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Estate Planning with Long-term Care Insurance


By Sam A. Moak

Estate Planning with Long-term Care Insurance

 The information in this column is not intended as legal advice but to provide a general understanding of the law.  Any readers with a legal problem, including those whose questions are addressed here, should consult an attorney for advice on their particular circumstances.

Longer life expectancies and the coming surge in the retirement-age population have increased the demand for long-term care, as well as for insurance as one means of paying for that care.  Long-term care encompasses a broad range of services for those with a prolonged illness, disability, or mental disorder.  Unlike the focus of traditional medical care exclusively on certain medical problems, the goal of long-term care is the maintenance of an individual’s level of functioning.

 The two main types of care are skilled care, provided by medical personnel for medical conditions according to a treatment plan, and personal care. Personal care, sometimes called custodial care, is assistance with the activities of daily living that can be provided in many settings, including nursing homes, adult day-care centers, or the individual’s own home.

 Whether the purchase of long-term care insurance makes sense for a particular individual depends on age, health status, overall retirement objectives, and income.  As with any type of insurance, it is critical to understand what is and is not covered among the types of long-term care services that are available.  Exclusions and limitations are common. Equally important is knowing where services are covered.  Some policies cover care in any state-licensed facility, but others may specifically include or exclude particular types of facilities.

 Since the amount of coverage is dictated by the type of service, coverage amounts will vary depending on the service.  Most policies have a “total lifetime benefit” for the duration of a policy.  In addition, benefits are often payable up to maximum amounts per day, week, month, or year.

 A provision on when benefits are payable, sometimes called a “benefit trigger,” is another key feature that can vary significantly among policies.  Typically, benefits become payable because of the insured’s inability to perform a certain number of the activities of daily living.  Policy language on mental incapacity also allows for benefits when the insured fails mental functioning tests. Such a benefit trigger is especially important for those afflicted with Alzheimer’s, even though most states prohibit the outright exclusion of coverage for that disease.

 Although they can add to the cost of a policy, there are optional policy provisions that can help to tailor a policy to individual circumstances.  Third-party notification authorizes the insurer to notify a designated third party, such as a relative or friend, if the policy is about to lapse for nonpayment of the premium.  A waiver of premium clause allows the insured to stop paying premiums once he or she is in a nursing home and the insurer has begun to pay benefits. Nonforfeiture benefits return some of the investment in the policy if coverage is dropped. If an insured has paid premiums for a certain number of years, some policies allow a death benefit to the estate consisting of a refund of premiums, minus any benefits the company has paid.

 Premiums paid for long-term care insurance are deductible as a medical expense, as long as all medical expenses exceed 7.5% of adjusted gross income. Since premiums on average increase more than tenfold between the ages of 40 and 70, this deduction increases substantially with age. The maximum long-term care premium you can add to your other deductible medical expenses is based on your age at the end of each tax year.

 Employer contributions to long-term care insurance for their employees are tax deductible for the employer, and premium payments are not taxable income to the employees.  The annual limitation will increase with inflation in future years.

 Consult your insurance agent and attorney about the benefits of long term care insurance when making your estate plans.  Also, remember that all insurance plans are not the same so review them carefully before purchasing one.

 Sam A. Moak is an attorney with the Huntsville law firm of Moak & Moak, P.C.  He is licensed to practice in all fields of law by the Supreme Court of Texas, is a Member of the State Bar College, and is a member of the Real Estate, Probate and Trust Law Section of the State Bar of Texas.