Long Term Care Insurance Offers Many Benefits to Business Owners

By Kevin M. Shea, Cherry, Bekaert & Holland, L.L.P. (CB&H)
Email: kshea@cbh.com

Owners of real estate firms and construction companies searching for additional tax deductions should consider the valuable benefits available by offering long term care insurance either to certain key associates and their spouses or to all of the company’s employees.

With baby boomers approaching retirement and their parents approaching an age where additional in-home health assistance or skilled nursing care is often necessary, the importance of proper planning for long term care has become even more apparent. As such, long term care insurance has gained popularity as an employee benefit.

Established to protect an individual’s savings and investments against unanticipated future healthcare costs, long term care insurance pays a daily or monthly benefit to chronically ill individuals who cannot perform two out of six daily living activities (i.e., bathing, dressing, eating, transferring, toileting and continence) or have a severe cognitive impairment, such as Alzheimer’s or dementia.

Most real estate and construction companies can take advantage of many benefits associated with offering long term care insurance, especially the availability of a tax deduction worth up to 100 percent of the premium cost depending on a company’s ownership structure. The premiums paid by C corporations, either for their employees or their employees’ spouses or dependents, are fully deductible as business expenses. The tax treatment for owners of S corporations is still favorable, but slightly more complex.

The premium is reported as additional compensation to the shareholder, but not subject to FICA or Medicare. Within certain limits (based on age), the shareholder is then able to deduct the premium to arrive at their adjusted gross income, and the S corporation is able to take a deduction as a compensation expense. In addition, this benefit is not subject to nondiscrimination rules, even though the premiums are deductible.
The fastest growing segment of the long term care insurance marketplace includes multi-life and corporate-sponsored plans. Such plans offer a number of additional benefits to employers, including preferred health discounts; an up to five percent discount on all premiums; simplified underwriting, which may benefit individuals with certain current health disorders; the ability, in most cases, to legally determine which employees will be offered the plan; and the option of coverage for non-employee spouses.

Individuals planning for future long term care have four general options to consider:

1. Save additional personal funds to pay for care when needed
2. Prepare an estate plan that allows assets to be shifted in order to qualify for Medicaid
3. Hope that the federal government will change course and design a long term care program that fills the gaps in Medicare and Medicaid
4. Purchase a long term care insurance policy through an employer or private company

Option #4, purchasing a policy, can offer the peace of mind knowing that money is specifically set aside for the purpose of long term care. When contemplating long term care insurance, here are a few Dos and Don’ts to consider:

• Don’t wait too long to purchase a policy. With an estimated 50 percent risk of needing care, age should not be a consideration when purchasing insurance. 40 percent of all long term care expenses are incurred by people ages 18 to 64.
• Do purchase a sufficient daily benefit. In Virginia, for example, a semi-private room currently averages $145 per day. A policy with inadequate benefits will require the use of personal assets or Medicaid to fill in the gaps.
• Do understand the “waiver of premium” feature. Typically, once the insured is receiving benefits from the insurance company, the premiums on the policy are “waived.” If recovery is made and you are no longer eligible for benefits, premiums will resume.
• Do consider policies with an inflation rider. The cost of long term care insurance continues to increase faster than inflation. With the most recent studies showing the cost of care rising seven percent annually, insurance companies are offering policies with riders that provide inflation protection. Simple or compounded increases to your inflation rider can sometimes be determined based on the age of the purchase.
• Do consider a “paid up” policy. Because insurance premiums will continue to rise, consider purchasing a “paid up” policy that no longer requires a premium once you reach a certain age or after a given number of years.
• Don’t forget to notify your tax preparer. All, or a portion, of your premium may be tax deductible. For individuals who itemize tax deductions, medical expenses are deductible if they exceed 7.5 percent of adjusted gross income (AGI). For 2008, the portion of the long term care insurance premium that is deductible is determined by the age of the insured:

• Don’t worry about unused policy benefits. One of the biggest concerns about buying coverage is the thought of dying and never needing the policy benefits. With some companies, you can purchase a “return of premium” rider which, upon death of the insured prior to age 65, pays back premiums on most policies after 10 years of policy ownership, less any benefits paid.

These are just a few factors to consider when selecting long term care insurance. Given the sector’s complex laws and frequent regulatory changes, it’s best to work with a financial planning professional experienced in the field. Choosing the right policy can reduce family stress and give you greater control over your future care.

Kevin is a Financial Services Professional with CB&H Business Services, LLC.