Long-term care is given either in a specialized nursing facility or in the home for certain activities of daily living or some type of cognitive impairment. Activities of daily living include things such as eating, bathing or dressing, where cognitive impairment is a condition that requires you to have significant supervision to protect yourself and others from threats to health and safety. Many times cognitive impairment is associated with some type of mental incapacity such as Alzheimer’s disease. Currently, half of all nursing home residents have Alzheimer’s disease or a related disorder.5

Consider these sobering facts relative to nursing home care on a national basis:

• After age 65, a woman has a one-in-two chance of spending time in a nursing home. A man has a one-in-three chance because of his lower life expectancy. 2
• The average stay for those Americans in a nursing home is two-and-a-half years. 4
• Nationally, the average cost of a nursing home is approximately $200 per day. 7
• On an annualized basis then, the cost of a nursing home could approach $70,000. 7

As a result of these statistics, fifty percent of all couples and 70 percent of single persons are impoverished within one year of entering a nursing home.1 It is clear, that for our country, this issue is not going to go away. By the year 2030, the number of Americans 65 and older will more than double to about 72 million.3 To protect one’s family wealth and to assemble a comprehensive retirement plan, many Americans are considering insurance that would protect them in the event that they must one day enter a nursing home.

This type of insurance is known as long-term care protection, which many professionals consider to be a critical component of a sound retirement plan. However, it is somewhat challenging to shop for such insurance because of the many features that can be included in any given policy design.

In this article we will explore how to select a long-term care policy that will meet your needs at a reasonable cost. In future articles, we will spend some time reviewing how business owners can purchase long-term care in a tax advantage manner.

Above all, it is important to consider the strength and stability of the insurance company offering the policy. Although this would seem to be an obvious consideration, the insurance company’s ultimate ability to pay policyholder claims is worth investigating. One excellent source for evaluating an insurance company’s strength and stability is the AM Best Company. You may want to begin your evaluation of potential insurance carriers by visiting their website at www.ambest.com. Companies receiving the AM Best rating of A+ or higher are considered superior and would make a sound choice for providing your nursing home protection insurance.

After you’re comfortable with the strength of the company providing the long term care insurance, your work has just begun. From a design standpoint, consider next the daily benefit amount that you select for the long-term care insurance policy. Pricing for all long-term care insurance policies is driven by this amount. Because long-term care costs differ by region, you should begin by determining the average daily cost of a nursing home in your area. As we’ve already noted, the average cost of a nursing home on a national basis is $200.00 per day.

Costs are also based upon the quality of the facility and the type of care it provides. For example, the cost for skilled nursing home care is considerably more expensive than the cost of intermediate care. Skilled care is that in which patients receive around-the-clock attention from licensed medical professionals. Intermediate care is that in which patients receive assistance with the activities of daily living, such as eating, bathing, and transferring from bed to chair.

Once you’ve determined the average daily benefit amount that you’d like to select for the long-term care insurance policy, you should consider the benefit period that you’d like to include on the policy. This is the length of time in which you’d receive benefits in the event that you had to enter a nursing home. Remember that the average stay in a nursing home nationally is two-and- a-half years. Consequently, it may not be advisable to have a benefit period that was less than three years. Not surprisingly, the longer the benefit period on the insurance policy, the greater the cost of the coverage. Most insurance companies give policyholders the option of selecting a variety of benefit periods ranging from as little as one year to a lifetime unlimited benefit period.

The next item that the policy buyer must consider is the waiting period. This is the length of time that a policyholder must wait to receive benefits after having actually entered the nursing home. Waiting periods can range from zero days to 180 days. Many people select a 90 or 100 day waiting period because there is a possibility that Medicare may pay some portion of the first 100 days for skilled nursing care. Logically, the longer the waiting period the lower the premium cost for the coverage.

After making decisions regarding the insurance carrier, the daily benefit amount, the benefit period, and the waiting period, new policyholders are generally asked if they would like to include inflation protection on the nursing home protection policy. Inflation protection ensures that the daily benefit amount keeps pace with the rising cost of a nursing home stay in future years. Because the cost of nursing home protection rises annually, this provision is highly recommended by insurance professionals.

In many parts of the country, the cost of a stay in a nursing home rises much faster than the general inflation rate. By selecting inflation protection as an option, policyholders can feel more comfortable knowing that the original daily benefit amount they selected will increase by a fixed percentage each year. Therefore, if an insured has to enter a nursing home 15 years after the policy was purchased and the cost of a stay in a nursing home in that future year has doubled, by selecting this option, it will help the insured’s daily benefit amount keep pace with rising costs.

As the long-term care industry has evolved, prospective policyholders have been asked to consider many new features that have appeared. For example, most people, given the chance, would prefer to receive nursing care in their home for as long as possible prior to entering the nursing home. Fortunately, most modern long-term care policies include home healthcare riders that allow people to do just that. Sometimes this home health care benefit is included in the base cost of the policy; other times an additional rider must be specifically purchased.

Another concept that has become very popular in nursing home care policies over the last ten years is that of community-based care. Typically, this is care given in an adult day care facility. These facilities provide nursing care for those needing it while the caregiver enjoys the opportunity to go to work during the day, comfortable in the knowledge that their loved one needing care is being taken care of.

Some nursing home care policies will even pay for modifications to an insured’s home that would enable policyholders to delay having to enter a skilled nursing facility. Potential modifications might include things such as railings in showers, wheelchair ramps or medical alert systems.

