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Topic: Insurance

Long-Term Care Insurance: Traditional and Asset-Based

By Thomas "Greg" Darden, CLTC | September 27, 2019

Traditional and Asset-Based LTC Insurance

Why are we talking about Traditional and Asset-Based Long-Term Care Insurance?  We would all like to think we’re going to take a nap one afternoon, far in the future, and not wake up. We won’t be sick, and we won’t need care. However, statistics tell us otherwise. The U.S. Department of Health and Human Services (HHS) tells us that 70% of Americans turning 65 now can expect to need and use long-term care (LTC).

While the average duration of care is three years, the degree of need is highly unpredictable – paid care could be required for many years and cost hundreds of thousands of dollars.

For a better idea of LTC costs, Genworth’s 2018 Cost of Care Survey (https://www.genworth.com/aging-and-you/finances/cost-of-care.html)  provides national, state and regional costs for long-term care, which can vary dramatically from state to state. The 2019 national median costs are listed below:

  • Semi-private room in a nursing home: $252 per day or $7,664 per month
  • Private room in a nursing home: $283 per day or $8,616 per month
  • One-bedroom unit in an assisted living facility: $136 per day or $4,120 per month
  • Home Health Aide services: $142 per day
  • Homemaker (licensed companion) services: $136 per day
  • Adult day health care services: $74 per day

Who Needs Long-Term Care Insurance?

High net worth individuals can generally afford to cover their long-term care needs out of pocket, though they may choose to insure part of the risk. Modest-income individuals may assume such care is unaffordable, so financial preparation does not enter their mind. Their default plan will be to rely on Medicaid.

The most vulnerable economic segment is everyone in between.

As part of our retirement planning approach, we encourage our clients to think about the costs of aging and how they want to plan for a possible need for LTC. A funding approach to LTC will often include some form of insurance. So, let’s take a closer look at the two most common types of LTC Insurance: Traditional and Asset-Based.

Traditional Long-Term Care Policies

Traditional long-term care insurance is pay-as-you-go, much like a homeowner or auto policy. You pay a premium (typically ongoing) and receive a monthly benefit for a specified or unlimited period.

The advantages of traditional policies include:

  • Lowest out-of-pocket cost;
  • Most benefit for your dollar;
  • Premium is deductible as a medical expense up to IRS limits for individuals who itemize;
  • Additional tax deduction advantages are available to business owners;
  • A portion of the premium can be paid from a Health Savings Account (HSA);
  • Benefits received are tax-free;
  • Some policies offer a shared-care feature that typically allows one spouse who exhausts their benefit to use some of the other spouse’s; and
  • Some policies offer a ‘joint waiver of premium’ feature suspends premium payments for both spouses when one goes on claim.
  • Depending on the state in which you reside, a traditional policy might qualify for the federal-state partnership program. Under this program, you can exclude from Medicaid “asset spend-down” the amount of your assets equal to the total amount of long-term care benefits paid to you.

Disadvantages include:

  • Harder to qualify for, due to strict underwriting requirements;
  • Premiums are not guaranteed and could increase;
  • Use it or lose it – no death benefit or refund of premium if the policy is canceled; and
  • No cash value.

Asset-Based Long-Term Care Policies

Asset-based policies are also referred to as ‘hybrid’ or ‘linked-benefit’ policies. These policies are a combination of life insurance and long-term care benefit.

First, the life insurance benefit (or cash value) is accelerated to cover LTC. Once exhausted, LTC benefits continue through a continuation of benefits rider in the contract. Funding can come from repositioning existing available assets (for example, cash from CDs, savings, or brokerage accounts).

The advantages of asset-based policies include:

  • Flexible payment options (single, multiple and limited payments);
  • A portion of the premium can be paid from a Health Savings Account (HSA);
  • Flexible funding options, including using existing cash values in life insurance or annuities through a ‘1035’ exchange, as well as the option to roll over a lump sum from a retirement account to pay premiums over time, thereby minimizing the tax impact;
  • The premium is guaranteed never to increase;
  • If the policy is canceled without having used LTC benefits, there is a refund of premium, typically subject to a vesting schedule;
  • Guaranteed death benefit: if benefits are never used, your heirs will receive a tax-free death benefit equal to at least the amount of money you paid into the policy, less any withdrawals for LTC, and if benefits are exhausted, a minimal residual death benefit is typically paid;
  • As with a traditional policy, the benefits are tax-free; and
  • Underwriting generally is less restrictive than for a traditional policy.

