Long Term Care Insurance - Advisor Insurance Resource

Long-Term Care Insurance

Planning for long-term care is an essential component of a comprehensive financial plan. Understanding the realities of extended care, the limitations of government programs, and the role of insurance can help you protect your assets and your family’s well-being.

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What is Long Term Care

Long-term care, often referred to as custodial care, is the assistance a person requires due to an impairment that compromises their ability to safely navigate daily life. Unlike medical care, which focuses on curing illness or injury, long-term care focuses on functionality and quality of life.

The Nature of Impairments

The need for care typically arises from two types of impairments:

Physical Impairment: A chronic medical condition—such as a stroke, multiple sclerosis, or arthritis—that hinders a person’s ability to perform basic routines known as Activities of Daily Living (ADLs). These activities include:
- Bathing
- Dressing
- Eating
- Toileting
- Transferring (moving from a bed to a chair)
- Continence
Cognitive Impairment: A deterioration of intellectual capacity, often caused by Alzheimer’s disease or other forms of dementia. This type of impairment compromises a person’s ability to reason, retain memory, or maintain safety awareness, requiring supervision to protect them from harm.

Where Care Is Provided

Contrary to common belief, long-term care does not exclusively happen in nursing homes. In fact, most people prefer to remain in their own homes, and a significant majority of insurance claims are for home health care. Care can be delivered in various settings:

Home Care: Unpaid care from family or paid professional services (home health aides, homemakers).
Adult Day Care: Centers providing respite for caregivers and social engagement for those needing supervision.
Assisted Living Facilities: Residential communities for those who need help with daily activities but do not require intensive medical attention.
Skilled Nursing Facilities (Nursing Homes): Institutions providing 24-hour skilled nursing and custodial care.

Who Needs Long Term Care Insurance

The need for long-term care insurance is often misunderstood. While many healthy individuals believe they will never need care, statistics suggest otherwise. The decision to insure is less about predicting health and more about mitigating the consequences of a potential care event.

You should consider long-term care insurance if:

You want to protect your family: The primary consequence of extended care is the emotional and physical toll it takes on informal caregivers—usually spouses or adult children. Insurance provides funds to hire professionals, allowing loved ones to supervise care rather than provide it.
You want to protect your assets: Paying for care out-of-pocket can rapidly deplete retirement savings intended for income or legacy.
You desire choice and independence: Insurance coverage often affords you the ability to choose where you receive care (such as at home) and who provides it.

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The "Self-Funding" Misconception

Many individuals with significant assets believe they can “self-insure” the costs of long-term care. However, self-funding typically requires repositioning or liquidating investments that may be providing essential income or are designated for other purposes, such as legacy planning or supporting family members. For high net worth families, this can mean disrupting carefully structured portfolios, selling appreciated assets, or converting long-term holdings—actions that can trigger taxes, interrupt growth, and impact overall financial goals.

Long-term care insurance offers an alternative. By leveraging insurance, families can use only a portion of the interest or annual yield generated by their current assets to cover the cost of premiums. This approach preserves both principal and investment strategies, allowing assets to remain intact and continue to support intended objectives—whether that is providing ongoing income, funding charitable gifts, or transferring wealth to the next generation. Insurance, in this way, enhances financial flexibility and ensures that care needs are properly funded without compromising the broader plan.

Tax Advantages of Long-Term Care Insurance

Long-term care insurance may offer several tax advantages, providing meaningful incentives for individuals and employers to secure appropriate coverage.

Health Savings Accounts (HSAs): If you have an HSA, you may use tax-free HSA funds to pay all or a portion of your long-term care insurance premiums, up to the federal age-based limits.
Tax-Free Benefits: Benefits paid from a tax-qualified long-term care policy are generally received income tax-free, up to the greater of the actual qualified long-term care expenses or a per diem limitation set by the IRS. For 2024, the per diem limit is $420 per day. This means you can receive up to this amount per day in benefits without owing income tax, regardless of your actual care expenses.
Tax Deductions for Businesses: Employers may deduct premiums paid for long-term care insurance as a business expense, provided the policy qualifies under federal guidelines. For C corporations, premiums are generally fully deductible and not included in the employee’s taxable income, as long as ownership and eligibility rules are satisfied. Sole proprietors, partnerships, and S corporations may also receive a deduction, but the treatment may differ based on business structure and how benefits are provided. Offering long-term care insurance as an employee benefit allows businesses to support workforce well-being while receiving a valuable tax deduction and potentially enhancing the overall benefits package to attract and retain staff.
Additional State Tax Incentives: Many states provide further tax deductions or credits for long-term care insurance premiums. The rules and amounts vary, so it is important to review your specific state’s guidelines or consult a tax advisor for guidance.
Tax Deductible Premiums for Individuals: While very few qualify for this deduction, for tax-qualified policies, premiums may be treated as a medical expense and deducted on your federal income tax return if you itemize deductions and your total unreimbursed medical expenses exceed a certain percentage of your adjusted gross income (AGI). The amount you may deduct each year depends on your age at the end of the tax year.

