Retirement Planning/long term care insurance
QUESTION: Hello Mr. Iannopollo,
We are considering buying longterm care insurance from a company that provides a cash payout of the monthly benefit, rather than a reimbursement of bills or a payment to providers, once the need for longterm care has been established. But we are concerned that there might be tax ramifications from receiving the benefit as a direct payout rather than as a reimbursement. Do you think this would be a problem?
Thanks for your help,
ANSWER: Hi Scott,
In general, most LTC policies pay a daily benefit and do not reimburse providers. You receive the funds and pay the providers your self. Benefits from an LTC policy are generally tax free because they are considered insurance reimbursements for medical expenses. You may also be able to deduct a portion of your premiums paid from your taxes.
LTC insurance is a great way to protect your assets in the event that you or your spouse need care in the future. When shopping for LTC insurance I will make the following suggestions:
1. Make sure you purchase from a company that is very strong financially. LTC insurance is a relatively new product as far as insurance goes and many companies have dropped out of the market because they did not have the claims experience to calculate future costs. If your company were to go out of business, you should still be protected but your far better off if your company is there when you need it.
2. Make sure you buy enough benefit so your policy will cover your needs now and in the future. I would expect LTC to continue increasing as they have been. If your benefit is, say $200 a day, that might be fine for now but will it be in 20 years? I usually recommend that one purchases the compound interest rider so that you daily benefit goes up each year to cover the rising costs. It's expensive but having a benefit that is far short of meeting your needs could almost be a waste of money in a sense.
3. Make sure you deal with an agent who has great knowledge of these products. Since LTC policies are built to meet the needs of each individual client, you'll want someone who can put together the policy that is right for you. You'll want a thorough explanation of how the policy works and also you'll want to know exactly where you stand tax wise.
Here is a link that should provide you with some useful info:
I hope this helps. Best of luck!
---------- FOLLOW-UP ----------
QUESTION: Thank you so much. This is very helpful. One thing: I'm not sure I explained clearly about the payout benefit of the longterm care policy we're considering. It would pay us the full monthly benefit of $6,000, as a cash payout directly to us, even if we only had a few hundred dollars' worth of home health care that month. I noticed one sentence in the excellent article you linked to that made me wonder if that would have tax repercussions: "Even if you receive benefits above the cap, they are still federal-income-tax-free -- as long as they don t exceed your actual long-term-care costs." With the company we are considering. the $6,000/mo direct payouts would likely exceed the long-term-care costs if you were receiving care at home.
In that case, do you still feel that the $6,000/month direct cash payout would probably have no tax repercussions?
ANSWER: Hi Scott,
As long as your per diem payout does not exceed the daily limit, benefits are federally tax free. For 2013 the daily limit is $320. $6000 per month is about $200 a day so you should be fine. Keep in mind, I am not a tax advisor and can't give tax advice so you should check with a CPA to verify my information.
Generally speaking, in most cases, when an individual buys an insurance policy (such as life, disability, LTC, etc) that pays out a cash benefit, as long as the individual payed the premiums themselves with after tax money, the benefits are tax free. If premiums were payed by an employer, for instance, the benefits would be taxable.
I hope this clears things up for you. Good luck!
---------- FOLLOW-UP ----------
QUESTION: Mr. Iannopollo,
So sorry to bug you again, but we just want to make sure we're not making a huge mistake. This company, MedAmerica, bills itself as one of the few that gives cash payouts of the monthly benefit, which can be used to pay family members or whatever you want. No need to file itemized expenses or bills. But a note in their brochure mentions that you should check on tax consequences. And we noticed something in the link you sent us that said: "Even if you receive benefits above the cap, they are still federal-income-tax-free -- as long as they don t exceed your actual long-term-care costs." So my concern was, what if I'm only receiving, say, $800/month worth of Home Health care assistance and that's all I need. But they're paying me the $6,000 cash benefit every month. Would there be tax consequences on the extra $5,200? It seems like you're saying no, you don't think there would be. But we wanted to make sure we're describing the situation clearly enough, which I'm not sure we were!
Thanks so much.
No problem Scott!
After doing some more research it looks like you may be right about the difference between your actual costs and your per diem being taxable. It's just that comparing it to other benefits received from self paid insurance policies (life, disability, accident, etc) it does not seem consistent. That does not mean it is not true (we are talking about the IRS!) It's not a situation I have ever come up against. Most people probably spend their whole per diem when accessing their benefits. Even if it were taxable, I don't think it would be a reason not to carry the LTC insurance because it is likely that you may never need the benefit or that you would use the entire amount or close to it if you did need it.
If you are going to make the investment in LTC insurance, I would suggest you consult a CPA about this matter. He or she could give you a more definitive answer than I can. There are even some on this site who can probably help. They would also be more likely to have seen a client who is in this situation than I am and many IRS laws have grey areas in them. Best of luck!