Understanding Long-Term Care Insurance – The
Over-Looked Fringe Benefit

One of the most tax-advantaged benefits for corporations and their employees today is Long-Term Care Insurance (LTCI). Most people are aware of the personal reasons for having this kind of protection, but they may not be aware of the corporate advantages.

Over the course of your lifetime, the chances are higher for you needing long-term care services than for you being in an automobile accident. Photo courtesy Downtown Detroit Partnership

As a corporate fringe benefit, LTCI enjoys a unique combination of tax advantages not available with other benefits. Namely, the premiums on tax-qualified policies on employees, their spouses and dependents are deductible by the corporation. In addition, the premiums are not taxable income to the employee. Finally, all or most of the benefits are tax-free if and when they are received.

Business owners also have an unusual level of control when using LTCI as a fringe benefit. It can be offered to a select group of key executives without losing any of the tax features. If offered to all employees, it may be available on a “guaranteed issue” basis; i.e., no medical underwriting. This can be a major plus for employees (and business owners) with health problems. A low-cost basic benefit can be paid for by the company, with optional “buy-ups” for employees who want more. Finally, there is the fact that most employees will truly value this benefit. Everyone has had experience with a parent or relative needing long-term care services. The statistics are staggering: nearly half of all adults eventually need long-term care services to assist them with basic activities of daily living. Over the course of your lifetime, the chances are higher for you needing long-term care services than for you being in an automobile accident.

Unfortunately, the federal government is not going to pay for the long-term care needs of our aging population. That is why the Health Insurance Portability and Accountability Act (HIPAA) was passed in 1996, providing tax breaks for the purchase of LTCI to both corporations and individuals.

As to the policies themselves, what benefits do they provide? Basically, when you can’t take care of your basic living activities (bathing, dressing, or feeding, for example), the cost of getting help is covered, whether in your home, a child’s home, an adult daycare facility, an assisted living facility, or a full-service nursing home.

The policies have many optional benefits that let you custom build a plan to suit your needs and budget. There are a variety of waiting periods, benefit periods, and features such as inflation riders, accelerated payment options, and spousal “shared-care,” to name a few. By way of example, a plan with a monthly benefit of $3,000, a 90-day waiting period, and an unlimited, lifetime benefit could cost as little as $70 a month if purchased at age 55. At age 65, that same plan could cost $125 a month; by age 75, $325 a month. (Costs will vary depending on the insurance company, your health, your marital status and the state you live in.)

So, what are the top three reasons to buy long-term care insurance?

-¢ Preserve your independence and freedom to choose, rather than being dependent on family and friends.

-¢ Conserve your estate and retirement assets.

-¢ Provide an important, tax-advantaged benefit for yourself, your family, and your employees.

Long-term care insurance is not just a health issue, but rather a part of an overall financial plan. It covers not just nursing home care, but the whole continuum of care needs. This is a benefit for all people, even those with the ability to afford private care. It is “icing on the cake” that this protection can be provided as a corporate benefit as well as a personal plan.

Norman Pappas is president and founder of Pappas Financial and the author of several articles on business and estate planning topics. His book, Passing the Bucks, is a guide to business succession and wealth transfer planning.