Today, with advances in medicine and individual efforts for healthier lifestyles, Americans are living longer than ever before. When we look around at family and friends, most of us know firsthand of someone who has needed long-term care.

This need is projected to continue and expand as our population ages. The over-65 population is expected to double by the year 2030. Adults currently living to age 65 have greater than a 60 percent chance of needing long-term care. Although we may think this is only a problem for the over-65 age group, almost 40 percent of the people receiving long-term care are between the ages of 18 and 64.

With annual long-term care costs averaging $56,000 a year, paying such a bill represents a significant risk. Many investors are now planning for this in the same way they would for their children's education or retirement planning. Stock market losses and historically low interest rates have caused many investors to reassess their retirement strategies. For clients wanting to self-fund this risk, it takes $1.4 million at 4 percent interest to generate enough income to cover the average cost. Inflation for health care-related costs continues to escalate much faster than the consumer price index, which can also be devastating. Some estimates have projected the cost to triple over the next 20 years.

For these reasons, long-term care insurance is one of the fastest growing employee benefits being requested. The Health Insurance Portability and Accountability Act (HIPAA) has also provided tax incentives for individuals and employers willing to address this need.

Premiums paid by the employer, on behalf of an employee, will not be taxable income to the employee. The IRS has not set any limits as to how much an employer may pay in premium for their employees. Premium payments can be structured as a single lump sum or paid over short time periods so the premium payments stop before retirement starts. When benefits are paid out, they are generally excluded from being reported as taxable income. Corporations (C-Corp) may deduct all premiums paid for long-term care for employees, including spouses and dependents. Employers have a great deal of latitude in deciding which employees are covered, unlike many other benefits. There is no requirement the employer provide coverage on a non-discriminatory basis.

Self-employed individuals may have two potential deductions for long-term care insurance premiums. Self-employed health insurance and itemized medical expenses are both eligible deductions. Long-term care insurance is treated as an accident and health insurance contract. Only the "eligible" long-term care premium can be taken into account when determining the deduction. The table below reflects the "eligible" premiums for 2003.

Age Amount

40 or younger $250

41 to 50 $470

51 to 60 $940

61 to 70 $2,510

71 or older $3,130

Partners in a partnership and members of a Limited Liability Company (LLC) that is taxed as a partnership are considered self-employed as opposed to employees. The partnership or LLC pays the premium, and the partner or member includes the premium in their gross income. They may deduct the eligible premium based on their age (as shown in the table above). The partnership can deduct any premium contributions for non-partner employees. The benefits, when paid out, are generally excluded as income to both the partners and employees.

At the present time, long-term care insurance cannot be purchased with pre-tax dollars using a cafeteria plan. In addition, the premiums cannot be reimbursed using a flexible spending account. There has been much discussion in Congress about reforming this provision of the law. Many predict such reform will occur over the next few years.

The message Congress has sent so far seems quite clear. They have provided tax deductions and financial incentives for employers and employees to make premium payments deductible. They allow individuals to receive benefits from a tax-qualified long-term care policy without having it reported as income. The IRS code also allows employers to determine the "key employees" who will be covered. All things point to our government recognizing the problem and wanting Americans to use the tax code to their advantage.

It is both prudent and wise to work closely with a tax consultant and insurance adviser to determine how to best structure a plan to meet your individual needs. Your retirement plan and independence may depend on it.

Peartree is director of Retirement Services at Barney & Barney LLC. For more information, call (858) 550-4978 or e-mail billp@barneyandbarney.com.