One of the more frequently asked questions about long term care insurance is if you can’t afford the long term premiums are there any tax benefits to owning a long-term care policy that might help subsidize the premiums.

Here are some answers to those questions given by tax experts:

1. Long-term care premiums are deductible as a medical expense (subject to the 7.5 percent-of-AGI floor), although there are limits to the deduction based on the taxpayer’s age. For example, a taxpayer between ages 61 and 70 may deduct as much as $3,080 in 2008 ($3,180 in 2009). A couple filing a joint return can deduct as much as $6,160 in 2008, if each spouse pays premiums on qualified long-term care policies. Payments in excess of any LTC benefits may be deducted as medical expenses.

On October 20, 2011, the Internal Revenue Service (IRS) issued Revenue Procedure 2011-52, which included inflation adjustments for the tax deductibility limits of long term care insurance for 2012. This is one of the ways the way the government is trying to encourage people to get long term care policies. There may also be state programs which offer tax deductions or credits for the purchase of long term care insurance.

Here is the table with the age divisions and deductions:

2012 Federal Long Term Care Insurance Tax Deductible Limits

Taxpayers Age at End of Tax Year 2012 2011

40 or Less $350 $340

More than 40 but not more than 50 $660 $640

More than 50 but not more than 60 $1,310 $1,270

More than 60 but not more than 70 $3,500 $3,390

More than 70 $4,370 $4,240

Source: IRS Revenue Procedure 2011-52 and IRS Revenue Procedure 2010-40

If you are self-employed you get an even better deal on your deductions. You are eligible to deduct 100% of long term care insurance premiums (subject to the maximum deductibility limits) without having to meet the 7.5% adjusted gross income medical expense requirement. This includes premiums paid for a spouse or dependents. The amount exceeding the deductibility limits will be taxed as ordinary income.

What if an employer pays for a portion or all of an employee’s tax-qualified long term care insurance premiums? If you are employed and your employer pays premiums on your behalf these are tax deductions for your employers business expense. The deduction for these premiums is not subject to age-based maximum deductibility limitations. You do not have to include these in your adjusted gross income.

If you are employed and your employer only pays a part of the premium you can deduct the remaining premium subject to the age-based deductibility limits set forth in IRS Revenue Procedure 2011-52, provided they are able to satisfy the 7.5% adjusted gross income medical expense requirement.

2. Using a distribution from an HSA to pay for the premiums is a qualified tax free HSA distribution, you do not get an additional itemized deduction because the HSA contribution itself was deductible and the distribution is tax free for qualified medical expenses. So here you get a double tax free supplement which will help reduce your cost. For more information see our postAre Long Term Care Premiums HSA Contribution

3. The new annuity 1035 exchange effective in 2010 allows you to do a partial 1035 from your NQ annuity to pay for a qualified LTC contract. The annuity distribution is tax free, but you do not get an itemized deduction for the LTC purchase. Tax experts say you would probably have to do one of these exchanges each year to pay the current LTC premium.

One reason so many people hesitate to purchase long term care policies is the expense. It is a huge expense at a time when we have so many other things to pay for like our kids college and our retirement. The government has enacted legislation to help with this problem.

The Pension Protection Act of 2006 says that starting Jan. 1, 2010, you ll no longer have to pay federal income tax on an annuity s proceeds if you use those proceeds to pay for long-term-care coverage.

The very fact that Congress enacted this legislation indicates a growing awareness by regulators that there is a fundamental need for long-term-care insurance. and they are trying to create better tax incentives to enable the industry

In response to the legislation insurance companies now offer what they call a hybrid policy which is a an insurance policy with a long-term-care rider.

Here is how it usually works. You put money ($50,000 is about the minimum) — into an annuity. Or you can use an annuity you already own or a whole or universal life insurance policy that you no longer need through what the IRS calls a 1035 exchange.

You then choose the amount of long-term care coverage you need. Average is usually 200 percent or 300 percent of the face value of the annuity. You also choose if you want inflation coverage and how long you want coverage to last.

Be aware though there are pros and cons to long-term-care annuities By definition, annuities expire after a certain amount of time whatever the length of the contract is. If you are sick for more than three years (called extended long-term care in the industry), you would really need to have an a regular long-term-care insurance policy because that will keep paying for as long as you live.

Here are the pros and cons in very simple terms:

Long-term-care annuities offer the flex appeal of having long-term-care coverage, but, if you don t need it, you can get your money back. In regular long-term-care insurance policies if you don’t use it you lose it.

Long-term-care annuities let you build up money tax-deferred. Good if you are in a high tax bracket. who plan to be in lower brackets when they begin drawing down their accounts.

If you are too ill to qualify for a regular long-term-care insurance policy, you might have an easier time getting coverage through a long-term-care annuity because they ask you fewer insurability questions and there are no medical underwriting requirements

The main drawback on long-term-care annuities is the length of coverage. If you don t deposit money enough upfront, your coverage may not last during an extended long-term-care situation.

If you can t afford to tie your money up for a long period of time you won’t want to do the annuity because the penalty for withdrawing your cash early are steep.

