Long-term care insurance has become more prevalent in today’s financial planning tactics. This topic can create a great deal of confusion and uncertainty about what is the right decision to make. The main reason individuals are reluctant to consider long-term care insurance is the fact that it may never get used. The truth of the matter is that the biggest risk is an unexpected long-term health care event that may dwindle all retirement savings.
Qualified long-term care insurance generally provides income protection for chronically ill individuals and reimbursement for the cost of qualified long-term care services. Qualified long-term care services include personal care services prescribed by a physician or licensed social worker for a chronically ill individual. The definition of a chronically ill individual is as follows:
- The person is unable to perform at least two daily living activities (eating, bathing and dressing and continence), without substantial assistance from another person, for at least 90 days,
- The person requires supervision to protect the individual from health and safety issues, and
- The person is suffering from severe cognitive impairment which requires substantial assistance.
Services provided in a nursing home would normally be considered qualified long-term care services.
To exclude payments from your taxable income, the plan must first meet three requirements:
- You, your spouse or your dependent must meet the definition of being chronically ill.
- The plan must only provide coverage for long-term care and must be renewable.
- Your plan must not provide cash or have a surrender value or money that is pledged, assigned or borrowed.
Once the long-term care plan is determined to fit the above requirements, amounts received from qualified insurance policies for long-term care are generally excluded from income if they are based on actual expenses incurred.
However, if you receive per diem payments (regardless of expense incurred), the amount that can be excluded is limited to a “per diem” rate. A per diem payment is a fixed amount received without taking into consideration the actual expenses incurred. The per diem amount for 2018 is $360 per day and the projected per diem amount for 2019 is $370 per day. Long-term care benefit payments received are reported in Box 3 of Form 1099-LTC for tax reporting purposes.
The other side of long-term care is accelerated death benefits. Accelerated death benefits are amounts paid under a life insurance policy and are fully excludable from taxable income if the insured is considered terminally ill. A terminally ill individual is a person who has been certified by a doctor with an illness or condition and is not expected to live longer than 24 months from the date of certification.
There are many items to consider whether long-term care insurance is right for you. It is important to not only look at the financial aspect but also the tax implications. Statistics show that at age 65, there is at least a 40% chance of entering a nursing home. Take the time now for long-term care planning and consult with your Henry+Horne tax advisor.
Danette Holguin, EA