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When to Buy Long-Term Care Insurance
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Deducting medical expenses
Medical expenses that exceed 7.5 percent of your adjusted gross income can be deducted on your taxes. Long-term care insurance premiums can now be included up to these amounts:
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for those 40 and younger, $200
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for those 41 to 50, $375
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for those 51 to 60, $750
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for those 61 to 70, $2,000
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for those 70 and older, $2,500.
hirty years ago, a pact between generations made each generation responsible for both the previous one and the one that followed. That was how families worked.
No longer. We're living 20 years longer than we were in 1925 and our children are living farther and farther away. Now that nursing home care costs average $46,000 a year (that's up 20 percent in the last three years), it's time to wake up to the problem of insuring your own long-term care.
Because of the uncertainties of Medicaid and the growing pressures on our children to lead independent lives, most people should have some long-term care insurance, even if it's just the basics. Most people would like to leave an inheritance to their children and do not want to be a burden to their families.
Long-term care insurance isn't cheap. Premiums vary based on your age, sex, geographical location and policy type, but annual costs can vary from $400 a year for a 40-something male to more than $3,000 for a man or woman aged 70 or older.
On the other hand, if you have at least $2 million in liquid assets or if you have a large annual retirement income (from a retirement plan or annuities), you probably can get away with not buying long-term care insurance.
The reality is most of us don't have $2 million. That leaves us with either buying long-term care or relying exclusively on Medicaid, the government-sponsored program designed to help us in our later years. Let's look at the harsh realities of Medicaid.
Should you rely on Medicaid?
Medicaid already is paying two-thirds of all nursing home costs and is strangling our national budget. And all this is before the baby boomer generation retires. The problems with relying on Medicaid:
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Medicaid rules are Byzantine, complicated and vary from state to state regarding how many assets you can have and still qualify.
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People think that they can do "Medicaid planning," in which they pass their assets to their children to get Medicaid to cover their nursing home care. But tougher laws are now in place that make it a felony for any adviser even to suggest that clients divest themselves of assets in order to qualify for Medicaid.
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Medicaid only pays if you live in a nursing home; most people would like to live in their own homes as long as possible before having to move into a nursing home.
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Do you really want to depend on your children for help? The Wall Street Journal recently reported that 40 percent of people whose parents are still living say they either financially support their parents now or expect to in the future, compared to 22 percent in 1994.
Ask yourself: Do you feel comfortable counting on the government to financially support you in the final stages of your life?
Long-term care policies
Enter the insurance industry. Long-term care policies are now available that can provide income to you if and when your health begins to fail. Benefits can start while you're living at home, in an assisted living facility or in a nursing home. Under a long-term care policy, you receive a daily benefit to cover the cost of a nursing home stay or skilled or custodial care in your home. Generally, your benefits are paid when you are unable to handle the normal activities of daily living.
The early long-term care insurance policies were crude at best. Fortunately, the industry has responded to the need for long-term care - to the extent that there are now so many policies and types of benefits that it is difficult to choose.
Some questions to ask yourself regarding long-term care insurance:
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Do you need it? If you have enough assets to pay for your own nursing home care (say, $300,000 in the bank - in today's dollars - or enough to pay for about five years of care), it may not be worth it for you.
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Do you have wealthy children or children living nearby? Are they willing to oversee your care or have you live with them?
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Do you want to leave your children an inheritance, or are you willing to use up all your assets in order to pay for your care?
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Does each member of your household have at least $75,000 in assets or annual income of $30,000 or more? (If not, many organizations suggest programs like Medicaid may be your best financial option.)
What to do before buying
Before you actually buy long-term care insurance:
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As painful as it is, talk about this issue with your loved ones. You need to have a plan in place if and when something happens. Your family members need to know whether they should plan to care for you financially, physically or both.
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Get an experienced agent who knows the market, knows your state laws and specializes in long-term care insurance. A good agent is important - long-term care insurance is complicated and unlike life insurance, you will be feeling the effects of your own decisions during the last years of your life. Your agent should help you assess whether long-term care insurance is good for you, and a good agent will tell you if you don't need it. Your health may be such that it doesn't even make sense to try to apply (although there are specialty long-term care insurance brokers).
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Determine how much coverage to buy. Find out how much long-term nursing home care costs in your state (or in the state in which you will be living, if you will be moving to be closer to family). Try to buy at least that much in monthly benefits.
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Decide where you want to receive benefits. It is only natural to want to stay in your home as long as possible. In that case, you'll need a policy that provides home care benefits. Check the policy's wording carefully to make sure that it covers exactly what the agent says it does.
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Look at how the insurance company determines whether you are eligible to receive benefits under a particular policy. Some insurers require that you be unable to perform two out of five (or sometimes three out of six) "activities of daily living." This includes the inability to bathe, which is usually the first ability that you lose as you age. A medical condition such as heart disease or Alzheimer's will also be covered but different policies offer different coverage levels depending on where you will be living (retirement community, nursing home, assisted-living center). The problem is that different companies have different tests for all of these qualifications. It takes a very focused person - or an agent - to determine the best plan.
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Most importantly, make sure your policy has an inflation protection rider. It should say something like "5 percent compounded" to ensure you'll be properly covered 20 years from now.
Some employers are catching on and are starting to offer group long-term care coverage for employees and their parents. This is good news because individual policies can be expensive.
Tax laws now allow you to deduct as medical expenses up to $2,500 in premiums for long-term care insurance plans ($2,500 in premiums for pre-1997 policies apply as well). But be careful -- this change only applies to certain "qualified" plans.
On the other hand, the lack of a tax deduction should not deter you from investigating and perhaps purchasing a long-term care policy. It is an expensive way to guarantee financial independence in old age, but, given the alternatives, it may be well worth the expense. 
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