Long-Term Care Insurance

Long-term care (LTC) is care provided for people who, because of injury, disease, or age, are unable to carry out the basic tasks required for living, such as eating, bathing, or going to the toilet. Although most people requiring long-term care are elderly, the need for such care can occur at any age because of injury or disease. The U.S. Government Accountability Office estimates that 40% of the 13 million people receiving long-term care services are less than 65. However, the chances of needing long-term care increases sharply after age 65. A study conducted by the U.S. Department of Health and Human Services indicates that people aged 65 face a 40% lifetime risk of entering a nursing home and 10% of those will be there 5 years or longer. Because women generally live longer than men, they have a 50% greater chance of requiring long-term care than men.

Most long-term care is provided by nursing homes and assisted-living facilities, but can also include home healthcare, housing for the aged and disabled, board-and-care homes, and continuing care retirement communities. Care can also be provided at the person's home by visiting nurses, home health aides, visiting programs, chore services, and home-delivered meals. There are also adult daycare centers, and respite services that give temporary relief for the caregivers who are relatives or friends. Most of the long-term care services that are provided in an area can be found by contacting the local Area or Office for Aging, or the local office can be found by calling Eldercare at (800) 677-1116 or by visiting their website at https://www.eldercare.gov/.

Most long-term care is very expensive, especially if the care is provided by a nursing home or assisted-living facility. The average cost for nursing homes, as of 2016, can exceed $7,000 per month, and the average cost of assisted-living facilities exceeds $3,300 per month, but can easily be more if the patient requires special services. Even services provided at home can cost $1,000 per month or more. )

If eligible, Medicare covers only the 1^st 100 days, and doesn't cover custodial care at all. Some life insurance policies have an accelerated or living benefit provision that allows the insured to be paid some of the benefit of the policy while still alive for long-term care.

Long-term care insurance pays either a monthly or daily benefit for medical or custodial care received in a nursing home, assisted-living facility, or at home. Most policies pay benefits as reimbursements — the policy pays for actual expenses incurred, up to the policy limits, and the benefits are tax-free. Some policies pay a daily benefit as a specified amount regardless of actual expenses. An insured can receive, in 2019, $360 tax-free from a per-diem policy, or more, if actual expenses are greater, and all benefits are tax-free if the insured is terminally ill. The tax-free daily limit increases every few years, depending on inflation. The insurance company reports paid benefits to the IRS and to you on Form 1099-LTC, Long-Term Care and Accelerated Death Benefits (Instructions for Form 1099-LTC).

Long-term care insurance is expensive. The cost of premiums varies widely, depending on the insurance company, benefits, length of waiting period, options selected, and your age when purchasing the policy. As with all other insurance, shopping around is prudent, and because the premium cost depends on age when purchasing the policy, switching policies should be avoided, because premiums are higher for older applicants. However, premiums for a policy already in force do not increase with age, unless the insurer raises the price for the entire underwriting class in which you are placed.

Most policies are guaranteed renewable, so they cannot be canceled except for nonpayment of the premium, or if the insured provided materially false information in the insurance application.

Paid premiums may be deductible. Both premiums for long-term care insurance and out-of-pocket costs for long-term care are classified as medical expense deductions. See the Long-Term Care Premiums and Services section for more information. The maximum deduction for long-term care premiums depends on the taxpayer's age and on the tax year the deduction is claimed, since the amount is indexed for inflation:

Types of Long-Term Care Policies

There are 3 basic long-term care policy types:

• A facility-only policy includes nursing homes, assisted-living facilities, Alzheimer's facilities, or hospices.
• A home health care policy includes home health care, adult daycare, and respite care.
• A comprehensive policy covers facility and home care, but also includes many options that are not available in the other policies.

All policies provide a care coordinator who can help the insured select the most appropriate treatment.

Long-term care policies can be classified according to how they pay benefits: indemnity policies and expense incurred policies. Indemnity policies pay a specific amount regardless of expenses, whereas expense incurred policies reimburses expenses up to a specified maximum.

