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. (Costs of Care - Long-Term Care Information)
If eligible, Medicare covers only the 1st 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 that is a specified amount regardless of actual expenses. An insured can receive, in 2007, $260 tax-free from a per-diem policy, or more, if actual expenses are greater than that, and allit can be received tax-free if the insured is terminally ill. The tax-free daily limit increases every year.
Because of the expense, long-term care insurance is expensive. The cost of premiums varies widely, depending on the insurance company, the benefits, length of waiting period, options selected, and your age when purchasing the policy. As with all other insurance, it is prudent to shop around, and because the cost of premiums depends on your age when you purchase the policy, it generally is not a good idea to switch policies unless there is a compelling reason to do so, because it will almost certainly cost more if you are significantly older. However, premiums for a policy already in force do not increase as you 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.
Example—Real World Pricing
In 2002, a policy offering a $150 per day long-term care benefit for 4 years, with a 90-day deductible, had the following national cost averages per year:
There may also be tax savings for paying premiums, because they are counted as a medical expense deduction. 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 amount of long-term care premiums that can be deducted depends on the taxpayer's age and on the tax year that the deduction is claimed, since the amount is indexed for inflation:
|Age < 40||$420||$410||$390||$380||$370||$360||$350|
|40 < Age ≤ 50||$780||$770||$730||$710||$700||$680||$660|
|50 < Age ≤ 60||$1,560||$1,530||$1,460||$1,430||$1,400||$1,360||$1,310|
|60 < Age ≤ 70||$4,160||$4,090||$3,900||$3,800||$3,720||$3,640||$3,500|
|70 < Age||$5,200||$5,110||$4,870||$4,750||$4,660||$4,550||$4,240|
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 basically good health between the ages of 18 and 84 can buy long-term care insurance. Some companies do not sell to people over the age of 84, but this age limit applies only at the time of purchase, not to its renewal or when benefits are received. In most cases, 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.
There is usually an exclusion 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, which are specific requirements that must be met before benefits are paid.
One benefit trigger is the inability to perform a certain number of activities of daily living (ADLs), which are 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.
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 that are 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.
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. You should 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 of these.
- 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 in order 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 that is 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.
Adverse Selection from Genetic Testing: How Long Will Long-Term Care Insurance — or Any Health Insurance — Be Available?
Many diseases that result in long-term disability have a higher incidence for those people with certain genes, such as the ApoE4 gene for Alzheimer's disease. The FDA has started to improve genetic testing kits, allowing consumers to test their own genes that may indicate increased risk for certain diseases. After receiving FDA approval, gene testing company 23andMe has started offering such genetic tests. Their test uses a saliva sample and costs $199, making it simple and inexpensive for people to test themselves. More companies will also start offering genetic tests, giving individuals a better assessment of their lifetime risk for certain diseases with a strong genetic component.
However, the information is not shared with insurance companies or with other 3rd parties, and insurance companies cannot require such testing, since it may make insurance unaffordable for many people. The Genetic Information Nondiscrimination Act prevents insurers from requiring genetic testing or using those results to determine whether to provide coverage. Additionally, companies — who may want to keep their own health insurance costs down, especially since many of them self-insure — cannot ask employees to take genetic tests nor can the results of any such tests be used in employment decisions.
By allowing only the consumers to know the results of their own genetic tests, those who discover that they are at higher risk will be more apt to buy long-term care insurance, while those who are at lower risk will be less inclined to buy the insurance because of its cost. As insurance companies cannot know or use the test results, they will not be able to set appropriate premiums to cover the cost. This adverse selection may cause a death spiral in the long-term care industry, since only those with the highest risk will be more likely to buy insurance, leading to higher premium increases, dissuading more healthier people with lower risk to forgo the insurance, thereby causing premiums to rise further until they are no longer affordable. The number of insurance companies that provide long-term care insurance has declined markedly. In 2000, more than 100 firms offered long-term care insurance; by 2016, only 12 firms. If the trend continues, as is likely, then the government will probably pay more of the cost of long-term care. Even today, 2/3 of nursing home residents are on Medicaid. Indeed, the Genetic Information Nondiscrimination Act may be an effective tool for promoting the single-payer health coverage in the United States, abhorred by some people, but present in many other countries. Since many diseases, including those that do not lead to long-term disability, have some genetic component, individuals can learn their own risks without informing the insurance companies, so those at high risk will be more likely to purchase health insurance than those at low risk, leading to the same death spiral that is likely to occur in the long-term care industry. This is particularly true as genetic tests become better and as the relationship between genes and certain diseases becomes better known.
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.