"Is it worth the cost?" asked Joe, a reader of this column. His wife Mary, with anxiety in her voice, said, "I never want to ask the kids for help." Whether or not to purchase long-term care insurance (LTC) was the subject of our conversation.
Before you finish reading this article, you will discover an astounding fact: Because of a new crazy (but wonderful) tax law, you can actually buy, use and benefit from a long-term care policy for free and —are you ready for this?—actually make a substantial profit.
Joe, age 58 and healthy, analyzed the LTC problem as a skilled business owner, measuring the cost against the potential benefits. Mary, age 57 and healthy (but from a family with a history of medical problems) was a buyer from the get-go. She was an emotional buyer, but a buyer with a purpose. "My old age will never be a burden on my children," she said.
Joe understood Mary's concerns and agreed to purchase LTC for Mary. Joe gave me a short course in LTC (reading from notes he took when visiting with the insurance agent) and concluded he would not buy the coverage for himself. Why? "I wouldn't fly your airline if it crashed 25 percent of the time," he said. His logic was based on the fact that only about 75 percent of seniors would ever need LTC (that is 25 percent of the policies would never pay 1 cent). "Too risky," he concluded.
Before continuing, there's something you should know: The above conversation took place more than 5 years ago. Today Joe, along with Mary, is the proud owner of a LTC policy.
Did Joe change? No. But in 1997 the tax law concerning LTC changed—big time! And members of my tax network have educated me on the changes and how to use these changes to make long-term care free . . . guaranteed. And, yes—because of the tax law—even make a profit on the deal, also guaranteed.
Like almost everything else in the Internal Revenue Code, the LTC provisions are a complex maze. But an example will give you a clear picture of why LTC has suddenly become the tax-advantaged darling of people who want to preserve and protect their wealth without risk.
Hats off to Irwin Cohen (a specialist in LTC from Skokie, Illinois, and a member of my network of experts) who provided most of the information in this article and the following example.
Jack, age 60 and the owner/president of Success Co., arranged for Success Co. to purchase a LTC policy for his benefit. Success Co. will pay an annual premium of $10,000 for 10 years (a total of $100,000, after which the policy will be paid up for as long as Jack lives). The tax consequences are tax heaven for Success Co. and Jack.
The entire $100,000 (at the rate of $10,000 each year as paid) is deductible for Success Co., resulting in a $40,000 income tax saving. Net cost to Success Co.: only $60,000. (The employer can select one or more employees, excluding all other employees, to receive the LTC benefits. Simply put, discrimination is okay.)
Jack gets a completely income tax-free fringe benefit for the premiums paid by Success Co. Any LTC benefits received by Jack (payments from the insurance company that issued the LTC policy) also will be tax-free. Now for the best part: The LTC policy has a clause in it that provides for a full repayment of all premiums when the insured dies. So, when Jack goes to the big business in the sky, his heirs will get a $100,000 tax-free (for income tax purposes) refund. This is a tax-free profit of $40,000.
This article does not attempt to cover all the rules, exceptions and traps concerning LTC. Be forewarned: Only work with experienced and knowledgeable experts.