You ll also need to have between $75,000 and $150,000 just to get coverage in the first place whereas a regular long-term-care insurance policy you, in will make monthly payments.

Long term care insurance policies and annuities are expensive and can be confusing. Your best bet is to read up on what is available so that you have an idea what is going on. Then talk to an agent that is reputable and has some experience with these types of policies. They can simplify the jargon and decipher the policy and help you figure out what is best for you.

Another option tax exempt way to pay for long term care insurance is to use an HSA or health savings account to pay for long term care. See our post Are Long Term Care Premiums HSA Contribution

A health savings account (HSA) is a tax-favored savings account created for the purpose of paying medical expenses. Contributions to the HSA are 100% deductible (up to the legal limit) — just like an IRA. If you use the money to pay for qualified medical expenses you do not have to pay taxes.

Any interest you earn on the money is also tax free provided you use it to pay for qualified medical expenses.

HSA money is different than the flexible spending account you do not have to forfeit the money at the end of the year. In other words if you don’t use it – you get to keep it and it continues to grow, tax-deferred.

No penalty or taxes will apply if the money is withdrawn to pay premiums for qualified long-term care insurance.

Many people were concerned that health care reform would affect their HSA account if they were using it to pay for long term care insurance premiums. The latest information on health care reform says there is not an impact on long term care premiums. There is an increased penalty on HSA distributions that are not used for qualified medical expenses for those under the age of 65 from 10 to 20 percent but long term care premiums are not unqualified medical expenses.

The Patient Protection and Affordable Care Act (PPACA) has created long-term care insurance programs to be financed by voluntary payroll deductions as a way to provide benefits to adults who become disabled.

You should be able to participate in this insurance program without losing your HSA eligibility. You may also be able to pay for the premiums from your HSA.

Here is the wording directly from the IRS web site regarding long term care insurance premiums and HSA’s
http://www.irs.gov/publications/p969/ar02.html#en_US_2010_publink1000204083

Insurance premiums. You cannot treat insurance premiums as qualified medical expenses unless the premiums are for:

You cannot claim this credit for premiums that you pay with a tax-free distribution from your HSA. See Publication 502 for more information on this credit.

As way to help pay for those long term care policies HSA’s a great way to help cut the cost. No taxes on the money you set aside and no taxes on the interest you accrue.

What is so frightening for us aging baby boomers is that the cost of long term care is rising at an alarming rate. It does make sense that since people are living longer, more and more people are making claims which would account for the risings rates. As hard as it to save money none of us wants to see our savings wiped out to pay for long term care.

In some cases you can find government subsidies and programs that will help you out. In some cases though you may need to supplement with long term care insurance.

Everyone agrees that long term health care insurance premiums take a huge bite out of most seniors income. If you are going to buy one of the policies you want your rates to remain relatively stable. So to help understand what causes rates to increase and how you can protect yourself from policies that do this here is some information from the GEORGETOWN UNIVERSITY Long-Term Care Financing Project

Even if insurers have the intention to sustain level premiums, things happen that cause them to increase premiums. For instance, in recent years the lapse rate—that is, the proportion of policyholders who drop their policy—has declined. This means more people are keeping their policies and will eventually be making claims. If the insurer did not predict this decline they may have increase rates to stay in business.

Premiums can also change for other less ethical reasons. According to the Georgetown University report “Every market has “bad actors”—in this case, insurers who set premiums for short-term gain rather than long-term price stability. One such practice is the use of “loose” underwriting rules—selling to less-healthy people along with others—and then setting rates that are too low to cover the long-term risk level of the purchasers.

Another is setting inappropriately low rates (that is, “low-balling”) in order to sell a particular policy and then closing enrollment in that policy (or “block of business”)—enrolling new applicants in a new and separate policy and raising the premiums for holders of the closed policy. The result is a “death spiral” for the initial policy—individuals who can pass medical underwriting drop such policies because they are able to purchase less expensive ones, and individuals who cannot are forced to pay significantly higher rates or lose their coverage.”

The NAIC Long-Term Care Insurance Model Act and Regulation was created to better protect consumers from rate instability. It was amended in August of 2000, to financially penalize companies that intentionally underprice policies and, help state regulators prevent insurers that do this from selling policies in their state. Also, the new model requires insurance companies to provide more disclosure of premium increases and provides policyholders more options when their premiums are increased.

Several states have recently adopted NAIC premium rate stability provisions so that their residents can better afford long term care insurance. The NAIC has an excellent publication called “A Shopper’s Guide to Long-Term Care Insurance” and here is the link to it NAIC Shopper’s Guide to LTC

What financial experts say is that rate increases don’t always mean your policy is bad, and the lack of rate increases doesn’t always mean your policy is good. If you do have rate increases you want to be assured that they are for a valid reason.

If your state has adopted NAIC premium rate stability provisions you have some reassurance but you also need to make sure you pay careful attention to any wording about rate increases in the policies you are looking at.

