Long-Term Care Insurance
By: Bill Monte
Published January 2009 / Reviewed November 2010
What is Long-Term Care?
Long-term care is a continuum of care, services and housing that you will need when you live a long life. It is custodial care that is defined as needing assistance with your basic activities of daily living (toileting, bathing, dressing, eating, transferring from one point to another and continence). It also includes care related to cognitive impairment so severe that the individual needs constant supervision. Long-term care services can be provided in a variety of settings, including your home, assisted living facilities or nursing homes.
Think you won't live a long life? Think back 25 years ago. If you had a stroke or cancer, you simply passed away. Few ever heard of Alzheimer's disease. Today, it is the leading cause for long-term care services. The longer you live, the more likely you are to need care. The question is not who will take care of you, because your family will most often do so, but rather what that care will do to your family and your financial situation.
Who covers the Cost?
Medicare, the primary health care program for retirees (or a person's major medical insurance prior to age 65) pays only for skilled or rehabilitative care, not custodial care in any venue. Medicaid, a federal and state program for financially needy individuals will pay for custodial care, but primarily in nursing homes and only after assets are "spent-down" to certain levels. Medicaid funding for home care and assisted living is very limited and based on availability of funds.The same is true for Veterans Affairs, which is generally based on service-related disability. In fact, the federal government has as much said this to veterans by encouraging them to purchase long-term care insurance through the new Federal Long-Term Care Insurance program.
The Role of Long-Term Care Insurance (LTCI)
The use of long-term care insurance thus becomes an important part of planning for potential disability related to living a long life. The product has two roles: helping keep families together and allowing your retirement portfolio to remain intact for the purpose for which it was intended, namely retirement.
From a family perspective, think about who will be providing your care; children will likely play a key role. Long-term care insurance doesn't replace the need for family involvement in providing care, but rather builds on it. It pays professionals to assist the person with the most difficult tasks such as toileting, bathing, feeding and continence. This, in turn, allows the family to provide care better and longer at home. That leads to a critical question: have YOU planned for the consequences of living a long life?
From a financial point of view, LTCI allows your retirement plan to stay intact. That is particularly important given the steep decline in portfolio values that we have seen over the past year. The product in effect protects the balance of your account value. LTCI also protects income. Although you may qualify to pay for nursing home costs by transferring assets, your income (pension, social security, IRA and/or 401K payout) cannot be protected.
Designing a Long-Term Care Insurance Plan: The Basics
Today's long-term care insurance policies are comprehensive in their coverage, meaning they cover the cost of custodial care that is received in all types of community as well as institutional-based care settings. When a long-term care insurance policy is designed, there are a handful of key components that determine the cost of the coverage.
• Daily Benefit Amount - what portion of the daily cost of care do you want the insurance company to pay for you?
• Benefit Period - how long of a time period do you want your policy to pay the benefit to you?
• Elimination Period - similar in concept to the deductible on your homeowner's or automobile insurance, this represents the number of days that you will pay for your care out of your own pocket, before the policy starts paying the benefit to you.
• Inflation Protection - how would you like your policy benefits to increase each year to keep pace with the rising cost of care? Each policy has different inflation options to choose from.
Types of Long-Term Care Insurance
There are two different forms of long-term care insurance that exist, both paying the benefit to the policyholder in different ways. The traditional form of long-term care insurance works under a reimbursement model where the person is reimbursed the cost of care that has been received up to the maximum daily benefit of the policy. Bills and receipts for care received have to be submitted to the insurance company, approved as covered expenses and then reimbursed back to the policyholder.
One very popular type of reimbursement plan is called the New York State Partnership for Long-Term Care. This plan was designed to assist residents of New York in planning for the cost of long-term care by combining the private aspect of LTCI with the extended coverage of Medicaid. It enables an individual or married couple to protect all of their assets instead of spending them down to cover the cost of care. The goal of this Partnership is financial independence through shared responsibility. We do our share by conducting proper planning and purchasing a Partnership LTCI policy and the State will do its share by protecting us against the cost of extended care situations with its Medicaid program. In a nutshell, if we need care down the road, we will use the Partnership policy to pay for that care. If we happen to need care for a long enough period of time where we have exhausted the benefits of the policy, then we immediately qualify for Medicaid coverage without regard to the level of assets that we have. There is no spend-down of assets that is required. This is an excellent asset protection strategy and is also the least expensive long-term care insurance option for New York State residents to consider.
