Tax Tips
Prepping for possible illness or disability

By Howard Abrams, PBS Tax & Bookkeeping

While the majority of the questions we receive revolve around tax preparation and planning, often we have clients seeking advice on other money matters. Here are some recent questions expressing common concerns about your financial security.

Q. I’m in my 50s and I’m very concerned that some sickness will happen to me in the next 10, 20, 30 years where I must stay home and cannot function normally. I’m fearful I won’t have enough money to pay a caregiver and I’m put in some care facility for the poor. How can I protect myself?

A. A great question and it’s a fear that all of us have or will have some day. In order to protect yourself and your family, you should consider purchasing a long-term care insurance policy.

AARP estimates that 60 percent of those over age 65 require some type of long-term care during their lives. Long-term care needs caused from an accident-related injury or chronic illness can be financially devastating. Long-term care insurance – LTCI – can help you protect against that.

The younger and healthier you are when you apply for LTCI will result in more affordable premiums. If you cannot afford long-term-care premiums, you should consider transferring all assets (except Medicaid exempt assets) to family members in order to qualify for Medicaid, which does pay for long-term care. But you must be comfortable transferring away your assets. Most people are not.

A word of caution: When determining eligibility Medicaid typically takes into account any transfers made within 60 months – five years – of an application and will deny the long-term care.

If you have a family history of illnesses that typically require long-term care, but that are not covered by traditional medical insurance policies, you may want to consult with an “elder law attorney” knowledgeable about long-term care. Check the website for the National Academy of Elder Law Attorneys at naela.org.

You also need to consider whether you’re going to get care from the person you live with or from other family members.

Long-term care insurance premiums are deductible within certain limits.

Q. I have my own trucking company. I’m healthy, but what if I get sick for an extended period of time or have an accident where I’m out of work for six months? I won’t be able to support my family. What happens to my business?

A. You should obtain disability insurance. It’s important because if you are unable to work for an extended period due to sickness or accident, disability insurance will provide an income flow enabling you to continue paying the expenses for you and your family, and to keep you from falling behind on your mortgage payments.

In essence, disability insurance replaces income that is lost when you are sick or injured and cannot work for a long period of time.

One of the leading causes of home foreclosures is disability. However, fewer than 20 percent of adults have disability insurance. Statistics show that almost one in four of today’s 20-year-olds will become disabled before reaching age 67.

The goal of disability insurance is to replace as much income as possible with affordable terms.

Features of a good disability plan: Non-cancelable and guaranteed renewable; monthly benefits that replace 60-70 percent of the insured’s income until reaching Social Security full retirement age 65 or older; cost of living adjustment to protect benefits from inflation; elimination of premium payments while the insured is disabled; residual benefits clause that allows partial payouts for partial disabilities; future insurability option to increase insurance as income rises, regardless of health; waiting period to begin receiving benefits – the norm is 90 days – and rehabilitation clause to pay for treatment necessary to get back to work.

Generally, if you do not deduct the disability insurance premiums, the benefits received are tax free. LL

 

This column is the opinion of the writer and does not necessarily reflect the opinions of Land Line Magazine or its publisher. Please remember that everyone’s financial situation is different. This article does not give and is not intended to give specific accounting and/or tax advice. Please consult with your own tax or accounting professional.