Ensuring a happy ending.

• Author: Schnepper, Jeff A.
• Position: Economic Observer - Tax laws regarding long term care plans - Column

YEAH, I KNOW. You are going to live forever. That may be the problem. The longer you hang on, the more likely you are going to need assisted living. That will be quite expensive. According to Christopher and James Bell of the Mobile, Ala., firm of Branch, Bell & Associates, "The need for long-term care touches eight out of 10 families in the United States." Your risk is higher than destroying your car in an accident, or even having a fire at home.

Frank Keating, president of the American Council of Life Insurers, reports that it currently runs more than $16,000 annually for daily visits by a home health care aid and over $55,000 per year for a nursing home. Those expenses are projected to reach $68,000 and $190,000, respectively, within the next 30 years. Moreover. you do not have to be old to worry about long-term care. More than 35% of the LTC benefits paid in 2001 were to those under age 40.

Without some sort of long-term-care plan, these extraordinary expenses can be catastrophic. They can wipe out your retirement savings and decimate your investments. Rep. Earl Pomeroy (D.-N.D.), talking about such coverage, states. "If you don't have it, you've got to impoverish yourself for Medicaid to pay for prolonged care." Adds Marc Rosenblum, a chartered life underwriter and financial consultant who sells long-term-care policies; "The fact of the matter is, a good policy will actually keep you out of the nursing home.... A quality LTC insurance policy with extensive home health care benefits can help you remain at home by providing the cash necessary for home care."

Not only that, but there are ways to get the Internal Revenue Service to pick up a piece of the tab. Currently, "eligible" premiums for long-term-care insurance are allowed as medical deductions. To get the tax benefit, you normally have to itemize your deductions. The total of your medical expenses, including eligible long-term-care premiums, must exceed 7.5% of your adjusted gross income. That is your total gross income less any above-the-line deductions. If your adjusted gross income is $100,000, 7.5% of that amount reduces your medical deduction. So, in this case, your first $7,500 in medical expenses would not count.

However, since eligible premiums for long-term care can be credited as medical expenses, you might think they can be paid on a pretax basis with a Cafeteria/Salary Reduction Plan or with a Health Reimbursement Arrangement. These eliminate the need to itemize and...