In conclusion, shopping for long-term care insurance policies is sometimes challenging because so many different options may be available on the policy. To ensure accurate comparisons of companies, policyholders must make sure that they are comparing identical provisions with regard to benefit amount, benefit period, waiting period and inflation protection. For people who may find it difficult to make these comparisons on their own, it may make sense to retain an independent insurance agent who has access to multiple carriers and who can assist with comparison shopping.

Whether those who are considering long-term care insurance decide to seek professional advice or go it alone, it is critical that they carefully analyze policy options and all other design considerations. Only by doing so can they make the best use of their dollars.

Sources:

1. GetCare.com
2. Helpguide.org
3. U.S. Department of Health and Human Services Administration on Aging
4. Seniorsinc.org
5. National Nursing Home Survey. National Center for Health Statistics, 1985; p. 49.
6. National Institute on Aging
7. 2004 Met Life Market Survey of Nursing Home and Home Care Costs

In a previous article we talked at length about the importance of long-term care insurance as part of a comprehensive financial and estate plan.  We also spent a considerable amount of time discussing how to compare and select a policy that meets your family’s needs. The next question we should ask ourselves is “What is the most efficient way to pay the premium for this protection”? Well, if you’re a business owner, the most efficient way to pay for long-term care insurance premiums may very well be through your business.

Business owners actually have the opportunity in many cases to purchase long-term care insurance in a tax advantage way to their companies. In many cases, all or a portion of the premium paid by the business on behalf of the executive is tax-deductible at the business level, and not considered taxable income to the employee receiving the coverage. Furthermore, this coverage can be offered on a selective basis and does not have to be offered to a large group of eligible participants, similar to what employers must offer in the qualified plan arena.

This article will explore in more detail how business owners can purchase long-term care insurance in a tax-advantaged way and significantly reduce the net cost of this coverage. Also, we have assembled a number of additional resources that will provide links to support this discussion.

The focus of this piece is on the tax-advantages of purchasing long-term care insurance through your business. However, there must first be an underlying need for the coverage. A discussion of why long-term care insurance is an important component of most financial plans is beyond the scope of this particular article. However, an extensive discussion of the need for this type of coverage can be found at this link.

The benefits available to a business and to the employee receiving the benefit vary based on the type of entity structure for that company. For example there are some significant differences in the tax-deductible of the premium if it is paid by a C corporation versus some type of a pass-through entity such as an S corporation or a partnership.

The most powerful benefits at both the business and individual level are available to C corporations and their employees purchasing this coverage. We have outlined some of the more significant benefits and provisions below:

• For C corporations the premium for long-term care insurance paid for by the business is fully deductible as a necessary business expense
• From the employee standpoint, the premium paid by the company is not considered taxable income to the employee receiving the benefit.
• The employee is not required to account for these dollars as economic benefit
• The company could decide to continue to pay these premiums on behalf of a retired employee and the premiums would continue to be deductible by the company and not considered taxable income either retiree
• This long-term care coverage can also be extended to an employee’s spouse with the same tax benefits applying at both the business and employee level. Dependents of the employee may also be eligible to receive these benefits with the same tax implications
• The company is not required to offer this coverage to all employees and may designate a certain group or class of employees to receive this coverage. Long-term care insurance offered as an employer paid benefits does not have to meet the same type of coverage requirements that are typically found with qualified retirement plans such as 401(k).

As you can see, there are compelling tax benefits to a C corporation to consider offering long-term care insurance as an employer-sponsored benefit. Although the benefits for pass-through entities such as S corporations, partnerships and LLC’s are different, they still warrant consideration. Some specific considerations for S corporations, partnerships, LLPs and LLCs related to the tax implications of this coverage include:

• If the premium is paid for long-term care coverage for an employee who owns less than 2% of the company, the premium is still fully deductible by the business and not considered taxable income for that employee. Therefore for employees that don’t own at least 2% of the company the benefits are quite comparable to a C corporation
• Employees who happen to own 2% or more of the company must account for those premiums paid as part of their taxable income. However, they may be able to deduct part of the premium expense. Additionally, there is a maximum allowable reduction based on the age of the employee receiving this benefit. We have included a table reflecting these age-based premium limits below.

For the 2009 tax year, the following age-based premium limits apply for deduction purposes:

For the 2009 tax year, the following age-based premium limits apply for deduction purposes:

Age on 12/31/09 Maximum Amount Considered Health Ins. Premiums

40 or under $320
41 to 50 $600
51 to 60 $1,190
61 to 70 $3,180
Over 70 $3,980

Generally, employers considering offering this benefit should consult their CPA or other tax advisor prior to making a decision to move forward. As you can see from the information reviewed above, the tax implications can vary significantly depending on the entity structure you’ve chosen for your business.

Additionally, there are a number of other policy design considerations that should be discussed with an experienced insurance professional. For example, many carriers in this space offers significant discounts for multiple life plans offered through the same employer. Also, some companies make limited pay policies available such as a 10 pay premium option where the policy is effectively paid-up after 10-years of premium payments and no further contributions are due.

In conclusion, many Americans will consider long-term care coverage as part of their overall protection plan. Regrettably, chances of someone in this country needing this coverage are significant and the cost of a single stay in a nursing home can be financially devastating for many families. Fortunately, for employers that would like to offer this coverage as an employer-sponsored benefit can do so in a tax-advantaged way at both the company and participant level. Although the benefits from a tax standpoint to vary significantly based on the type of business entity a competent tax professional should be consulted, this technique warrants careful consideration by many companies.