The aggregate benefit rate is either expressed as an amount per day (examples: $100, $200, etc.) for a specific number of years or for a lifetime, or a daily and lifetime maximum can be chosen.

Like disability-income insurance, long-term care insurance has elimination periods (aka waiting periods, deductible periods) that typically range from 0 to 180 days. Longer elimination periods substantially reduce premiums, but increases out-of-pocket costs.

Tip: many people go through several phases of disability and then recovery, so it may be best to obtain a policy where the elimination period must be satisfied only once.

Benefit Eligibility — Benefit Triggers

Virtually anyone in good health between the ages of 18 and 84 can buy long-term care insurance. Some companies do not sell to people over age 84, but this age limit applies only at the time of purchase, not to its renewal or when benefits are received. The insurance company cannot cancel the policy except for the nonpayment of premiums. However, they can raise prices if they do so for the entire underwriting class.

An exclusion may apply for pre-existing medical conditions for which the insured has been diagnosed or treated within the past 6 months. Note that this 6-month period will begin anew if you switch policies.

Tax-qualified policies have 2 benefit triggers, specific requirements that must be met before benefits are paid.

1. One benefit trigger is the inability to perform a certain number of activities of daily living (ADLs), specified in the policy, and usually include being able to eat, bathe, dress, use a toilet, or transfer, such as from a bed to a chair, without assistance, and to maintain continence.
2. The other benefit trigger results from cognitive impairment, either from dementia or from Alzheimer's disease, that causes the insured to require supervision to maintain health, and to prevent injuries either to themselves or to others.

Some policies not tax-qualified may have a medical necessity trigger that will pay benefits if a doctor certifies that the insured requires long-term care, even if the insured does not satisfy the previous triggers.

Optional Benefits

Considering how fast medical costs and care has risen in the past, it makes sense to purchase inflation protection. This option is provided either as an option to increase protection over time without providing evidence of insurability, or the benefit increases automatically by a certain percentage annually.

The waiver of premium benefit allows the insured to stop paying premiums after a specified amount of time under long-term care. Most policies, for instance, require the insured to be in a nursing home for at least 90 days before premiums are waived. There may be other restrictions, as well, so read the policy carefully.

Tip: 80% of the people who become disabled are cared for in their home, so you may want a policy with the waiver of premium benefit that applies to homecare.

Another option — the nonforfeiture benefit (aka return of premium benefit) — will return some of the premium paid if the policy is canceled or if death occurs before requiring any long-term care. However, this benefit increases the cost of the premium by 20% to 100%— in fact, it is this extra cost that is being returned to you. Therefore, this benefit makes no sense, since it would be wiser to pay reduced premiums for a policy without this benefit and simply invest the rest.

Long-Term Care Insurance and HIPAA

The Health Insurance Portability and Accountability Act of 1996 (HIPPA) imposes consumer protection standards on long-term care insurance providers. Consumers must receive a Shopper's Guide for long-term care insurance and an Outline of Coverage, which describes the policy's benefits and limitations early in the sales process. High-pressure sales tactics and twisting, which is a misleading or incomplete comparison of policies, are prohibited. Companies must also report annually the number of claim declines, policy terminations, and replacement sales.

This law also prevents companies from canceling a policy, even for aging, or for deteriorating mental or physical health, except for the nonpayment of premiums. For those with cognitive impairment, the policy can be reinstated up to 5 months after the policy lapsed.

Long-term care insurance policies cannot exclude coverage by type of treatment, medical condition, or accident, with the exception of mental or nervous disorders, but not Alzheimer's disease, and can also exclude coverage for alcoholism and drug addiction. A policy cannot exclude coverage for pre-existing conditions for more than 6 months after the policy inception.

An individual that had group coverage from employment can continue the coverage after leaving the job by paying the premiums. If the place of employment discontinues group long-term care insurance, then employees can buy individual policies without providing any evidence of insurability.

