Current estimates from AARP put the annual cost of a nursing home at a national average of $78,000. Older Americans, struggling to reassemble their retirement plans from the worst economic downturn in 70 years, may be ignoring the potentially most devastating threat to their plans: the spiraling cost of long-term care.
On January 1, some important provisions of the Pension Protection Act of 2006 went into effect to help pay for those costs. Individuals no longer have to pay federal income tax on the proceeds from an annuity used to pay for long-term care coverage. That means that chronically ill or disabled people will no longer have to rely on their own private long-term care policies or Medicaid to pay for costs related to long-term care. The change is spurring the creation of hybrid deferred annuity policies that also carry long-term care coverage. These products allow policyholders to use the proceeds for LTC coverage, for income or for both. The proceeds that went to pay for long-term care costs for the policyholder would not be subject to federal tax.
This option isn’t for everyone and it’s important to consult a financial expert and more important, a tax expert to decide if this alternative is for you. It’s important to talk to both financial and tax experts before wading into this arena and to see how much coverage you can buy based on the size of the annuity you can afford.
Before studying these products more closely, it’s important to look at the big picture of your finances and your expectations for care if you became temporarily or permanently disabled:
What resources do you have? This question goes beyond monetary issues. While caregiving puts a strain on family, it’s important to consider whether family and friends are truly willing and able to help with your care, which can provide a considerable financial and emotional benefit.
Check your health history: People in good health purchasing long-term care insurance at the age of 55 usually get the most affordable deal in LTC insurance. But an individual’s family health history and current health status are the real determinants of what your LTC insurance policy will cost – or if you’ll qualify for coverage at all.
Are you a single female? Again, personal and family resources come into play here, but since women typically live longer than men, women should take a heightened interest in providing for their long-term care safety net. Long-term care insurance might be a good solution given their other investments and their health history.
What types of services are covered? Over the course of time, long-term care policies now place more emphasis on home-based care or assisted living. A basic LTC insurance policy pays for assistance with activities of daily living including eating, dressing, bathing, toileting, incontinence, and transferring. Each policy lists the types of services that are covered under nursing home care and under home health care. Homemaker services are generally covered and other services as listed in the policy.
What triggers the coverage? A qualified LTC policy won’t go into effect until the covered individual can’t perform two tasks of daily living for a specific period of time, typically 90 days, or when that person needs substantial supervision related to cognitive impairment. This is where you have to read the fine print.
What if I never want to go to a nursing home? The best-designed LTC policies will pay the same amount of benefit whether care is received in a long-term care facility, an assisted living facility, an adult day care center, or in the home. It’s a good idea to keep home health care benefits since most people would rather stay in their homes.
How good is the insurer? Do your homework on the financial health and track record of the insurer you choose, and that’s particularly important if you’re buying a hybrid policy.
This column was produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Al Benelli, CFP, a local member of FPA.
Al Benelli is a Certified Financial Planner® practitioner with Long Financial Group of Plymouth Meeting, PA. An engineering and business major from Penn State and St. Joseph's Universities, Al continues his education through the Wharton School of Business of the University of Pennsylvania. Securities and Investment advice offered through Cadaret-Grant & Co. member FINRA/SIPC.
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