Where Does Long-Term Care Insurance Fit in Your Financial Plan?
As life expectancies in the United States continue to rise each year, people can anticipate extended youth and longer retirements. At the same time, the cost of any healthcare they may require continues to increase.
As a result, more and more people are looking at long-term care insurance (LTC) as a way to protect their lifetime savings. The decision to make long-term care insurance part of your financial plan is an important one that you should approach much as you would any other major spending decision.
How do you decide whether the risk of needing long-term care is worth the price of coverage? The answer depends on a number of factors including your age, financial condition, health status, and family situation.
Let the numbers point the way
The decision to purchase LTC insurance must begin with a careful analysis of your financial position. For some, LTC insurance is an affordable and attractive form of security. For others, the cost makes it prohibitive.
Generally, you should consider a long-term care policy if you have more than $75,000 in assets per person in your household and an annual income of at least $30,000 per person. If you don't fall into these categories, it might make better financial sense to plan to “spend down” your assets – that is, use your own resources to pay for long-term care until your assets reach the point where Medicaid begins to pick up the tab.
Of course, these figures represent general parameters. People who feel strongly about leaving an inheritance or who want to avoid relying on Medicaid, may still prefer to purchase long-term care insurance. However, buying an LTC policy should not cause financial hardship or require a significant change in your lifestyle. It makes little sense to dip into your savings to pay premiums.
Doing so depletes the very asset you are trying to protect. Ideally, you should spend no more than 6 to 8 percent of your income on LTC premiums. In general, annual premiums can range from a thousand dollars a year to over $3,000 depending on how old you are when you purchase the policy and the benefits.
Policies are typically less expensive when you enter into them at a younger age. In determining whether you can afford LTC insurance, it's important to look ahead.
When the premiums start adding up to several thousand dollars a year, many policyholders find they simply cannot afford the premiums and abandon the policies.
Unfortunately, this eventuality happens at a time when they are more likely to need the coverage. Before committing to an LTC policy, it is important that you consider whether you will still be able to afford the premiums 10 or 15 years from now.
Here’s to your health
The second factor in determining whether to buy LTC insurance concerns the status of your health and your family's health history. Do you have relatives that farmed the fields well into their nineties or a family history of heart disease that claimed the lives of close relatives at an early age?
Long-term care insurance might be more strongly recommended for an individual with a family history of strokes, high blood pressure, dementia, Parkinson's disease, or other conditions likely to require long-term care. If your genetic history has you leaning toward purchasing LTC coverage, don't wait too long -- the onset of a significant medical condition may make it difficult to obtain insurance.
It’s a family affair
You may be a likely candidate for LTC insurance if family members live too far away to provide you with regular care. On the other hand, if you have a spouse or children who have indicated their willingness to be caregivers, you may want to consider a policy providing generous home health benefits.
Keep in mind that there is no guarantee that your spouse or children, devoted as they may be, could care for you for very long, particularly if you are struck with Alzheimer's disease or some other serious medical condition that requires around-the-clock care.
Tax breaks available
If you're considering a long-term care policy, familiarize yourself with two tax breaks and determine if you qualify.
First, any premiums you pay (subject to the limitations outlined below) are considered qualified medical expenses which, together with other medical expenses are deductible to the extent they exceed 10 percent of your adjusted gross income (7.5 percent if you’re 65 or older in 2016).
The amount of your write-off depends on your age. Medical expenses include premiums paid for a qualified long-term care insurance contract, up to annual limits.
For an individual whose attained age before the close of 2015 is:
40 or under, the limit is $390; more than 40, but not more 50, the limit is $730; more than 50, but not more than 60, the limit is $1,460; more than 60, but not more than 70, the limit is $3,900; and more than 70, the limit is $4,870.