LTCI is a hot financial topic as your wealthy clients age. Is the deductibility one prize of the insurance?
“Only traditional LTCI policies have this benefit – the hybrid or linked benefit ones do not – a benefit few if any consumers know about because few if any insurance agents or financial advisors ever bring up this benefit,” said Jesse Slome, executive director the American Association for Long-Term Care Insurance.
The IRS recently issued new limits for the tax deductibility of ‘tax qualified’ long-term care insurance premiums: age 40 or less attained before the close of the taxable year, $420; older than 40 but not more than 50, $790; older than 50 but not more than 60, $1,580; older than 60 but not more than 70, $4,220; and older than 70, $5,270.
“With a bit of forward-thinking, Congress recognized the importance of encouraging individuals to plan for the very real risk of one day needing long-term care,” he said. “If people have no plan, they very likely turn to taxpayer-funded programs, which puts a strain on taxpayers. Tax deductibility was one way to encourage more people to plan.”
Traditional life insurance provides a death benefit and LTIC pays for qualifying expenses. An example of a linked benefit policy would be one with a death benefit, maintains a cash value and can provide income tax-free payments for qualified long-term care related expenses. One linked-benefit product does have a portion of the premium attributable as a deductible premium, Slome said.
Most clients are unable to deduct any these premiums at the federal level, since for out-of-pocket, unreimbursed medical and dental costs must exceed 10 percent of AGI.
“With the new tax law, I see little if any tax benefit when you buy the policies in your 50s or 60s,” Slome said. “Income from employment usually precludes one from exceeding the limits that make medical expenses, which would include long-term care insurance premiums tax deductible,” he explained. “After one retires and ceases to have employment income, it’s often much easier to reach the limits that would make your LTCI premiums deductible as a medical/health expense.”
“Just because you buy long term care insurance does not automatically allow you to deduct premiums,” added David Eisenberg, senior vice president at Quantum Insurance Services in Los Angeles. “For our younger clients, it’s often less important given their income being too high. Senior clients are much more interested in the tax advantages but sometimes find the premiums become too excessive at those ages to justify the benefits of tax deductibility.”
Tax reform will also result in fewer individuals itemizing deductions, so Slome doesn’t believe a financial advisor should sell LTCI focusing on the potential for future tax deductibility. “But too few individuals are prepared for the real risk and many today resist planning. Sharing that these policies provide real benefits – the industry pays out about $9 billion in annual benefits – with the added benefit of a future tax benefit is an important point to share,” Slome said.
He still believes “many can and will benefit from the deductibility of LTCI. The potential of a $5,270 qualifying expense (deductible) for a single widow, for instance,” he said, “or imagine the value of up to $10,540 expense for a couple where one spouse now has big medical bills.”