Long-Term Care Insurance

Introduction

Long-term care insurance helps cover the cost of a nursing home or (with some policies) services provided at home. Long-term care is gaining in popularity. We'll help you decide whether you should purchase a policy and how to shop for one, but it is important to first understand what we mean by long-term care (LTC).

Long-term care typically begins when you need help with one or more activities of daily living, usually as a result of an illness or disability (for example, a stroke or Alzheimer's disease). Activities of daily living (ADLs) are defined for LTC purposes as dressing, eating, bathing, walking, transferring between a bed and a chair, toileting, and maintaining continence. Along with assistance in ADL, you may require acute medical care, otherwise known as skilled nursing care, or intermediate nursing care, which requires some skilled nursing care combined with personal care.

But it is the long-term personal care, more commonly referred to as custodial care, that can be quite costly. While studies have shown that a majority of people will either never enter a nursing a home or will spend less than three months in one, many elderly people will need some daily assistance at home to care for themselves. This care may be provided by a home health aide or may require a skilled nurse, or a physical, occupational, or speech therapist.

For those who do enter a nursing home, the average length of stay is about two years. Contrary to popular belief, nursing home costs are not eligible for Medicare coverage unless certain qualifications are met.

Tax-qualified LTC insurance premiums (LTC premiums) are considered a medical expense. For an individual who itemizes tax deductions, medical expenses are deductible to the extent that they exceed 10% (7.5% for age 65 or older) of the individual's Adjusted Gross Income (AGI). The amount of the LTC premium treated as a medical expense is limited to the eligible LTC premiums, and is based on the age of the insured individual. That portion of the LTC premium that exceeds the eligible LTC premium is not included as a medical expense.

Individual taxpayers can treat premiums paid for tax-qualified LTC insurance for themselves, their spouse, or any tax dependents (such as parents), as a personal medical expense.

The yearly maximum deductible amount for each individual depends on the insured's attained age at the close of the taxable year; for example, if the taxpayer is age 50 in 2014 the maximum deduction is $700 ($680 in 2013) before application of the 10% AGI limitation. If the taxpayer is over age 70 in 2014, the maximum deduction is $4,660 ($4, 550 in 2013) and before application of the 7.5% AGI limitation. These deductible maximums are indexed and increase each year for inflation.