Long-term-care insurance: what the 90% of older clients who don't have this coverage need to know.

Accountants would never advise clients to go without car insurance. Yet rarely do CPAs recommend their clients purchase long-term-care insurance when, in fact, the probability of needing LTC insurance is much greater than the likelihood of being in a car accident.

The American Council of Life Insurers says less than 10% of the nation's elderly own an LTC policy. Benefits are tax-free and there's no imputed income to employees whose companies provide this insurance as a benefit. It's a good deal for many clients--even better than buying car insurance. Here's what CPAs need to know to advise clients on their LTC insurance needs.

COMMON MISCONCEPTIONS

Many clients have a number of misconceptions about LTC insurance that makes them resist buying this important coverage:

Existing insurance will pay for LTC. Wrong. Health insurance pays only for restorative care, not chronic care such as that required for a long-term illness. Medicare pays only for the first 100 days in an LTC facility. Medicaid does cover long-term-care needs. However, it's intended to cover those people with incomes at or near the poverty level--not most CPAs' typical clients.

Personal wealth will pay for all LTC needs. Maybe. CPAs need to assess whether the client has sufficient personal wealth to self-insure against LTC needs. The calculation revolves around having enough principal and income to fund such care. Few families have the wealth necessary to provide extended care. For the rest, LTC insurance is essential.

LTC insurance is too expensive. Not when compared with costs of actual care. The cost for LTC coverage is only a fraction of it. "This works out to about 50 cents a day for a 40-year-old and $1 a day for a 50-year-old," says Susanne Howarth, CPA, of TBG Financial West in Los Angeles. Further, the elderly are not the only people who need to plan for long-term care. "People between 18 and 64 receive about 40% of all long-term care," says Howarth, "The younger a client purchases LTC insurance, the lower the premiums." (But the more he or she will pay over a lifetime.)

Clients will be forced to live in a nursing home. Wrong. Nowadays, most long-term-care policies allow the beneficiaries to receive care at home.

TYPES OF LTC INSURANCE

The difference between plans revolves around the treatment of premium inflation and benefit compensation. Depending on a client's circumstances, there are five common types CPAs can recommend:

Expense reimbursement plans. Similar to most health insurance plans, the patient pays LTC costs and then presents the invoices to the insurance company for reimbursement. CPAs might recommend this plan to clients who don't have pressing cash flow issues and-don't mind doing the paperwork to apply for reimbursement.

Indemnity-based benefit plans. Here, the plan fixes the monthly benefit in advance. It requires no invoices for payment. Rather, the physician issues a statement declaring the need for long-term care. Clients who value reduced paperwork, faster payments and a guaranteed cash flow favor this plan.

Continuous premium payment options. Policy owners pay the monthly premiums forever. The policy is not cancelable except in the event of nonpayment of premiums. However, the insurance company can increase premiums on an entire class of policies. The advantage of this plan is that the premiums are usually the lowest available.

Limited payment plans. Policy owners pay premiums for a set time period--usually until age 65. After the last premium payment, neither the company nor the insured can cancel the policy. "Limited payment plans are more expensive--sometimes twice as much as continuous pay policies. However, their guaranteed fixed payment and no-cancel features make them attractive to some clients," says Howarth.

Hybrid products. Some life insurance policies include LTC riders. However, the benefit level is usually less than that of a standalone policy.

PREFERENTIAL TAX TREATMENT

The Health Insurance Portability and Accountability Act (HIPAA) provided full deductibility of LTC insurance premiums that C corporations pay as part of an employee benefit plan. This is particularly advantageous for companies with highly compensated employees since there are no discrimination tests to meet, as with other types of benefits such as pension plans. Additionally, neither company premium payments nor care benefits are treated as income to employees.

Self-employed clients can deduct a percentage of the eligible LTC premiums based on their age and income. The percentage works on a sliding scale in 10-year increments beginning at age 40. The eligible annual premiums begin low--$450 for ages 41 to 50--then steadily rise to a high of $2,990 for age 71 and older. The tax-deductible percentage is generous. For 2002, it's 70%, increasing to 100% in 2003.

For most company plans, the employee's family members can purchase the same insurance at the same rate provided to the company as a group. Individuals buying LTC insurance can deduct the premiums as an itemized medical expense on schedule A; these benefits are also tax-free.

PITFALLS TO AVOID

CPAs should advise clients to scrutinize historical premium increases of prospective LTC insurance carriers. Generally, those with LTC as part of their main line of business have a better track record. Determine the company's financial stability--younger clients will have to count on its surviving for decades before they collect any benefits.

CPAs should also pay close attention to provisions for benefit inflation. Most plans vary according to price, benefits and age of the insured. Compound inflation protection--where the inflation allowance compounds annually--is best. Additionally, clients should be able to increase coverage based on their age at the time of original purchase. Without this provision, additional insurance can become prohibitively expensive.

WHAT'S NEXT?

According to a recent study by the Health Insurance Corporation of America, the average age of people buying LTC insurance has fallen to 58 from 61 in the last few years. Younger and younger clients will now be asking CPAs for policy evaluations.

As the 78 million baby boomers age, experts predict they will live longer, but not necessarily healthier. Our society no longer has extended families living together and able to provide long-term care to the sick or elderly. The burden falls to individuals to provide this care for themselves.

The AICPA cites $50,000 annually as the national average cost for long-term care. As this cost escalates, CPAs should look for the eventual need for such care to take an increasing role in personal financial planning.

NEIL ALEXANDER, CFP, is founder and president of Alexander Capital Consulting, LLC, in Los Angeles. His e-mail address is [e-mail].