As small business owners, we are often so focused on the day-to-day running of our businesses that we overlook benefits we can be creating and receiving – at a low cost – for ourselves and our employees.
We also overlook the importance of planning for ourselves and our loved ones. As Baby Boomers age, more entrepreneurs’ and employees’ lives are disrupted by having to become caregivers for parents and grandparents. And, as individuals age, the costs of caregiving for ourselves can make a big dent on our financials.
As my Future File legacy planning business is all about preparing families to deal with emergencies, aging and end-of-life issues, I spend each day talking about the importance of planning for long-term care. And, as there is a way to deduct premiums related to long-term care coverage, I thought it was important to spread the word.
I talked to Marc Glickman, a Long-Term Care expert, Actuary, and CSO of LifeCare Assurance, to share some of the reasons why this is important and how you can go about taking advantage of this benefit as a business owner.
Carol Roth: Why should small business owners be thinking about fundingLong-Term Care insurance now?
Marc Glickman: The risk of outliving our money has become a reality as we live longer. As we age, everyday costs can increase because we may need caregivers to help us with our activities of daily living (aka “long-term care”). Long-term care may even be needed at younger ages because of an accident or disabling disease like dementia.
Often, family will step in to provide informal care rather than paying for professional help. Initially, this might be manageable, but extended long-term care often disrupts the life of the caregiver.
Therefore, everyone should have a plan to protect their loved ones from the devastating consequences. It may make sense for a family to pay a professional caregiver. However, full-time caregiving services are expensive, typically ranging from $50,000 to $150,000 per year. An extended care event has the likelihood to drain income and deplete life savings for the family.
Long-Term Care Insurance (“LTCI”) can fund professional caregiving services provided in the home or in a long-term care community or facility. LTCI can be very affordable when purchased while individuals are younger and healthier. Plans are available starting for well under $100/month and provide maximum benefits of hundreds of thousands of dollars for an extended care event.
CR: Why does Long-Term Care insurance make a great benefit for small business owners to take for themselves or to provide to their employees?
MG: The government allows businesses to treat LTCI premiums similar to health insurance. The premiums paid by the business for employees are tax deductible as ordinary and necessary business expenses. The benefits received by the employees are generally received tax-free even after taking the tax deduction.
Therefore, one of the most efficient ways to fund an LTCI plan is through the employer.
Business owners can carve out plans based on criteria of their choosing for only themselves, for key executives or for everyone in their organization. The plan can also include coverage for family members. Most insurance companies provide discounted premium for couples applying together and the spouse’s coverage is tax deductible for the business, too.
This provides many benefits and protects businesses from losing key employees who could unexpectedly become a caregiver if they have bought family plan coverage. LTCI is also regularly surveyed as one of the most attractive benefits to reward and retain key employees.
CR: How do the tax benefits of issuing LTCI work for different business structures, especially knowing that most small business owners are S-Corps, LLCs, sole proprietorships and partnerships?
MG: C-Corporations are allowed to deduct the full premiums for all employees including the owners of the business assuming the deduction is considered reasonable compensation.
S-Corporations, LLCs, partnerships, and sole proprietorships can also deduct the premiums as a necessary business expense. For less than 2 percent of owners, premiums can be fully deductible. For greater than 2 percent of owners, the LTCI deduction for the business is generally passed through as income to the owner’s individual tax return. However, the owner can typically deduct this premium on line 29 of the 1040 as a “self-employed health insurance deduction” up to the lower of the actual premium paid or an annual limit based on the age that the IRS refers to as “Eligible LTC Premium.” This is not an itemized deduction and so, it can be taken on the first dollar of premiums.
For premiums paid in 2018, the deduction is up to $1,560 per person between ages 51-60 and $4,160 between ages 61-70. For a typical small business owner and their spouse, much of the LTCI premium is deductible on their individual tax return on line 29.
Tax reform has made the deduction relatively more valuable for small business owners who would otherwise pay a higher federal and state tax rate on their individual income.
CR: If a small business owner wants to explore getting LTCI, who should they speak with?
MG: Business owners will want to consult with an insurance agent or advisor who specializes in Long-Term Care insurance and is familiar with all the plans in the market. These agents can be found through referrals from your CPA, financial advisor or through web searches.
CR: Are there any pitfalls or mistakes that small business owners make in getting or structuring LTCI that can affect their benefits or their business?
MG: The most common mistake is waiting to get coverage. Many individuals can qualify for affordable plans while they are working but may lose the ability to qualify for these plans if they are diagnosed with a serious health condition.
Buy what you are comfortable spending now. As long as you are healthy, you can usually buy more coverage later. Even a small amount of protection today will provide your family time and begin the foundation for a long-term care plan.
While LTCI has become more popular as an add-on to life insurance or annuities, life and annuity plan premiums are not generally tax deductible for businesses.
There are new LTCI plans that come onto the market every year, each that provide their own value propositions and accept individuals with different medical conditions. Your agent or advisor can help you find the plan that is right for you.
Entrepreneurs know more than anyone the importance of planning and having a tax-friendly way to approach your long-term care is a great way to plan in a financially savvy way.
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About Carol Roth
Carol Roth is the creator of the Future File ® legacy planning system, “recovering” investment banker, billion-dollar dealmaker, investor, entrepreneur, national media personality and author of the New York Times bestselling book, The Entrepreneur Equation. She is a judge on the Mark Burnett-produced technology competition show, America’s Greatest Makers and TV host and contributor, including host of Microsoft’s Office Small Business Academy. She is also an advisor to companies ranging from startups to major multi-national corporations and has an action figure made in her own likeness.
Bank of America, N.A. engages with Carol Roth to provide informational materials for your discussion or review purposes only. Carol Roth is a registered trademark, used pursuant to license. The third parties within articles are used under license from Carol Roth. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.