About six months ago I wrote about a little-known tax law that allows you to get all the benefits of long-term care insurance (LTC) for free. Readers bombarded me seeking more information and asking questions. The purpose of this article is to answer the most common questions.
Why don't most people buy LTC? The simple answer is that they don't know that the tax law provides for free LTC. Without this knowledge, they logically don't buy something they might not need. Industry statistics show that 75 percent of us will ultimately need LTC. Not a bad wager—three out of four LTC buyers will be winners. But 25 percent will have wasted every dollar they spent in premiums. It's that blasted 25 percent that causes people not to buy LTC.
How can you say "LTC is free," when premiums must be paid? Let's use an example. Joe and Mary take out LTC policies. Over the years Joe's premiums are $200,000; Mary's are $228,000. Joe only has one minor claim requiring the insurance company to pay $5,000. On the other hand, Mary requires years of care, both at home and in a nursing home, costing the insurance company $452,000.
Because of a clause in their LTC policies, Joe's heirs will receive a death benefit of $200,000; Mary's $228,000 (the exact amount of premiums each paid). There is no question that their LTC was free. Was there any cost? Yes, the cost of money.
Premiums also can be paid by your employer as a tax-free fringe benefit. If you pay your own premiums, a portion of it is deductible as a medical expense, depending on your age and the year in which the premium is paid.
What is the authority for these tax benefits? The Internal Revenue Code Section 77028(b).
This article does not attempt to cover all the rules, exceptions and traps concerning LTC. Actually, when you buy an LTC policy, it should be tailored to your exact needs and circumstances. Only work with experienced and knowledgeable experts.
Keep Star Employees From Leaving
The article "New Methods Needed To Find And Keep The Best" in the July 1, 2001, issue of Accounting Today tells the sad key-people story facing almost every business in the country. This quote from the article tells it all: "In a recent student orientation seminar at Kansas State University, participants were told that they would most likely change jobs eight times between the ages of 18 and 32."
Nothing new. I've been struggling with this problem for about 20 years. The problem seems to come in three forms: how to keep key employees, how to attract key employees and how to sell the business to key employees.
Here's my definition of a key employee: If that employee leaves, you'll cry. Well, over the years, we have had very few clients cry over the loss of a key employee.
Here's why. We set up a non-qualified deferred compensation (NQDC) plan. It mimics ownership, but the employee does not own any stock. A NQDC plan creates a profit sharing account and provides for the business to be sold to the employee with these funds, which are otherwise only accessible at retirement or death.
The NQDC plan's basic provisions are the sharing of profits, a disability policy and a life insurance policy plus the amount in the account to take care of the employee's family after his or her death.
This does not cover all the details of a NQDC plan. But if you want to keep (or find) super-star employees, I urge you to tailor a NQDC plan for your particular situation. It is easy to do, and it sure beats crying after a key employee says the final "goodbye."