Benefits consultants Hewitt Associates says its research indicates that more than 60 percent of workers will simply default to the choice they made the previous year. This may not be the best choice. If you do not make a choice at all your employer may choose for you and they will probably pick the option that saves them the most money but may cost you more. Here are some tips that were detailed in the business section of our local paper.

1. Do your homework and seriously evaluate all benefit options and weigh them against your specific needs. Look over what you did last year and see where you could improve other than not ever getting sick. In other words – did you put enough dollars in your flexible account, did you use docs covered under your plan, how much did you spend in co-pays and out of pocket costs. Most employers can provide access to past medical and dental claims so you can estimate what the costs this year might be.

2. Think about any life changes that may affect the benefits you select this year. Are any of your dependents no longer eligible for coverage or will you have a new dependent.

3. Use the tools available to you. Many employers offer health care cost estimators that allow employees, to comparison shop for health insurance by evaluating two or more health care plans at a time. Users an compare monthly premiums, co-payments, deductibles and coinsurance payments.

4. Read the fine print. More employers are changing the rules of the annual enrollment process, and it’s up to you to make sure you fully understand if and how those rules may affect you.

5. Assess your family’s needs. More companies are requiring employees to pay a bigger portion of the cost of coverage for their dependents. You should assess if your spouse or partner can get coverage under an employer plan. It may be more cost effective for each of you to take coverage under your own employer health plan if that option is available.

6. Consider participation in health and wellness programs, like smoking cessation, weight management or physical fitness. It could improve your health and save you money.

7. Take advantage of tax free benefits like flexible spending accounts and dependent care spending accounts.
Looking to save money on your car insurance too? See our post on Cheapest Cars To Insure

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Here is a wonderful opportunity from Suze Orman. For the next 24 hours you can download a free copy of her book Woman and Money CLICK HERE
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According to the article, a good place to start is a Web site run by the Georgetown Univeristy Health Policy Institute, www.healthinsuranceinfo.net Click on your state, and you can get summary information on consumer protections and what private insurers may and may not do. When considering the options for personal health insurance, experts recommend focusing on protecting yourself against ruinous medical expenses and worry less about having your routine expenses paid. It’s better to take the high deductible and get good coverage for the big problems, than get one that pays for routine visits but has limited coverage for major events like surgery.

You should also look for a policy that is renewable at your option. A lot people buy a temporary policy because they assume they will get a job and be able to drop the individual coverage. Experts say though if you don’t find a job or have permanent coverage by the time your 6 month policy expires, you could have a problem renewing. If you have no claims, you can renew but if something happens 3 or 4 months into your policy, you only have coverage for a few more months. Then, when you try to renew, you can’t. Temporary policy are a risk and should be avoided if at all possible.

You should look at internal caps and limits the policy may contain. What is the lifetime maximum the policy will pay? Experts say ideally there should be no limit, but $2 million should be the least you should accept. But then there is the premium. To get a sense of range of premiums for your particular profile you should go to a website that quotes insurance rates. I like  http://www.bestquoteus.com/best-individual-health.html 

Finally, if a policy looks good, you should find out if the insurer will sell it to you. In most states, that decision rests with the insurer. Different carriers have different rules so you should shop around. But according to the article, if you are refused coverage, ask your state insurance regulator if there are companies offering “guaranteed-issue” policies for which you can’t be turned down. The downside is that these policies are expensive.

As I mentioned finding individual health insurance  can be a difficult and frustrating experience. But this is a situation where you really need to persevere because there is nothing more important than your health.

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Why doesn’t everyone choose COBRA when they are in this situation? Because you now have to pay not only your share of the insurance premium but the part that your employer was paying and possibly a two percent administrative fee. Our local newspaper reported that the amount can be over $1,000 a month for a family, based on the average cost to employers of $12,000 per employee for health insurance last year. The article also noted that only about 20 percent of workers who were eligible for COBRA chose the COBRA option.

What the article said that I found interesting was that if you had a good plan at work, you should take the COBRA, because it is likely to be better than anything you can get from the individual health insurance market. Insurance experts say especially if you have a pre-exisiting condition – take the COBRA.  If you take the COBRA option it not only gets you the coverage you are used to but it also “preserves your right to buy insurance.” Keeping up your coverage with COBRA makes you “HIPPA-eligible” when you enter the individual market. HIPPA stands for the Health Insurance Portability and Accountability Act of 1996. The HIPPA requires states to have at least two policies available with pre-existing conditions exclusions.

If a state doesn’t have those two policies available, then it must set up an assigned risk pool. Assigned risk pool means insurers in the state share the coverage for people unable to buy a policy on the open market. Some states regulate what the assigned risk pool can charge as a premium but other states do not.

The other important thing the article mentioned was COBRA  and HIPPA have deadlines. It said you have a right under the law to COBRA benefits, but you lose that right if you fail to exercise it within 60 days of the termination of your group coverage. You have 63 days from the expiration of COBRA coverage to apply for HIPAA-eligible coverage.

Check our post on individual health insurance at bestquotes.com best-individual-health-plan

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