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Planning for Long Term Care

Introduction to
Long Term Care Insurance

If you can afford the premiums and you are insurable, the best solution to the prospect of significant long-term care costs is long-term care insurance. Most long-term care insurance policies today pay for home care and assisted living as well as for nursing home care. The problem is choosing a good policy and being able to afford it.

Long-term care insurance is a contract between an insurance company and a policyholder to pay for certain types of coverage under certain conditions. In general, long-term care policies are sold by insurance agents to policyholders, although group policies are becoming increasingly available from large employers, membership organizations like AARP, and health maintenance organizations.

Despite the wide range of policy options, there are a few rules of thumb for purchasing a policy. Following these rules tends to drive up the insurance premium, but if an individual is going to invest in long-term care coverage, he or she should buy a good policy.

Buy enough coverage for what you want to cover

While nursing homes are increasingly expensive, more alternatives to nursing homes exist than ever before. If you cannot afford to purchase sufficient coverage to pay for nursing home care (including anticipated inflation), you may be able to cover the cost of home care or assisted living. In that case you can think of the policy as "avoid nursing home" insurance. It doesn't make much sense to pay insurance premiums and then be bankrupted by nursing home fees anyway because of insufficient coverage. As with other medical expenses, the inflation rate in nursing home fees is quite high. In addition, people should probably assume that they won't be entering a nursing home for at least 10 years. At that time, the cost of the nursing home will be about twice what it is today. Here's a formula for figuring out how much coverage to purchase: average daily cost of a nursing home today x 2, minus your monthly income divided by 30, equals amount of coverage to purchase.

For instance, if the average nursing home in a region costs $150 a day and your monthly income is $1,500 a month, then you should buy coverage of $250 a day ($300 - $50 = $250). Somewhat less coverage can be purchased if an inflation rider is bought (meaning that the insurer's payments rise with inflation) or if you are prepared to contribute some of your savings to the cost of care.

Buy enough coverage. How much coverage you need depends on your strategy. In general, you do not need to purchase a lifetime policy ­ three to five years worth of coverage should be enough. In fact a new study from the American Association of Long-term Care Insurance shows that a three-year benefit policy is sufficient for most people. According to the study of in-force long-term care policies, only 8 percent of people needed coverage for more than three years. So, unless you have a family history of a chronic illness, you aren't likely to need more coverage.

If you are buying insurance as part of a Medicaid planning strategy, however, you will need to purchase at least enough insurance to cover the five-year lookback period. After moving to a nursing home or assisted living, you may want to transfer assets to your children, or to whomever you would like to benefit, if you haven't done so already. As explained in the discussion of Medicaid, Medicaid penalizes such transfers by imposing a period of ineligibility that can be as long as five years (or five years for transfers to or from certain trusts). After those five years have passed, you can qualify for Medicaid to pay your nursing home costs (provided the assets remaining in your name do not exceed Medicaid's limits).

For more on how much long term care insurance you need, click here.

Buy a home care option or rider

One of the problems with Medicaid is that although it pays for nursing home care, in most states it pays for only limited home care (New York State is a notable exception). Thus people often feel financially compelled to move to a nursing home, where the state will pick up the cost. Until there is a change in the law, most home care will have to be paid for out-of-pocket or by insurance. It doesn't make much sense to pay insurance premiums to replicate the Medicaid situation--coverage at a nursing home but not at home.

Fill out the application completely and make sure the insurance company evaluates it before issuing the policy. If in order to qualify for insurance you fail to tell the insurer about an illness, the company may refuse you coverage at the time benefits are needed. It is better to be denied a policy and to be able to plan knowing that coverage is not available than to believe that coverage will be forthcoming, only to have it denied when it is needed. Likewise, you should make sure that you purchase from an insurance company that evaluates--or in insurance company parlance "underwrites"--the policy from day one. If not, the company could refuse you coverage when they evaluate the application at a later date.

Compare insurance companies and rates

Make certain that the insurer is rated A or A+ by A.M. Best or another service that rates insurance companies. Your coverage will not be very effective if the insurer goes out of business. In addition, rates charged by insurance companies in the long-term care field tend to vary widely. Compare different companies' rates and offerings before making a decision. For more on what a good policy should include, click here. Which spouse gets the coverage?

Often, a married couple will be able to afford coverage for only one spouse. Looking at statistics alone, the wife should purchase the policy. In our society women tend to live longer than men and to provide more care than men. The result is that women are much more likely than men to end up in a nursing home for a long period of time. In addition, the Medicaid rules provide some protection for the spouse of a nursing home resident. For these reasons, the best bet for couples who can afford the premiums for one policy only is to purchase it for the wife. Couples should bear in mind, however, that this is playing the odds and is not a sure thing.

Can you afford long-term care insurance?

A rule of thumb is that payment of the long-term care insurance premium should not affect your standard of living. Thus, premiums are affordable if they are paid with money that you would otherwise set aside to add to savings. An alternative would be to purchase an annuity that pays sufficient benefits to cover the long-term care insurance premiums.

For more on how to cut premium costs, click here.

