As an Asset Protection attorney ANY avoidable source of loss, risk or exposure to my clients is unacceptable. One often overlooked area is the possibility that you or a loved one may need long term care as a result of age, illness or accidents. In cases where such care is required, the financial effects can be devastating even to the most affluent clients and are a needless expense that can be avoided.
For help in this area I turned to an expert, Dr. Jonathan Smith, M.D. a medical specialist who knows what this care costs and who now provides education and coverage to clients and advisors all over the U.S. on this easily addressed but potentially serious exposure. He shares important thoughts on this issues with us below. The insurance part is good enough, but some options are also both creditor protected AND have a return of premium guarantee if you never need it. Interestingly, even DOCTORS (who know better) often neglect this area of their own planning.
Here are Dr. Smith's points, they are tough to argue with...
1. The successes of medical science and the Medical Profession have helped people to live longer, but not necessarily healthier.
2. Women live longer than men.
3. The Federal Government says "at least 70% of the people over age 65 will require some form of Long Term Care services at some point in their lives". (1)
4. The Term Long Term Care services is applied to any 1 of 3 levels of services a person receives when that person fails to perform at least two of the six Activities of Daily Living (ADL), or is mentally incompetent.The ADLs are:
A - ambulating, walking around
B - bathing oneself
C - continence; continent of urine and/or stool
D - dressing
E – eating; feeding oneself
T - transferring; moving between bed and chair, etc
5. The inability to perform the ADLs may occur at any age.Example: as a result of a severe automobile accident, a person is left unable to walk (Ambulating). Toileting and Bathing are accompanying failures. As a result, who is going to move that person to a toilet each time there is a need to urinate?Or shall that person be left to soil him/herself?
6. The cost of care can be CATASTROPHICALLY EXPENSIVE.
Example: When the minimum wage in California is $8.00 per hour for UNSKILLED help, the cost for labor for home-help is $192.00 per day, and, if paid from a tax-deferred account, is nearly $120,000.00 per year! (assuming an overall tax rate of 40%)
7. Medicare and private health insurance programs do NOT pay for the majority of long term care services. (1)
8. Successful business owners have a special tax advantage when it comes to protecting earned assets from the aforementioned real and crippling financial losses.
9. Successful business owners can own PEACE OF MIND for themselves and their dependents, thus sparing each other the effects of the potentially devastating financial losses.
10. The successful business owner can experience the DIGNITY of receiving care at home, instead of 'spending down assets' to be eligible to be admitted to a Medicaid facility. He still has the ability to leave a LEGACY with the premium payment money returned upon his death.
It comes as a surprise to many that there is an insurance policy that has been around since HIPAA (1997) which specified Long Term Care Insurance as "A Health Benefit" in the tax code. (HIPAA LEGISLATION PUBLIC LAW 104-191 AUGUST 21, 1996 IRC Sec. 7702B)
Such a product is QUALIFIED LONG TERM CARE INSURANCE with CONTRACTUALLY-GUARANTEED FULL REFUND OF ALL PREMIUMS PAID with no reduction in the refund for benefits paid.
HOW DOES IT WORK? Money is paid to the the Insurance Company; the amount is enough to buy the Peace of Mind, the Dignity of the Insured and/or his family, and the size of intended Legacy.
The premium payment may be partially tax deductible, or completely tax deductible, if paid as a benefit to employees in a C corp,{IRC Sec. 162(a) and Regulations.162-10; IRC Sec. 162(a) and ISP Coordination Paper UIL 162.35-02; IRC Sec. 7702B(a)(3) IRC Sec. 7702B(a)(1)}: and is ERISA independent (ERISA: 29 USC 1191b IRC Sec. 1167; Not subject to ERISA) (please consult your tax attorney/ accountant we never provide specific tax advice in a setting like this).
Long term care Insurance is 'purchased' for a level of benefits, and upon death of the insured, the insurance company contractually guarantees to refund all premiums paid (and this is a nontaxable event!{IRC Sec. 7702B(b)2(C)(1)(E)}
As of January 1,2010, PPA (2006) suggests a 1035 exchange from a qualified plan to Qualified Long Term Care Insurance (PENSION PROTECTION ACT PUBLIC LAW 109-280 AUGUST 17, 2006, SECTION 844)
(Sec. 844) Excludes from gross income any charge against the cash value of an annuity contract or the cash surrender value of a life insurance contract made as payment for coverage under a qualified long-term care insurance contract which is part of or a rider on such annuity or life insurance contract if the investment in the contract is reduced (but not below zero).
Requires an individual excluding such charges from gross income to file a return with the Secretary of the Treasury. (http://thomas.loc.gov/cgi-bin/bdquery/z?d109:HR00004:)
I recommend anyone interested consult a specialist; use these references for guidance:
(1). http://www.longtermcare.gov
(2) www.aarp.org/families/caregiving/state_ltc_costs.html
(3) www.dhcs.ca.gov/services/ltc/Pages/ConsAWordfromtheDirector.aspx.
About guest author Jonathan Smith, M.D.
More than a quarter century in Anesthesia practice (monitoring of people’s health, managing their risks and protecting them from death), made me aware of the financial burden on people living longer, but not necessarily healthier. I saw the need for Guaranteed Full Refund of Premium Long Term Care Insurance as a way to protect Earned Assets from the often debilitating losses to long term care, while preserving Dignity by affording home care; and capital for a Legacy. I own such a policy and advocate the concept. Clients and advisors can reach me directly at jonathan.smithmd@gmail.com for help.
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