Protecting Your Retirement Savings with Long Term Care Insurance: What You Need to Know

It's a reality many of us don't like to think about, but the likelihood of needing long-term care (LTC) is higher than we might expect. And with the average cost of a private room in a nursing home hovering around $100,000 annually, your retirement savings could be at serious risk. Fortunately, a Long Term Care (LTC) insurance policy can help protect those savings, providing a safety net for your hard-earned money.

How Long Term Care Insurance Works

LTC insurance is designed to help cover the costs of care for people who can no longer manage daily tasks due to illness, disability, or aging. Here's how it typically operates:

• Daily Benefit Limits: Your policy will set a daily benefit amount—usually between $50 and $500—that's reimbursed to you based on the level of coverage you select. This benefit can be used for various types of care, including in-home assistance or nursing facility care. So, if you choose $200/day, that's the amount you'll be reimbursed, even if your care costs less on some days.

• Adjusting for Inflation: Many policies offer the option for inflation protection, generally at 3-5% annually. While this feature increases premiums, it can make a big difference in coverage value over time, especially with compounding inflation adjustments.

• Benefit Periods: The length of your benefit period can range from 2 years to a lifetime. Most policyholders opt for periods of 3-5 years, aligning with the average 2.5-year stay in a nursing home. However, this average doesn't include at-home care, which can also be covered.

Example: Imagine choosing a $150 daily benefit with a 5-year benefit period and 3% inflation protection. You'll be eligible for benefits up to $150/day, which increases annually with inflation.

When Should You Enroll in LTC Insurance?

The short answer? Sooner rather than later. Here's why:

• Premiums and Health Impact: Premiums are based on your age and health at the time you enroll. Signing up at 55, rather than 65, can mean significantly lower premiums. However, you'll need to qualify health-wise—those with certain conditions may be denied coverage regardless of age. But once you're covered, your policy is guaranteed renewable, meaning you'll keep it as long as you pay the premiums.

Case in Point: Consider a healthy 55-year-old who locks in LTC coverage at $2,000/year. Waiting until age 65 could raise the premium to $3,500/year or more for the same coverage. Health can also affect insurability, so enrolling early helps secure coverage when you're more likely to qualify.

Are LTC Insurance Benefits Tax-Free?

Yes, benefits received through LTC insurance are generally tax-free, meaning you can use the reimbursements without worrying about added tax burdens. In 2023, the tax-free cap for LTC benefits is $420/day, adjusted yearly for inflation. The amount reimbursed each year is reported on Form 1099-LTC, typically received early in the following year.

IRS Code Reference: Section 7702B(d) of the Internal Revenue Code outlines the conditions under which LTC benefits are excluded from gross income, providing a tax-free cushion for policyholders.

Can You Deduct LTC Insurance Premiums?

In some cases, LTC insurance premiums are deductible as qualified medical expenses. The deduction is based on age-related caps, which allow you to itemize premiums along with other healthcare expenses on your tax return. If you're over age 60, the cap is higher, but it's important to remember that only premiums within this cap are deductible.

Example: A couple, both aged 67, can deduct up to $4,510 in LTC premiums in 2023 if they itemize deductions. This can ease the financial burden of LTC coverage, particularly for those on fixed incomes.

Consider LTC Insurance for Your Financial Peace of Mind

LTC insurance can protect your retirement savings from the high costs of long-term care. From daily benefit limits and inflation adjustments to tax-free benefits and potential tax deductions, it's a robust tool for securing your financial future. If you or a loved one may need long-term care, consider speaking with a financial professional to determine the best level of coverage for your situation.