These tax advantages make long-term care insurance a strategic tool not only for protection but also for effective financial planning. Families can leverage current tax law to offset premiums and ensure that benefits remain untaxed, easing both the cost and potential impact of needing care.

Tax Advice Disclosure Statement

The information provided in this communication is for general informational purposes only and does not constitute legal, tax, or financial advice. While every effort has been made to ensure the accuracy of the information, it may not be applicable to your specific circumstances or the most current legal or tax developments. You should not act or rely on any information provided without seeking the advice of a qualified tax professional or legal advisor who is familiar with your individual situation. Any reliance you place on such information is strictly at your own risk. This communication is not intended to be used, and cannot be used, for the purpose of avoiding tax penalties under the Internal Revenue Code or applicable state or local tax laws. For personalized advice, please consult a licensed tax advisor or attorney.

Limitations of Government Programs

A critical part of long-term care planning is understanding what public programs do—and do not—cover. Relying on Social Security, Medicare, or Medicaid often leads to significant gaps in coverage.

Medicare

Medicare is a health insurance program designed for acute care (doctor visits, hospital stays) and short-term recovery. Medicare does offer limited skilled nursing care for up to 100 days following a qualifying hospital stay, provided you are improving and the personal care is related to the treatment of an illness or injury. Medicare does NOT cover: Custodial care (help with bathing, dressing, etc.), which makes up the majority of long-term care needs. It does not pay for extended home care, assisted living care or long-term nursing home stays.

Medicaid

Medicaid is a joint federal and state "safety net" program for those with very limited income and assets. To qualify, you must generally spend down your assets to poverty levels (often $2,000 in countable assets) and have very low income (often under $2,901 per month). For those that qualify financially, Medicaid only pays for care in nursing homes. While some states have waiver programs for home care, access can be limited, and waiting lists are common. Relying on Medicaid often means losing control over where care is received.

Social Security

Social Security is an income replacement program for retirees and the disabled. It is not intended to pay for long-term care services. The monthly income provided is rarely sufficient to cover the high costs of long-term care.

Long-Term Care Insurance Underwriting

Long-term care insurance underwriting involves strict medical guidelines to assess an applicant’s eligibility for coverage. Certain medical conditions may lead to automatic declines, while others may require additional scrutiny. Insurers evaluate factors like age, family medical history, and current health status to determine risk, and a list of some questionable and uninsurable conditions can be found below:

Uninsurable Pre-existing Conditions

You will be declined insurance coverage if you already have any of the following condition(s):

Alzheimer’s Disease or any other form of Dementia.
Severe Arthritis with Functional Limitations.
Diabetes (Type 1 or with any reported neuropathy).
Cancer (within the past 6 months).
Parkinson’s Disease.
Stroke (within the past 6 months) or with residual impairment.
Congestive Heart Failure.
Emphysema, if severe or with nicotine use.
Chronic Obstructive Pulmonary Disease, if severe or with nicotine use.
Any conditions which require the assistance of another human being for the basic activities of daily living: bathing, eating, toileting, or transferring in and out of a bed or chair.

Questionable Pre-existing Conditions

You may be declined insurance coverage if you already have any of the following condition(s):

Controlled Diabetes (Type 2).
Sleep Apnea (non-compliant with CPAP).
History of Cancer (advanced stage/grade).
Atrial Fibrillation (A-Fib) or Coronary Artery Disease (CAD).
Osteoporosis with Joint Deformity.
Severe Anxiety or Depression.
Multiple Family Members with a History of Alzheimers, Parkinson's or Stroke.
Eating Disorders.
Current or Planned Physical Therapy.

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