Long Term Care Insurance—-Why this benefit makes good business sense

By Marc Haberman, LUTCF

“Having adequate long-term insurance is the single most influential determinant of whether an individual will have a financially secure retirement.”

—Employee Benefit Research Institute study, Employee Benefit News

Why are employees more interested in LTC?

To attract and retain your key Baby Boomer employees, this is an excellent benefit to consider. For employees now in their 50’s, the likelihood of needing in-facility or at-home care at some point in their life is about 50:50 that care will be needed in their later years. While the average nursing home stay is just under 3 years, the average home-care experience is well over 4 years. That means, if you should need care by 2025, just 7 years of combined home and in-facility care translates to over $1,800,000! The question has not become so much whether one should purchase long term care insurance; rather how much one should buy.

Long-term care costs are increasing faster than inflation.

According to the Office of the Actuary, Centers for Medicare and Medicaid Services, nursing home care is increasing at 5.8% per year. In 2005, the average nursing home care was $74,095. By 2035, at the current annual increase, that translates to $1,100 per day, or $401,500 per year.

The Internal Revenue Service wants to help!

Did you know that employer-provided qualified long- term care insurance premiums are excludable from an employee’s income under Section 106 of the IRC? The employer may deduct the entire premium as reasonable and necessary business expense under IRC Section 162. This deduction also applies to the cost of coverage paid for employee’s spouse and dependents. Furthermore, there are no provisions in HIPAA requiring nondiscrimination in employer-provided plans. This allows employers to selectively choose participants from their employees and retirees, in a reasonably discriminatory manner, without endangering the exclusion from income.

Several insurance companies offer a “10 Pay” option. Premiums are payable for 10 years, after which the coverage remains in effect for the lifetime of the insured. This allows employers to establish a fringe benefit to senior executives, fully paid for during their working years. The benefits are generally tax-free.

When purchasing Long-Term Care Insurance, here are some questions you need to consider:

1. What is the Daily Benefit? Long-term care policies are designed to pay a specific maximum benefit per day. Most policies reimburse the insured for expenses incurred up to the daily benefit.
2. Is Home Care coverage included? Most polices now cover home care at the same daily rate or 50% of the in-facility rate.
3. When does coverage start? The elimination period is the time you have to pay out of pocket before your policy kicks in. It’s similar to the deductible in other types of insurance. The longer your elimination period, the lower your premium. A 90-day elimination period is most common.
4. How long does coverage run? Benefit periods range from a minimum 1-year to unlimited. The unlimited benefit plans will pay as long as you are on claim. With a limited benefit plan, you run the risk of outliving your coverage. Capping a policy at 3-, 4-, or 5- years can be a way to play the odds and limit your policy costs. However, if the point of insurance is to protect you from risk you can’t afford to cover, then buying a longer policy makes more sense.
5. Do I need Inflation Coverage?  If you are purchasing a policy at a young age (50’s or early 60’s), inflation coverage is essential. By the time you actually need care, the cost is likely to be substantially higher than the original benefit purchased decades earlier. A $200 daily benefit, sufficient today, will cover only 1/3 of the daily cost in 20 years. Insurance companies generally offer 5% compound or 5% simple interest inflation riders. Both add to the policy’s cost, so weigh the relative value carefully.
6. How is the premium determined? The premium you pay for a long-term care policy is a function of your age and health at the time of your application, along with the benefit structure you select.
7. Is the premium deductible? Depending on whether you pay long-term care premiums personally or through a business entity, part or all of the premium is tax deductible.
8. Does the insurance company matter? It is essential to select an insurance company with a strong history and substantial experience writing long term care policies, a company you can count on to be there when you need the benefit you’ve paid for. An experienced insurance agent can help you through the selection process. This is an important financial decision that should be discussed with a knowledgeable professional to ensure you get the best plan for your individual situation.