Disadvantages include:

  • More money paid into the policy initially and in the early years;
  • Premiums are generally not tax-deductible; and
  • Relatively less benefit for your dollar.

When considering whether LTC insurance should be a part of your plan, it’s also important not to underestimate the value of a carrier’s ability to offer care coordination and case management. Having these services available if and when you need to file for LTC benefits will greatly relieve stress on your family.

Lastly, when considering Traditional and Asset-Based policies, key features can be tuned to arrive at the best fit for your needs and budget. These include the amount of monthly benefit, how that benefit will be paid (reimbursement or cash indemnity), the benefit period, the elimination period (the initial period during which you have to cover the costs – essentially a deductible) and benefit inflation. Let us help you put together LTC protection that considers you, your loved ones and your heirs.


How to Put the Premium Tax Credit to Work

By Bob Palechek, CPA | July 19, 2019

The Affordable Care Act (ACA) – nicknamed Obamacare – was disappointing for some, but a godsend for others. If today it is your solution for healthcare coverage, you will want to take maximum advantage of one aspect of it called the ‘Premium Tax Credit,’ assuming you qualify.

The Premium Tax Credit (PTC) is a tax credit ‘advance’ that qualifying taxpayers can receive to help pay the cost of the private health insurance they are purchasing through a Health Insurance Marketplace.

It is considered an ‘advance’ because you can choose to benefit from it every month as a reduction in the cost of your monthly health insurance premium. Whatever sum is determined for you by the HHS formula will be paid directly to the insurance company to lessen how much you have to pay out of your pocket for premiums.

You can also choose not to apply the credit to your insurance premiums. Instead, you can wait to receive it when you file your tax return. In that case, if the amount of the annual credit is higher than your tax liability, the difference will come back to you as a tax refund. And if you owe no taxes, the full amount of the year’s credit will be refunded to you.

Who Can the Premium Tax Credit Benefit?

This tax credit may be available to those paying for their own health insurance. For example:

  • Those whose employers do not offer to pay for health insurance;
  • The self-employed; or
  • People retiring before the age of 65 (when Medicare kicks in), whether they are giving up employer-paid health insurance or not.

However, their household income cannot exceed 400% of the ‘Federal Poverty Line,’ or FPL. The FPL is affected by:

  • Where you live (Alaska and Hawaii’s ‘lines’ differ from the rest of the country);
  • Your family size, which is the number of people you will include on your tax return for the year; and
  • Your income which, for PTC purposes, equals your AGI plus tax-exempt interest.

For example, if you and your spouse live in one of the 48 contiguous states or Washington, D.C., in 2019 the FPL is $16,910. So, if just the two of you file a joint tax return and your AGI + tax-exempt interest income is $67,640 (400% of $16,910) or less, you may qualify.

Understanding AGI

AGI is not only the total of those incomes that are taxed at ordinary income tax rates. If income from any source is taxed at all, it is included in your AGI. Also, AGI is your income before the standard deduction.

Your AGI includes:

  • both qualified and ordinary dividends;
  • the net of both short-term and long-term capital gains;
  • business income or losses;
  • rental income or losses; and
  • deductible contributions to your Health Savings Account.

Your AGI never includes:

  • The portion of your Social Security that is not taxable; or
  • Qualified distributions from a retirement account, like direct rollovers to a new plan or Roth distributions.

However, don’t forget that you must ‘add back’ any tax-free interest received during the year.

When Might You Benefit from the PTC?

The people most likely to benefit from the PTC are those younger than 65 who:

  • are keeping their AGI low by primarily living off Roth distributions and Social Security; or
  • are self-employed and can control when their business losses occur.

To qualify for the PTC, you or a family member also must:

  • Have health insurance purchased through the Health Insurance Marketplace;
  • Pay the balance of the premium (after applying the advance credit payments);
  • Not be eligible for affordable insurance through an employer; and
  • Not be eligible for a government program like Medicaid, Medicare, and others.

These four qualifications must be met for a period of at least one month and must all be occurring during the same month. Some additional requirements include:

  • Having income between 100% and 400% of the FPL for your family size;
  • Not filing taxes as Married Filing Separately (with a few exceptions); and
  • Not being claimed by someone else as a dependent.

If you have any questions about whether you are getting the maximum out of the Premium Tax Credit, call us at 1-844-4-Ask-Jim (1-844-427-5546) and let our Tax Planning Department review it for you.

