home expenses.

What is the Inflation Protection? 

• Nursing care costs are rising at rates higher than inflation and LTCI policies often do not pay out for many years after they are purchased, so it is very important to have some inflation protection.
• Older LTCI policies tended to boost benefits by 5% compounded each year, but 3% per year is now common, due to increased costs from the low market interest rates.
• Compound interest rate protection is more expensive than simple interest, but probably worth it if you buy the LTCI policy when you are younger.

 Is the LTCI Benefit Shared Between Spouses or Are They Individual Policies? 

• With shared coverage, benefits from both partners’ policies can be pooled and one or both partners may access the benefits until they are paid out in full.
• This option costs more in premium, but makes it much more likely that the proceeds will be paid out for nursing expenses for at least one of the two insureds.

 What Are Options to Reduce the Cost of LTCI Premiums? 

• Obviously, buying early, lower per day benefits, longer elimination periods, lower inflation protection and lower duration all lower premiums.
• LTCI premiums may be deductible on your Form 1040, to the extent that your medical expenses exceed 10% of your adjusted gross income.
• If you intend to stay in the home and have nursing care provided at home, consider taking out a reverse mortgage on the house to free equity up for expenses. Homeowners borrow against a home’s equity and continue to live in the house. The loan and accumulated interest is paid off when the home is sold, or the borrower moves or dies.
• “Combo” or “hybrid” life insurance policies or annuities are becoming more popular. Both of these tax-advantaged saving vehicles can provide a lifetime stream of income. Typically the hybrid life insurance policy permits an advance payment of death benefits for LTC needs.
• You can make a 1035 exchange of money tax-free from an annuity or cash-value life insurance policy to a LTCI policy.
• Some states require insurers to offer policyholders who drop their policy an option to elect a benefit equal to the premiums actually paid to that point, rather than forfeit the policy entirely.

Like other financial decisions, whether to acquire LTCI or what options to purchase, are multi-variable equations. Please seek advice from your financial advisor before venturing forth.

Remember, it’s not what you make that matters…it’s what you keep!

Disclaimer
The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties.  Please seek advice from an independent tax advisor before acting on any information presented.

A recurring question raised by clients regards the advisability of acquiring long-term care insurance (“LTCI”). The ballooning cost of home health care, assisted living and nursing home care is general knowledge. In central North Carolina, Genworth Financial released monthly costs for 2016 and projected for 2026, including:

As aging baby boomers approach their retirement years, projected medical expenses represent a large budgetary consideration, that can be alleviated with Medicare and Medigap insurance policies. The above-listed long-term care expenses, current and projected ten years from now, represent an even more significant drain on a retirement budget. Experts estimate that more than two-thirds of individuals age 65 or older will require long-term care for some period. The advisability of using LTCI to hedge against the significant financial risk represented by long- term care expenses has been the subject of considerable debate.

LTCI pays for some or all of the costs of nursing homes, assisted-living facilities and home health care for people unable to care for themselves. According to Limra, a research firm funded by the insurance industry, about eight million people have some form of LTCI. In the early 2000s annual sales of LTCI policies peaked at 750,000, but have decreased to around 131,000 annually recently. Only about a dozen companies remain in the LTCI market, down from about ten years ago. In launching LTCI products, which originally offered unlimited lifetime benefits, many insurers underestimated factors such as number of claims, how long claimants would receive benefits, rising health care costs and lower return and yield on insurance company investments.

As the market has tightened, premiums have been rising. Next submission we will speak more specifically on pricing of various provisions in an LTCI policy. For now, know that premiums have been rising at rates as high as 40% per year. The older you are when you commence the policy, the longer and the larger the coverage and the inflation increases, the higher the premium.

In November 2015, Boston College’s Center for Retirement Research published a study on LTCI (the “Study”), indicating that previous research on LTCI understated the risk of going into nursing home care, but overstated the average length and cost of those days.

• The Study found that Medicare had paid as much as 25% of nursing home costs in recent years.
• Nearly half of men’s nursing home stays, and 36% of women’s, are less than three months, within Medicare’s 100-day maximum for stays following hospitalization.
• The Study places the risk for men or women, age 65 or older, of needing nursing-home care at, 44% and 58%, respectively, up from previous research indicating 27% and 44%.
• The Study further concluded that nursing-home stays are shorter than previously believed, 10 and 16 months for the typical single man or woman, respectively, versus the 16 and 24 months previously accepted.

