Can you afford long-term care? (Economic Observer).

THE CONSUMER FEDERATION OF AMERICA and the American Council of Life Insurers have released a survey which reveals that more than 80% of American workers have no long-term disability insurance or are covered inadequately. Naturally, most of these workers concluded that a disability would affect their finances adversely if it lasted more than a year.

Long-term care insurance can protect you and your family from catastrophic financial risks when you or your loved ones need extensive care. Since the current cost of nursing home care averages more than $50,000 a year, long-term care becomes a critical factor in retirement security. Without it, you risk having your savings wiped out by even a relatively short stay in a nursing home.

Many people think long-term care is covered by Medicare, but they're wrong! Medicare focuses on acute-care needs, such as hospital stays and physician visits. It pays for only short-term, skilled nursing home stays after being in a hospital. Medicaid, meanwhile, is a welfare system. It only covers long-term care if your assets are depleted. Each state has its own rules for eligibility, but, in round numbers, most limit nonexempt assets to around $2,000, with a maximum monthly income of approximately $1,500. That means, if you have Social Security income of $1,000 per month and a pension of $501, even if you have no other assets, you won't qualify for aid under this program. (Check with your state's Division of Medical Assistance and Health Services for the exact numbers for you. These normally change annually, subject to cost of living, inflation, and political pressures.)

In buying long-term care, consider the type of coverage you need. Do you want a comprehensive policy that covers just about everything? What is the daily benefit that the policy pays? If you have other income, your daily benefit payout can be reduced, as can your premium payments. How long an elimination period can you deal with? What is the duration of the benefit payments? Most people opt for a payout of two to five years. A lifetime policy would be much more expensive, but that may be your better choice if your family has a history of chronic ailments or Alzheimer's disease. Does the policy have inflation protection? Is your insurer financially strong? How much can you afford? All of these issues must be addressed if you're buying a long-term care policy.

A majority of business owners would like to buy long-term care insurance if they could do so on a pretax basis, according to an Apr. 2, 2001, survey of 300 U.S. Chamber of Commerce member companies. Forty-eight percent of the employers surveyed said they would be more likely to provide long-term care insurance as an employee benefit if they received better tax incentives to do so. Seventy-five percent would be more likely to purchase individual long-term care insurance if they could do so on a pretax basis. According to Chamber president and CEO Thomas Donohue, "Providing quality long-term care for a rapidly growing number of seniors is taking a heavy personal and financial toll on America's workers, families, business--especially small businesses that struggle with worker productivity."

Let's review the current tax incentives for long-term insurance and prospectives for change. An employer plan providing coverage under a qualified long-term care insurance contract is generally treated as an accident or health plan. Employer contributions for long-term care for employees are deductible as a business expense. Employer contributions for qualified insurance for an employee, his or her spouse, and his or her dependents are excludable from gross income and from wages for employment tax purposes. This exclusion doesn't apply to coverage provided through a cafeteria plan or for expenses reimbursed under a flexible spending arrangement on a tax-free basis. Amounts received from this insurance are also excludable from income taxes, subject to a $200 a day (indexed for inflation) or a $73,000 annual (for 2001) limit.

If you pay for your own long-term care insurance, those premiums may be included in your pot of unreimbursed medical expenses that are allowed as an itemized deduction to the extent the total exceeds 7.5% of your adjusted gross income. The limitation on the premiums paid for 2001 is: If your age is not more than 40, the limit allowed is $230; more than 40, but not more than 50, $430; more than 50, but not more than 60, $860; more than 60, but not more than 70, $2,290; and more than 70, $2,860. If you are self-employed, you may deduct 60% of your long-term care insurance premiums as above-the-line medical expenses. This amount increases to 70% in 2002 and 100% beginning in 2003. There was a Senate provision to accelerate the 100% deduction to 2002 under the Tax Relief Act of 2001, but it didn't survive the Conference Committee.

According to the United Seniors Health Council, a nonprofit group in Washington, D.C., the best candidates for long-term care insurance are those with assets of at least $75,000 in addition to a home, as well as $25,000 in income for singles and $35,000 in income for couples. Those are the people who, according to the USHC, can least afford the nursing home costs that average $56,000 a year.

In March, 2001, the Long Term Care and Retirement Security Act of 2001 was introduced in Congress. It provided all individuals with an above-the-line deduction for premiums paid and would allow longterm care policies to be covered by both employer-sponsored cafeteria plans and flexible spending accounts. It also included a tax credit of as much as $3,000. As yet, the bill has not passed into legislation.

Until then, you can find more details about long-term care and the policies via the Internet by clicking on www.acli.org, then "Financial and Retirement Security" in the table of contents on the left, and then "disability income insurance" link. Finally, scroll down and click on the link under "Policy Comparison Checklist." This will give you the information you need.

In the meantime, stay healthy. The odds of making a catastrophic insurance claim on your house are one in 1,200; on your auto, one in 250. It's one in two that you or your spouse will need long-term care!

Jeff A. Schnepper, Associate Economics Editor of USA Today, is an attorney and estate planner in Cherry Hill, N.J., and author of How to Pay Zero Taxes.