Using a HELOC to Lower Your Health Insurance Premiums

By Justin Fundalinski, MBA | May 24, 2017

health insuranceWith the House passing a bill to replace the Affordable Care Act (better known as ObamaCare), an excellent cost savings strategy for retirees under the age of 65 could be lost. However, there is a long road for the new health care bill before anything is finalized (or even approved by the Senate for that matter). The strategy discussed this month uses the rules set forth by the Affordable Care Act to maximize the Premium Tax Credit (a tax credit to that is used to offset healthcare premiums for those who purchase health insurance in the “Health Insurance Marketplace.”)

What Exactly Is The Premium Tax Credit?

To answer this I defer to the IRS’s definition[1]:

“The premium tax credit is a refundable tax credit designed to help eligible individuals and families with low or moderate income afford health insurance purchased through the Health Insurance Marketplace, also known as the Exchange, beginning in 2014. The size of your premium tax credit is based on a sliding scale. Those who have a lower income get a larger credit to help cover the cost of their insurance. When you enroll in Marketplace insurance, you can choose to have the Marketplace compute an estimated credit that is paid to your insurance company to lower what you pay for your monthly premiums (advance payments of the premium tax credit, or APTC). Or, you can choose to get all of the benefit of the credit when you file your tax return for the year.”

As a take away from this little except, notice that it says nothing about assets. It is entirely based on income.

How Much Can The Premium Tax Credit Benefit Someone?

How much you can get from this tax credit can be very substantial, but it all depends on your income and household size. Of course, the more income you have or the smaller the household the less the credit you can get.   Unfortunately, there is very little aggregated data to give a nice consolidated summary of how much the credit is, but I have a few examples.  In Colorado:

  • At a maximum, a family of two can save just over $1,400 monthly on healthcare premiums.
  • At a maximum, a single individual can save over $700 monthly on healthcare premiums.

These amounts are nothing to squawk at!

How Do I Get Premium Tax Credit?

Individuals and families can get a premium tax credit if their household income is anywhere between 100% and 400% of the federal poverty level. Currently these income levels look like this[2].

  • $11,770 (100%) up to $47,080 (400%) for one individual
  • $15,930 (100%) up to $63,720 (400%) for a family of two
  • $24,250 (100%) up to $97,000 (400%) for a family of four

Clearly you do not need to have a lot of income to be quickly phased out of this credit (and much less to get the maximum credits), however don’t quit reading this article yet. Retirees (or soon to be retirees) that are younger than age 65 have a lot a lot of control over how they generate income and some simple income and withdrawal strategies can avoid what is counted as income for Premium Tax Credit eligibility!

How Can I Manipulate My Income To Get A Premium Tax Credit?

In order to get the Premium Tax Credit, the IRS looks at your Adjusted Gross Income (essentially all your taxable income such as capital gains, taxable Social Security, dividends, earned income, etc…) and adds to it some other items that are not taxable (primarily the big hitters in this category are interest from state and local bonds, and the non-taxable portion of Social Security benefits).  Fortunately, there are lots of income items that are not added to your income. Some of these items being:  income drawn from a Roth IRA account, basis withdrawn from capital assets, as well as proceeds from a loan.

Upon retirement, you have a lot of discretion in how you generate income for yourself. You can draw from different types of accounts/assets and you can delay or not delay your Social Security, pension, or annuity benefits.

Using a HELOC

Now, if you have large Roth IRA accounts or a lot of basis in taxable accounts you could potentially bridge all your income needs for a few years (until you reach age 65 and you are eligible for Medicare), and get a hefty Premium Tax Credit.  However, if you don’t have such resources or it does not make sense from a long term planning perspective to drain those accounts you are not quite out of luck yet!  One of the largest assets that many retirees have is the equity built in their home.   An excellent planning strategy that we have seen is to generate just enough income from withdrawals of qualified assets or Social Security/Pension income to maximize your Premium Tax Credit. Then bridge the rest of your income needs by drawing from a Home Equity Line of Credit (HELOC).  You can save thousands of dollars in medical premiums and pay off the loan at a later date from assets that you would have debited anyways.

Of course, there are many nuances, technicalities, and planning aspects that need to be considered beyond this basic concept.   Not only that, everybody’s situation is very different.   If you are in the market for insurance and wish you could lower your monthly premiums feel free to give us a call.  We can help you navigate through this cost saving strategy.

[1] https://www.irs.gov/affordable-care-act/individuals-and-families/questions-and-answers-on-the-premium-tax-credit

[2] https://www.irs.gov/affordable-care-act/individuals-and-families/questions-and-answers-on-the-premium-tax-credit