Long Term Care Insurance

What is long term care insurance?
Long term care insurance (LTCI) is a relatively new insurance product designed to protect against the high cost of nursing home and skilled nursing care. See the Long Term Care FAQ for more information on the kinds of available long term care and costs. Simply put, a significant portion of the older population will spend some time in a nursing care facility, and the cost of such care is unaffordable for most individuals.

Why would you purchase long term care insurance?
Some individuals will qualify for government assistance with the cost of long term care relatively easily (usually through the federal/state Medicaid program). Others have sufficient wealth to pay privately for long term care for the rest of their lives. Most middle class Americans, however, will want to consider long term care insurance for one or more of these purposes:

  • To prevent impoverishment of the spouse who does not enter the nursing home
  • To protect an estate for children
  • To prevent having to go on government "welfare", and to ensure the ability to select a nursing home (rather than having to rely on the government’s choice of facilities)
  • To increase the likelihood that care can be provided in the home, and nursing home placement avoided altogether
 
If you decide to buy long term care insurance, what kind of policy terms should you consider?
As with any insurance policy, a number of variables will affect the quality and cost of the LTCI policy. In addition to the importance of selecting a strong insurance company, consideration should be given to the length of coverage, the elimination period, the amount of coverage, inflation protection and home care benefits.

What length of coverage is best in a long term care insurance policy?
LTCI policies usually provide for coverage for a fixed number of years, though some policies provide for a maximum total dollar benefit instead. The appropriate length of coverage depends on the purpose of the policy. If you are purchasing LTCI so that benefits will be available while waiting to qualify for Medicaid coverage, then the length of coverage should be keyed to the maximum Medicaid transfer penalty period (currently five years). In such a case, a five-year period might be appropriate; a longer period provides extra protection in case Medicaid law changes. If, on the other hand, your purpose in purchasing LTCI is to provide full coverage (and to protect assets from having to be spent for long term care), a lifetime benefit may be necessary.

What is the proper length of "elimination period" in a long term care insurance policy?
As with other insurance policies, LTCI usually provides for an "elimination period." This is the length of time you will need to be eligible to receive benefits (that is, receiving skilled nursing care) before benefits are paid. If benefits were payable immediately upon the beginning of skilled care, LTCI would be prohibitively expensive. A shorter elimination period (30 days, for example) will make the policy much more expensive than the same policy with a longer elimination period (180 days, for example). Most LTCI buyers will compromise between those extremes, and select an elimination period of 60 or 90 days.

What daily benefit rate should you purchase?
LTCI is usually sold in increments of $10/day benefit. For example, a policy might pay for long term care costs up to $100/day; a benefit increase to a maximum of $110/day will be slightly more expensive. When selecting the benefit rate, consider what other income will be available to pay for long term care costs. Policies for married couples will usually need to provide a higher benefit rate, since all the couple’s income might be necessary to maintain the non-institutionalized spouse at home. Adequate home care will probably require a higher benefit rate, as well, since home care can be significantly more expensive than nursing home placement. Given current nursing home costs, a benefit rate ensuring $110 to $120/day of coverage (after considering the availability of Social Security, other pension and investment income) should be about the right level for most Arizona residents.

Is inflation protection important?
The cost of long term care has risen more rapidly than other medical costs in recent years. Medical costs, in turn, have tended to rise faster than other expenses. In other words, inflation has increased long term care costs significantly in the past several decades. If you expect to maintain your LTCI policy for more than a few years, you should consider adding inflation protection. There are two ways to do this. You can purchase an automatic inflation protection provision which increases the daily benefit rate each year. Alternatively, individual LTCI policies may guarantee you the right to purchase an additional benefit amount (at the then-prevailing rate) each year, or every several years. The latter approach will usually be less expensive initially, but will also provide less protection against inflation and will be more difficult to implement if you become disabled or inattentive to your health care needs in the future. The future cost of increases in coverage may actually be greater than purchasing full inflation protection at the inception of the policy.