The real question is whether it is a smart idea to acquire LTCI or use the premium dollars for other investment purposes?

• People with low income and assets may need to rely on Medicaid.
• Those with over $2.5 – $3 million in retirement assets can likely afford to pay their long-term care expenses individually.
• The people in the middle are the potential LTCI clients.

 If staying at home is the goal, round-the-clock home-based professional care can be costlier than a high end nursing home. In 2012, according to the American Association for Long-Term Care Insurance, roughly half of newly opened claims were for home-based care, versus 31% for nursing homes and 19% for assisted care facilities. Reverse mortgages could assist with these costs of staying in your home. Homeowners borrow against a home’s equity and continue to live in the house. The loan and accumulated interest are paid off when the house is sold, or the borrowers move out or pass away.

We will discuss other alternatives and what to look for in a LTCI next time. Stay Tuned!

Remember, it’s not what you make that matters…it’s what you keep!

Disclaimer
The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties.  Please seek advice from an independent tax advisor before acting on any information presented.

We have previously discussed the impact of the Tax Extenders that were approved in December 2015 on preparation of our 2015 tax returns. Perhaps the single most impactful change between 2014 and 2015 tax returns involves the Affordable Care Act (“ACA”) and the requirements it places on all taxpayers. These provisions have phased in since ACA’s passage in 2010, but returns filed for 2015 will be the first for many Americans to be materially affected by the insurance coverage rules.

• As of January 1, 2014, most Americans are required to have minimum essential health insurance– known as the Individual Insurance Mandate. This should have little impact on most tax filers.
  • If you had employer-provided insurance for most of 2015, or you purchased coverage through a private exchange or directly from an insurance company the Mandate should have no impact on your taxes. You simply check a box on your return to indicate that everyone listed on the first page of the return had insurance coverage throughout the year.
  • If you purchased insurance through the government’s health insurance Marketplaces, you may be eligible for a tax credit/subsidy that can be applied directly to your insurance provider to lower premiums payable or applied on your tax return.
  • Approximately 85% of individuals who purchased insurance through the Marketplaces receive advance premium tax credits/subsidies. Subsidies generally apply for incomes between 100% and 400% of the Federal Poverty Level (which Level in 2016 varies from $11,770 for a single person to $40,890 for a family of 8). The applicable subsidy is based on income and family size.
  • If you received the advanced premium credit/subsidy in 2015, you will likely have received a Form 1095-A in January reporting this credit, that you should reflect on your tax return. You will file Form 8962 and may receive a larger credit or be required to pay back some or all of the credit, if your actual income is more or less than the amount you estimated when you purchased coverage in the Marketplace. If you are required to repay credit paid at the time you purchased insurance in the Marketplace, the amount owed will flow from Form 8962 to Form 1040, line 46.

• If you did not have insurance coverage for 2 or more months in 2015, you may be subject to a penalty (known as an individual shared responsibility payment) when you file your return. The penalty is the higher of 2% of your 2015 income or $325 per adult, and $162.50 per uninsured dependent under the age of 18, up to $975 total per family. Individuals that need to make a shared responsibility payment/penalty can calculate the payment on the worksheet included in the instructions to Form 8965.

• Taxpayers who did not maintain coverage, but meet certain criteria, may be eligible to receive an exemption from coverage. Some exemptions may be obtained only from the Marketplaces and others can be claimed on Form 8965 of your tax return. If a taxpayer does not have insurance or an exemption, a penalty will be payable.

• The ACA also brings the new shared responsibility payment to applicable large employers that do not offer minimum essential coverage, coupled with complicated new reporting requirements, such as Form 1095-A discussed above for the individual recipients.

We are all hearing heated debates of the pros and cons of the ACA (aka, “Obamacare”) in the various presidential campaign events. Without regard to the relative merits of the various arguments, the time has come to focus on its impact on our tax returns. Preparation of our 2015 returns will be the first of many impacts of ACA on our financial lives. Many unfortunate taxpayers will discover that the government was serious when it mandated insurance coverage be in place for all, when they encounter the higher penalties in 2015 and still higher in 2016. Taxpayers who have not yet obtained coverage are encouraged to do so now, or apply for an exemption.

Remember, it’s not what you make that matters…it’s what you keep!

Disclaimer
The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties.  Please seek advice from an independent tax advisor before acting on any information presented.