As baby boomers plan for retirement, there is a growing need for long-term care. At the same time, costs for nursing home care, assisted living and in-home care are growing faster than the inflation rate. This is worrying for many people and presents a financial predicament. But a long-term care insurance policy can help.
The rising cost of long-term care services
According to a recent article from Barron’s, financial advisors suggest that we should factor in an increase of at least 2x the inflation rate to estimate the future prices for long-term care services. A 2018 study by life insurance company Genworth estimated that the cost of assisted-living facilities was growing by 6.67%, more than three times the inflation rate over the same time period.
The same investigation by Genworth revealed the cost of a semi-private room in a nursing home had increased by 4.1%. The current cost of one year in a nursing home is estimated to range from $55,000 up to $290,000, depending on the state. The estimate for in-home services is between $19,000 and $50,000 annually.
Tax benefits of long-term care insurance
Generally speaking, the IRS considers long-term care expenses (including nursing home care) to be regular medical expenses. These can be deducted on your individual income tax return as an itemized deduction if the total amount is more than 7.5% of your adjusted gross income (AGI) for the tax year.
For example, if your AGI is $100,000 for 2019, you’ll need to spend at least $7,500 in total medical expenses (including long-term care outlays) to qualify for the deduction. Any long-term care expenses you incur for a spouse or dependent are also deductible on your return.
Premiums paid for long-term care insurance are also tax deductible. Once again, total medical expenses including these premiums first must exceed 7.5% of the year’s income. The IRS does impose limits on the amount of long-term care insurance premiums that can be included as part of medical expenses for the year.
In 2019, the maximum annual deduction for the premium is $420 if you are 40 years old or younger. The limit increases with age: People between the ages of 51 and 60 have an annual limit of $1,580; while individuals aged 71+ can deduct $5,220.
Life insurance with long-term care riders
Instead of buying a separate long-term care policy, you can purchase a long-term care (LTC) amendment to your existing life insurance policy. Called a LTC rider, this supplement comes in two forms:
1. A life insurance policy with long-term care benefits added at an extra cost.
2. A life insurance policy with an accelerated death benefit rider. In this case, the rider is free. The insurance company can offer this because long-term care benefits reduce the insurance policy’s death benefit. The disadvantage here is that the policy’s beneficiaries will receive a smaller payout if the LTC benefit is used.
In both cases, LTC riders are usually only available with permanent insurance policies such as whole life. Insurance companies also vary in their rider policies. Some place a cap on the amount of death benefit that can be used for long-term care expenses.
If you need any help evaluating your current insurance coverage and available options and planning for care in your retirement, contact a Glass Jacobson financial planner today.