Should a long term care insurance policy include home health care coverage?
Most individuals hope and expect to receive any long term care in their homes. Early LTCI policies did not provide for home care benefits, or limited them to half or less of the daily benefit rate for nursing home care. Most modern policies cover home care benefits with the same maximum daily benefit rate; this may be critically important in permitting you to remain in your home. Even most modern LTCI policies do not permit payments to family members for in-home care, although some do permit payment to family members licensed as CNAs (Certified Nursing Assistants). It is important to understand that the financial, personal and medical pressures involved in keeping patients at home are both stronger than and different from those in institutions; purchase of LTCI with a strong home health care benefit can make it easier to stay at home, but even the best policy may not make it possible in every circumstance.

What is the difference between a "qualified" and a "non-qualified" long term care insurance policy?
Under the "Health Insurance Portability and Accountability Act" (better known as HIPAA), at least some long term care insurance premiums and benefits receive favorable income tax treatment. If a given LTCI policy meets the federal standards, premium payments are deductible (but see below) and benefits received under the policy are not treated as taxable income. This may make a particular policy more attractive to a prospective buyer.

In order to qualify for the favorable income tax treatment, a LTCI policy must meet the following standards:

  • The policy must not require a "medical necessity" trigger for benefits to be received. In other words, the policy must allow coverage for functional impairments that are not purely medical in nature--problems such as Alzheimer's disease.
  • The policy must require that the beneficiary's condition is likely to continue for at least ninety days.
  • Benefits must be payable if the covered individual either has a cognitive impairment or requires substantial assistance with 2 of 6 ADLs ("activities of daily living"--see the explanation of ADLs in our Long Term Care FAQ), including such items as eating, bathing, toileting, transferring in and out of bed or a chair, dressing, ambulating, etc.
 
An LTCI policy which has met the federal guidelines is usually referred to as a "qualified" or "tax qualified" policy. If you have not been advised of the tax qualification of a given policy, you should assume that it is "non-qualified" until you can establish otherwise; tax qualification has been a strong selling point for LTCI salespersons.

Are long term care insurance premiums deductible?
Although federal law expressly provides for the deductibility of LTCI premiums, they are grouped together with other medical expenses and treated as a single deductible item. Total medical expenses (including LTCI premiums, medical and dental expenditures, prescription drugs, eyeglasses, health insurance premiums and other medical expenditures) are deductible only to the extent that they exceed 7.5% of the taxpayer's Adjusted Gross Income. Under current income tax rules only about 4.5% of all taxpayers claim a medical deduction on their returns, so the deductibility of LTCI premiums will make a significant difference to only a few buyers. This is particularly true since most taxpayers with substantial medical expenses other than LTCI premiums may find it difficult to qualify for LTCI coverage.

If you require long term care, will benefits be taxable?
Before the Health Insurance Portability and Accountability Act of 1996, it was unclear whether benefits received under a LTCI policy would be treated as income. Although the rules are now clear for "tax qualified" LTCI policies, the confusion remains for non-qualified policies. Ordinarily, even if LTCI benefits are treated as income the high (and deductible) medical costs associated with long term care would substantially reduce any tax liability, but there is some dispute about whether those expenses will be deductible if they are reimbursed by the LTCI policy. In other words, the possibility exists that LTCI benefits would be taxed and long term care costs would not be available as an income tax deduction; for this reason, it is probably unwise to purchase a new non-qualified LTCI policy until the IRS adopts rules resolving the issue.

How much should you expect to pay for long term care insurance?
Prices for LTCI vary widely, but the most important determinant of premium price for a given purchaser is age. The average annual premium paid for existing LTCI policies is about $1,800, but that figure can vary tremendously for individual buyers. If you are in your mid-to-late 50s and looking at buying a new policy, mid-level coverage might cost between $1,000 and $1,500 per year. A similar policy for a 70-year-old might cost nearly $3,000 per year.