Partnership Policies

Many middle-income people have too many assets to qualify for Medicaid but can't afford a pricey long-term care insurance policy. Four states ­ California, Connecticut, Indiana and New York ­ offer special long-term care policies that can allow buyers to protect assets and qualify for Medicaid when the long-term care policy runs out. These are called "partnership policies," and they are intended to provide incentives for people to purchase long-term care insurance policies that will cover at least some of their long-term care needs. (Note: A fifth state, Illinois, has a partnership program, which is technically still in effect, but few or no policies are being sold.)

In California and Connecticut, the asset protection offered by partnership policies is dollar-for-dollar: for every dollar of coverage that your long-term care policy provides, you can keep a dollar in assets that normally would have to be spent down to qualify for Medicaid. So, for example, if you're single, you would normally be allowed only $2,000 in assets in order to qualify for Medicaid coverage of long-term care. But if you buy a long-term care insurance policy that provides $150,000 in benefits, you would be allowed to retain $152,000 in assets and still qualify for Medicaid. (These states set limits on the assets that can be protected.)

In New York, the partnership policy benefits are even more significant. Once you have exhausted the benefits from your long-term care partnership policy, you can qualify for Medicaid coverage no matter your level of assets. In other words, an unlimited amount of assets can be protected.

Indiana offers either of the above models, depending on when the policy was purchased and the policy's design.

Bear in mind that the Medicaid asset protection will only work if you receive your long-term care in the state where you bought the policy, or in another partnership state that has a reciprocal agreement with the first state.

For more information on the state partnership policies, visit the following Web sites:

• California
• Connecticut
• Indiana
• New York

The tax deductibility of long-term care insurance premiums

Under the Health Insurance Portability and Accountability Act, also known as "Kennedy-Kassebaum," passed in 1996, "qualified" long-term care insurance policies receive special tax treatment. To be "qualified," policies issued on or after January 1, 1997, must adhere to regulations established by the National Association of Insurance Commissioners adopted in January 1993. Among the requirements are that the policy must offer the consumer the options of "inflation" and "nonforfeiture" protection, although the consumer can choose not to purchase these features.

The policies must also offer both activities of daily living (ADL) and cognitive impairment triggers, but may not offer a medical necessity trigger. "Triggers" are conditions that must be present for a policy to be activated. Under the ADL trigger, benefits may begin only when the beneficiary needs assistance with at least two of six ADLs. The ADLs are: eating, toileting, transferring, bathing, dressing or continence. In addition, a licensed health care practitioner must certify that the need for assistance with the ADLs is reasonably expected to continue for at least 90 days. Under a cognitive impairment trigger, coverage begins when the individual has been certified to require substantial supervision to protect him or her from threats to health and safety due to cognitive impairment.

Policies purchased before January 1, 1997, will be grandfathered and treated as "qualified" as long as they have been approved by the insurance commissioner of the state in which they are sold. Most individual policies must receive approval from the insurance commission in the state in which they are sold, while most group policies do not require this approval. To determine whether a particular policy will be grandfathered, policyholders should check with their insurance broker or with their state's insurance commission.

Premiums for "qualified" long-term care policies will be treated as a medical expense and will be deductible to the extent that they, along with other unreimbursed medical expenses (including "Medigap" insurance premiums), exceed 7.5 percent of the insured's adjusted gross income. If you are self-employed, the rules are a little different. You can take the amount of the premium as a deduction as long as you made a net profit--your medical expenses do not have to exceed 7.5 percent of your income.

The deductibility of premiums is limited by the age of the taxpayer at the end of the year, as follows (the limits will be adjusted annually with inflation):

Age attained before the end of the taxable year Amount allowed as a medical expense in:

The Taxation of Benefits

Benefits from reimbursement policies, which pay for the actual services a beneficiary receives, are not included in income. Benefits from per diem or indemnity policies, which pay a predetermined amount each day, are not included in income except amounts that exceed the beneficiary's total qualified long-term care expenses or $250 per day (in 2006), whichever is greater.

Consult With a Qualified Agent

If you are considering long-term care insurance, you need to consult with a qualified professional to determine whether you can afford this type of coverage and whether the policy you are considering meets necessary standards.

Long-term care insurance has attracted much media attention, and many insurance agents are now selling it. However, long-term care insurance is a complex product that should be approached with caution. ElderLawAnswers believes that insurance agents and brokers selling long-term care insurance should be highly trained and know how to recommend the right coverage based on a client’s finances and objectives.

One factor to consider is whether the agent has a professional designation in providing advice about long-term care. However, recommendations from friends and other advisors are also very important because they will have personal knowledge of the experience and integrity of the people they recommend.

One professional designation is that offered by the Corporation for Long-Term Care Certification, “Certified in Long-Term Care” (CLTC). The Corporation for Long-Term Care was established by a founding member of the National Academy of Elder Law Attorneys, the country’s premier legal organization addressing elder law issues, and is dedicated to training agents to solve clients’ long-term care needs.

Moreover, the Corporation for Long-Term Care Certification’s program is “third party,” meaning that it is not affiliated with any insurance company or supported financially by the long-term care insurance industry. This is important because you will want an agent who represents a number of insurance carriers so you can choose from a variety of policies. The Corporation for Long-Term Care Certification also has received the support of your state insurance regulator by the granting of continuing education credits.

You can visit the CLTC Web site where you will find:

• A directory of CLTC graduates in your area
• How to choose a CLTC professional
• Course material