John Bullis: 7 out of 10 will need long-term care insurance

It is important for seniors to have a long-term care plan. Many folks dread and avoid discussing this planning. They know about seven out of 10 folks that reach age 65 will require some form of long-term care during their lives. They hope it is not them.

Some folks believe Medicare will take care of this problem. Unfortunately, Medicare only pays for medically-necessary care and only after the senior has spent at least three days in the hospital as an “admitted” patient. Even then, Medicare will only pay in full for the first 20 days of long-term care. The senior must pay a co-payment for the next 80 days. In 2013, that co-payment was $148 per day. After 100 days the Medicare coverage stops. Then the senior is responsible for all expenses.

It gets worse. Sometimes the hospital shows the senior as an “observation” patient instead of “admitted” patient. If the senior is considered an “observation” patient, Medicare will not pay anything for long-term care.

There are some combination policies available to consider. The goal is to not pay premiums for long-term care insurance and it turns out it was not needed. The common fear of wasting premiums on a traditional long-term care policy can be overcome with a return-of-premium “rider” on the life insurance or annuity policy.

The annuity must contain specific language that indicates it is intended to qualify under section 7702B(b) of the IRS code. If your annuity was issued before Jan. 1, 2010, or does not meet the qualification rules, you may be able to do a tax free exchange under section 1035 of the IRS code to a qualified annuity. Doing the tax free exchange of an old annuity (that has earnings) is better than cashing it in and having unnecessary taxable income. You can have long-term care benefits, or you can cash in the annuity (or leave it to your heirs) with the qualified policy.

Another option is using a specially designed life insurance policy. Basically this just advances the policy’s death benefit to pay for long-term care. It can cover a single life or joint lives. These riders offer an inflation provision. This kind of policy has premiums that can never increase. For example, a 60-year-old non-smoking couple may buy $150,000 of joint life insurance, with a provision for 25 months of long-term care insurance of $6,000 per month benefits. The annual premium is about $4,900 for these two non-smoking seniors with a 5 percent inflation rider. The guaranteed interest earning rate of 4 percent means the cash value increases to about $76,400 at age 80. If the long-term care provision is not used, they have the life insurance or they can withdraw the cash value and cancel the policy.

Why not meet with your favorite insurance agent and see how the annuity or life insurance options may be beneficial for you to get some long term care insurance?

Did you hear? “Eventually you will reach a point when you stop lying about your age and start bragging about it,” by Will Rogers.

John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Co. CPAs.