Who should buy long term care insurance?
In order to truly spread the risk of long term care costs, LTCI must become more commonplace. That, however, does not help each individual determine whether he or she should purchase a policy. To a considerable extent, purchasing a LTCI policy depends on the level of aversion to risk: as with any insurance purchase, the buyer must judge whether he or she is willing to take the chance that long term care will not be needed, or that he or she will be able to afford as much care as might be needed. With that limitation, the following criteria might suggest whether or not you are a good candidate for long term care insurance:
 
  • Age. Long term care insurance should be considered at younger ages, since the total cost of the insurance will be less and the policy more affordable. Late 40s to mid-50s is the ideal time to consider purchasing LTCI, but if you have not made a decision it is not too late to consider insurance even in your 70s.
  • Socioeconomic status. Most poor people will find that they qualify easily for Medicaid assistance if long term care is required. Rich people may be able to afford the cost of long term care without having to touch their principal. Of course, "poor" and "rich" are relative terms, but in our view LTCI should be a solidly middle-class investment.
  • Concern about quality of care. Even if you could qualify for Medicaid assistance with your long term care, you may not want to leave the choice of nursing facilities to the Medicaid bureaucrats. Although the quality of Medicaid care is, in our view, at least, comparable to private-pay care in Southern Arizona, there is no doubt that reliance on the Medicaid system requires you to give up control and selection. If these are important to you, long term care insurance may be worth the premium cost.
  • Home care. Although some home care is available under both the Medicaid and Medicare programs, if you feel strongly about avoiding nursing home placement you will be much better served by either accumulating substantial wealth or purchasing long term care insurance.
  • Lack of family. Home care under the Medicaid program requires that most of your care come from unpaid (usually family) caregivers. If you do not have family who would be willing and able to provide care, and you want to increase the likelihood that you will be able to stay in your home, long term care insurance may help provide the margin of comfort you need.
 
This list is not intended to be comprehensive, but to suggest some of the considerations you need to have in mind when shopping for long term care insurance.

How important is it to choose the right the insurance company?
It is essential that your insurance company have sufficient financial resources to survive years of claims on their long term care policies. While this is important in every insurance purchase, LTCI is a relatively new product and buyers have tended to "self-select" (that is, LTCI buyers tend to be older and less healthy than would be ideal for the long term care risk to be spread widely among insurance policy holders). This makes it especially important that your LTCI carrier be financially sound. Discuss the insurance company's rating with your insurance agent, and satisfy yourself that the company is sound. Consider the pointers on evaluating insurance companies provided by the Long Term Care Insurance Buyers Advocate Alliance.

What long term care insurance policy pitfalls should you look out for?
State insurance regulation, an active marketplace and new federal laws have all worked to make LTCI policies more attractive than the policies of a few years ago. There are still a number of concerns that you should watch for when reviewing any LTCI policy proposal:
 
  • "Substantial" assistance -- the level of assistance you would need with ADLs before the policy kicks in--should be defined clearly. For example, at some future date you may be able to physically take your medications, but be too confused or disoriented to remember to do so. In order to ensure that you receive benefits from your policy in such a situation, the policy should include coverage if you require something other than physical assistance with ADLs. Look for words like "directional" or "stand-by" assistance, "cuing", or other terms which will cover you in such a circumstance.
  • Bathing as an ADL -- surprisingly, inability to get into and out of a bathtub or shower is one of the most common precursors to institutionalization. Make sure your LTCI policy includes bathing as an ADL, and give extra points to any policy which provides for coverage if you are unable to perform that one activity.
  • Paying for home care -- few policies permit payment to family members when they act as caretakers, unless they happen to be certified as CNAs ("Certified Nursing Assistants"). In truth, a policy which permitted payments to a spouse or adult child would probably be extremely expensive. But look for the possibility that family caretakers can be paid if they DO get the CNA certification. Family members may be willing to work for less than the prevailing rate and that fact, coupled with good LTCI coverage, may allow you to stay at home longer.
©2014 Fleming & Curti, PLC