A newer form of long-term care insurance that was introduced in 2004 is called "Cash Benefit". With this policy, no bills or receipts for care are needed. The policyholder simply receives a monthly cash benefit amount that can be used in any way that they prefer. It gives the policyholder the unrestricted ability to create whatever caregiving scenario that is desired. If they want to have a family member act as the primary caregiver and pay that person a salary for providing care, they can do so. This type of policy was created for people who want to stay in their home and want to be in control of who can take care of them. It brings a tremendous amount of flexibility to the equation.
How do I receive benefits on my Long-Term Care Insurance Policy
The Health Insurance Portability and Accountability Act (HIPAA) enacted by Congress in 1996 standardized the eligibility requirements to receive benefits on long-term care insurance. The law states that any licensed health care practitioner has to deem that you are "chronically ill" which means you are:
Unable to perform, without substantial assistance from another individual,
at least 2 out of the 6 activities of daily living that were mentioned earlier
(bathing, dressing, eating, transferring, toileting and continence)
for an expected period of at least 90 days due to a loss of functional capacity
"You require substantial supervision to protect yourself from threats to health
and safety due to a severe cognitive impairment"
Remember, these policies pay for custodial care, the type of care that is chronic and progressive in nature, where we need help with the basic daily routines that we all currently take for granted.
Tax Incentives for Long-Term Care Insurance
Something else that came out of the HIPAA law relative to long-term care insurance was the creation of the Tax-Qualified Long-Term Care Insurance policy and the corresponding federal and state income tax benefits that are now given to policyholders as incentives to implement long-term care insurance. The federal income tax benefit is a possible deduction from income and is based upon the person's age and annual premium amount. New York State's incentive is a very lucrative 20% income tax credit on the annual premium, which is a direct subtraction from the amount of state taxes a person pays each year. In essence, one-fifth of your long-term care insurance premium is being paid for you by New York State! A long-term care insurance professional should be able to quantify the level of tax benefits that an individual or married couple is eligible for with a quick review of their most recently filed income tax returns.
When is the best time to buy long-term care insurance?
Obviously, the best time to consider long-term care insurance was yesterday, because the annual premium that you pay for this coverage is determined by your current age and health. The fact of the matter is that you will never be as young or as healthy as you are today. The cost of this coverage does rise significantly the longer that a person waits to implement it. Long-term care insurance is coverage that a person pays a fixed annual premium for, which creates a substantially growing benefit over time to keep pace with growing costs of care. The cost vs. benefit analysis is severely weighted towards the benefits side. In addition, this is insurance that you have to "health qualify" for (however, no medical exam), so those who procrastinate are taking the risk that an unexpected health condition may surface causing a situation where a "preferred health rating" is no longer available or worse, coverage is no longer even an option.
Those who are concerned about how they will pay for the growing cost of long-term care and how it will affect their family and finances should thoroughly educate themselves on the many benefits of long-term care insurance to determine whether it is appropriate for them to consider. Doing so will help them avoid the enormous financial and emotional crisis that a need for long-term care will create. It will also preserve the retirement assets that an individual or married couple has worked so hard to build and allow them to avoid the spend-down requirement of Medicaid. But perhaps most important, long-term care insurance can allow them to remain independent and avoid becoming a burden to the people they care about most.
Bill Monte is a Certified Long-Term Care Planning Specialist and is President of LTCi Consultants, Inc., an independent long-term care planning practice located in Rochester, New York
The Rochester Healthnote Library consists of locally-authored articles either commissioned by Rochester Health or republished with the author's permission. The information provided in the Rochester Healthnote Library is for general informational purposes only and is not meant to be a substitute for professional medical advice and treatment. You should always seek the advice of your physician or other medical professional if you have questions or concerns about a medical condition.