ARE YOU PREPARED FOR FUTURE LONG-TERM CARE EXPENSES?

Long-Term Care statistics are overwhelming. Americans have over a 43% chance of entering a nursing facility and a greater than 62% chance of receiving some form of Long-Term Care health services. The costs of these health services can be staggering. The average nursing facility stay now approaches $50,000 per year and even more for an Alzheimer’s center. Home health care expenses will range from $15 per hour for custodial care (85% of all care given) to $25 per hour for skilled providers (Nurse/Physical Therapist, etc.). The probability of exhausting $200,000 or more per person on Long-Term Care health expenditures is 15%. Can you afford to take this risk?

What is Long-Term Care? Long-Term Care is defined as the health services needed by those who have chronic illnesses or other health care conditions that limit their ability to care for themselves. Long-Term Care can be provided in a residential setting (in your home), a community setting such as an adult daycare center, or a facility setting such as a nursing home or assisted living facility.

The largest catastrophic financial risk we face during our retirement years is a debilitating physical or cognitive impairment. Combine the spiraling costs of health care, limited government assistance and absence of insurance coverage, a comfortable retirement plan can turn into economic disaster. Researching and preparing a comprehensive health care plan is necessary to maintain a secure retirement lifestyle.

YOUR OPTIONS:

There are four basic planning strategies available. They include: A) Self Insuring; B) Fully Insuring with an insurance policy; C) Partially Insuring with an insurance policy; and D) government programs such as Medicaid/Medicare. Before deciding on the strategy that will meet your goals, it is essential to obtain and understand all the risks, costs, and benefits related to the Long-Term Health Care delivery system. We can provide the educational material and guidance to develop a comprehensive review for you.

"Self Insuring" the Long-Term Care risk involves researching this exposure and then concluding that your risk tolerance is comfortable absorbing any and all future health care expenses with your private income and assets. Keep in mind that once you become ill, you will not be able to re-evaluate your position and implement an alternative plan. Also anticipate the necessity to liquidate assets such at stocks, bonds, and real estate, in order to pay ongoing expenses. The process of liquidation can add complications (tax consequences, untimely market values, etc.) to an already stressful period for the ailing individual and his or her family.

"Fully Insuring" is transferring all the potential future health costs to a comprehensive Long- Term Care Insurance policy in exchange for an annual premium. Insurance policies have improved dramatically over the last three years, although we still need to thoroughly compare various insurance companies. A policy can cover all levels of care - custodial, intermediate and skilled - in a number of locations such as a private home, retirement community, assisted living facility, nursing home or Alzheimer’s center. Inflation options are available to keep pace with the increasing costs of health care services. First-dollar coverage and unlimited policy benefit reimbursements are also available. The approximate premium costs per person (level premium once purchased) will range from $500 per year at age 55, to $1,000 per year at age 65, to $2,000 per year at age 75. It is becoming affordable.

"Partially Insuring" is a combination of self insuring and transferring a portion of the financial risk to an insurance policy. This strategy is most widely used due to its effectiveness of shifting the majority of the statistical risk (2-3 years of Long-Term Care services) to an insurance policy while reducing the premium outlay. A further example of this strategy would include the selection of a larger deductible and a capped maximum policy limit.

"Government benefits" are misunderstood by most Americans. Medicare covers only 2.5% of all Long-Term Care costs. Medicare is very restrictive (skilled care only), and has limited coverage periods (full coverage for 20 days and then partial coverage for 80 days). That’s it! Medicaid picks up 45% of our country’s Long-Term Care expenses. You must meet your resident state’s eligibility to qualify (only a few thousand dollars in assets). The opportunity to transfer assets to beneficiaries and trusts and immediately receive Medicaid assistance was reformed in the OBRA 1993 Act which eliminates the advantages of what is known as "Medicaid spend-down planning." Retirees in the middle income bracket and above can anticipate minimal government assistance.

A common question asked when developing a Long-Term Care strategy is the tax deductibility of insurance premiums. The Health Portability & Accountability Act of 1996 (HR3103), also known as the Kennedy/Kassenbaum Bill, was passed August 21, 1996 and brought tax advantages to Long-Term Care (LTC) premiums. An individual who purchases and pays the premium for a "qualified" policy will be able to count a portion of these premiums toward itemized "medical expenses" based on age. "Medical expenses" exceeding 7.5% of adjusted gross income may be tax deductible.

Paying for Long-Term Care insurance with corporate dollars allows additional tax leverage and perhaps full deductibility. Qualified LTC premiums are subject to the same rules as other employer paid accident and health insurance premiums. An employer can discriminate as to eligibility (not subject to ERISA) and it does not appear that employers are required to provide COBRA-type continuation coverage for LTC to employees or dependents. Employer qualified premium contribution is non-taxable compensation to the employee and benefits are received tax free up to a $175 daily benefit limit (indexed) for "indemnity" contracts which reimburse only "actual qualified LTC services." LTC policies included in Section 125 cafeteria plans for flexible spending accounts funded with pre-tax dollars do not qualify as deductible employer premiums. Tax deductibility depends on the type of entity as follows:

C-Corp – All employees (including owners, highly compensated, etc.) are eligible to have qualified employer premiums fully deducted by the employer, without any cap or limit.

S-Corp/LLC/Partnerships – The employer paid premium will be included in the owners/partners income (identical to other medical insurance premiums) and the owner/partner will be able to personally deduct at the corresponding level of phase-in (which is 45% for 1999). Employer paid premiums for non-owner/non-partner employees will be fully deductible expenses.

Self Employed – LTC insurance premiums are considered to be an accident and health benefit (similar to major medical) which is deductible at the corresponding level of phase-in (which is 45% for 1999).

Reviewing these tax planning incentives with us can provide significant savings while building a comprehensive wealth preservation plan. Long-Term Care insurance policies, we predict, will gain much more popularity in the coming years. The policies are quite complicated and the insurance company product lines vary greatly.

We can help you efficiently manage this growing financial risk exposure. Give us a call to discuss your specific personal financial plan. We are here to help.

Please contact Rubino & McGeehin for additional information.

Rubino & McGeehin
6903 Rockledge Drive
Suite 1200
Bethesda, MD 20817