Tips for Buying Long-Term Care Insurance

The National Association of Insurance Commissioners has developed standards that protect consumers. Look for a policy that includes:

• At least 1 year of nursing home or home health care coverage, including intermediate and custodial care. Nursing home or home health care benefits should not be limited primarily to skilled care.
• Coverage for Alzheimer's disease.
• An inflation protection option, that either:
  • automatically increases the initial benefit level annually,
  • or guarantees the right to increase benefit levels periodically without providing evidence of insurability.

• An outline of coverage that describes the policy's benefits, limitations, and exclusions, and which will allow you to easily compare it with others, and a long-term care insurance shopper's guide that helps you decide whether long-term care insurance is appropriate for you. Your company or agent should provide both.
• A guarantee that the policy cannot be canceled, nonrenewed, or otherwise terminated because you get older or suffer deterioration in physical or mental health.
• The right to return the policy within 30 days after you have purchased the policy and to receive a premium refund.
• No requirement that policyholders:
  • first be hospitalized to receive nursing home benefits or home health care benefits,
  • first receive skilled nursing home care before receiving intermediate or custodial nursing home care,
  • first receive nursing home care before receiving benefits for home health care.

Paying for Long-Term Care Using Accelerated Death Benefits from Life Insurance

Another option available to pay for long-term care expenses is surrendering a life insurance policy for its cash value or collecting an accelerated death benefit. If the insured is terminally ill, defined as a physician-certified life expectancy of less than 24 months, then the accelerated death benefits are fully tax-free. If the insured is chronically ill, then the benefit is tax-free if used to pay for the actual cost of care. Benefits that are paid periodically may be taxable if they exceed a per diem amount, adjusted annually for inflation.

Because of the time value of money, periodic payments are often chosen because the total amount payable is usually greater, so the total payment available should be considered along with the tax consequences of receiving periodic payments.

Medicaid Trusts

Long-term care is expensive. Medicaid will cover long-term care, but only if the patient has low income, under $2205 per month in 2017. Medicaid eligibility also depends on nonexempt assets, assets which are considered in being able to provide funding for the applicant's care. Nonexempt assets include retirement accounts, stocks, mutual funds, checking and savings accounts, and real estate other than the primary residence. Exempt assets are not considered for Medicaid eligibility, and include a primary residence.

Since many people have higher incomes, but no long-term care insurance, long-term care could deplete their assets. One solution is to set up a Medicaid trust, but should be set up by an eldercare attorney, because, as a joint operation between federal and state governments, Medicaid rules vary.

Medicaid Look-Back Rules

One method that many wealthier taxpayers consider is the transfer of assets from the Medicaid applicant to other family members. To prevent this, Medicaid has look-back rules, which look at the value of all assets that the applicant has had within the past 5 years, or in some states, 3 years. If the value of those assets exceeded the threshold at any time during the look-back period, then the applicant will be disqualified.

Transferring Assets to a Medicaid Trust

Assets can be preserved by transferring them to a Medicaid trust before the look-back period. The disadvantage of Medicaid trusts is that they are irrevocable, meaning that the terms of the trust cannot be changed nor can the Medicaid applicant regain control of the property. Since living trusts are revocable, trust assets will be considered for Medicaid eligibility if the applicant has any incidents of ownership in the trust or control of the property, so a living trust cannot be used as a Medicaid trust. The Medicaid trust property will be managed by a trustee, who cannot be the applicant.

Medicaid Trust Costs

The cost of a Medicaid trust depends on the terms of the trust, and the number, types and value of the property to be transferred, but it typically runs from $5000-$10,000. Because a Medicaid trust is an irrevocable trust, it must file an annual tax return, which may require tax preparation fees. There may also be additional legal fees for the continued operation of the trust. A family member may be the trustee, which can save on fees that would otherwise have to be paid to a disinterested trustee or a corporate trustee.