Tax Article - The ABC's of LTC- Long-term care policies still make sense for some

When money is tight, planning for the future seems all the more difficult. This holds especially true for the distant future — where worries such as a lengthy stay in a nursing home or rehab facility may pale in comparison with an impending job loss or the sudden diminishment of a retirement fund.

Yet no amount of economic travail can completely negate the importance of guarding against future crises. Take long-term care (LTC) insurance as an example. Although one of these policies may appear to be a nonessential expense at the moment, procuring such coverage may still be the right move for some individuals. Deciding whether you fit the bill entails learning some of the ABCs of LTC.

A: Adjust Your Expectations
A very simple definition of LTC insurance might read, “An insurance policy that provides benefits for a chronically ill or disabled person over a long period.” Yet many people assume these policies offer a sort of blanket coverage for most any extended medical need. In truth, LTC policies come in a variety of forms with very specific coverage provisions. So, when shopping for one, it’s important to adjust your expectations accordingly.

Some policies cover both nursing home care and home-based care, while others cover only one or the other. Similarly, some policies base benefits on actual expenses (commonly called “reimbursement arrangements”), while others (often referred to as “per diem policies”) provide daily payouts regardless of actual expenses. (The latter are far less common.)

B: Beware Of Limitations
No matter what a given policy covers, you should expect it to have some limitations regarding when benefits kick in. Typically, being unable to adequately perform certain activities of daily living (ADLs) will trigger coverage, but each policy may define these differently. In some cases, you might need the sign-off of a doctor, nurse or licensed clinical social worker.

Many policies also specify how long you’ll need to wait for benefit payouts to begin after care is initiated — known as an “elimination period” in insurance terminology. Common elimination periods include 30, 60, 90 and 120 days. Generally, if all else is equal, the longer the wait, the less expensive the coverage.

In addition, the term of coverage may be limited. A five-year term is fairly common. Most LTC insurers do offer lifetime coverage, but it’s obviously more expensive. Another upgrade to consider is inflation protection — it’s rarely included upfront but typically worth the extra cost.

C: Consider the Tax Impact
As you might expect, LTC coverage has a tax impact. The most straightforward way to avoid negative tax consequences is to obtain a qualified LTC plan.

Under one of these, you’ll receive benefits tax free and be able to deduct part of your premiums as medical expenses. Limits on these deductions increase based on the insured’s age. In 2009, the limits range from $320 if you’re 40 or younger to $3,980 if you’re over 70. To claim the deductions, you must itemize and your combined medical expenses need to be more than 7.5% of your adjusted gross income.

To be considered “qualified,” the plan must, among other things:

• Provide coverage for only qualified long-term care services, and
• Be guaranteed renewable.

While the definition of qualified long-term care services is detailed, essentially it means care provided to help someone who is unable to perform at least two of six ADLs for a period of at least 90 days, or who has a “severe cognitive impairment” that necessitates substantial supervision as protection to his or her health and safety.

A Reach Worth Considering
An LTC policy may seem a bit of a reach at the moment, but it’s a reach worth considering. After all, you may have more to protect years down the line when, we hope, the economy has made a full recovery.

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