This series highlights key areas, trends and opportunities that many people may not realize about long-term care insurance.
There are tax advantages available. The vast majority of long-term care insurance policies sold today are federally-tax qualified; this means that benefits are received tax-free even when the payment is in the form of a cash benefit (up to certain IRS limits). It also means that premium payments can be tax-deductible as an itemized medical expense under certain circumstances. In this way, LTC is treated as a medical expense. While many people do not itemize medical expenses or qualify for the tax deduction, there are individual circumstances where this tax advantage can apply. Even for someone in their prime working years, making a good income, there may be periods of time during which medical expenses peak and, when combined with the cost of annual long-term care insurance premiums, the threshold of 10% of adjusted gross income is met. Also, many states provide a state tax credit or deduction to those who purchase long-term care insurance. (Consumers should ask their accountant or tax expert about these provisions.)
Lapses in coverage due to rate increases are rare. While no one likes to receive a rate increase, the reality is that the vast majority of policy holders are able to retain their coverage either intact or with some coverage modification that enables them to be able to afford the rate increase. Industry lapse rates are in fact extremely low. Most insurers offer viable options to consumers when there is a rate increase. Some have the opportunity to elect a no-cost contingent nonforfeiture benefit which allows them to retain a small amount of coverage (roughly 90 days’ worth) if they decide they cannot or choose not to accept the rate increase. Most people value their coverage enough to continue to pay the premiums even with the rate increase. For example, one analysis shows that 87% of consumers accept the rate increase; 12% modify coverage to maintain their prior premium and less than 0.5% let their coverage lapse in response to the rate increase. While the exact numbers might differ across companies, the direction of consumer response remains.
There are other options for consumers who can’t afford an increase. Policy holders also have the option of adjusting coverage – most typically accepting a slightly lower rate of inflation protection or small decrease in their daily coverage amount – in order to maintain or even reduce the premium they’ll have to pay.