Long Term Care Insurance is on my Top 5 list of estate planning tools along with a Will or Trust, Power of Attorney, Health Care Proxy and Life Insurance. I wrote this article in an attempt to demystify this vital estate planning tool for clients and the public.
What is it?
Long-term care insurance (LTC or LTCI) is a type of insurance that helps to pay costs associated with long-term care. Long-term care insurance covers care which is generally not covered by private health insurance or Medicare.
Do You Need it?
Long-term care insurance becomes necessary when someone suffers an injury, illness or impairment that requires long term assistance with daily living. Although it may be utilized by people of all ages, long-term care is primarily an issue for people who are living longer and need help with everyday activities of daily living or who may require supervision due to severe cognitive impairment.
According to the Kaiser Commission on Medicaid and the Uninsured (September 2013), the majority of Americans aged 65 and over will have long-term care needs (70% of “Baby Boomers” can expect to use some form of long-term care during their lives).
Without long-term care insurance, the cost of providing necessary services will quickly diminish the savings of individuals and their family. With healthcare costs increasing each year, the need to protect income and assets against the potentially high cost of long-term care is compelling.
According to the New York State Department of Health, the average cost of nursing home care in New York City and Long Island is over $400 per day, or over $146,000 per year.
When Does it become Active?
Individuals who require long-term care are usually not sick in a traditional sense. Instead, they are unable or require assistance to perform certain activities. Most LTC policies will provide benefits once an individual is unable to perform two of the six following activities of daily living (ADLs)
- Transferring (getting in and out of a bed or chair)
What Does it Cover?
Long-term care insurance can cover home care, assisted living, adult daycare, respite care, hospice care, nursing home, Alzheimer’s facilities and home modifications to accommodate disabilities.
Home care coverage will pay for a visiting or live-in caregiver, companion, housekeeper, therapist or private duty nurse up to seven days a week, 24 hours a day up to the policy benefit maximum.
How Does it Work?
The policy applicant selects the amount of daily or monthly benefit to be paid by the policy (usually $100-$500 per day or $3,000-$15,000 per month), paying a higher premium for a higher benefit payment. The applicant will then choose a benefit period-multiplier to determine the total benefit period. Benefit periods usually range from 2-10 years or 730-3650 days. The total benefit pool will be limited to the amount calculated by multiplying the daily or monthly benefit by the period-multiplier. Most insurance companies do not currently offer lifetime benefit periods.
Example: A $200 per day benefit amount and a 10 year benefit period-multiplier are chosen. In this example, the policy total pool of money would be $730,000 ($200 x 365 days/yr. x 10 yrs.).
Other policy features include:
- Elimination Period – Benefits begin to be paid after an elimination period (usually between 30 and 365 days), during which the insured pays for care out of their own pocket. The most popular elimination period chosen is 90 days.
- Inflation Protection – Some policies offer different forms of inflation protection, increasing the daily and monthly benefits to account for the increasing cost of services.
- Waiver of Premium – In addition, while the insured is receiving benefits, most policies provide that their premiums will be waived.
- Portability – LTCi will pay benefits wherever you live in the United States when you are on claim. Some companies will pay benefits outside of the United States but will generally reduce those benefits.
Optional features (riders) that may be available include:
- Waiver of elimination period for home health care so that benefits are immediately payable.
- Shared Policy Pools of Money for Spouses and Domestic Partners
- Spousal Waiver of Premium
- Survivorship Benefits
- Cash Benefits
- Restoration of benefits
- Return of Premium
What about Medicare and Medicaid?
Medicare primarily covers skilled medical services of doctors, nurses, therapists and costs associated with acute medical conditions or hospitalization. Medicare generally covers up to 100 days of care in an approved nursing facility only if the resident requires skilled medical services and was hospitalized first for at least three days including the day of discharge. Home health care coverage is very limited.
In the United States, Medicaid will provide long-term care services for the poor or those who spend-down assets because of care and exhaust most of their assets with certain exemptions. However, Medicaid generally does not cover long-term care provided in a home setting or for assisted living.
What is a Hybrid LTC Policy?
While traditional LTC policies operate like other insurance requiring premiums be paid on a continual basis, several life insurance companies have begun to provide linked-benefit insurance policies (sometimes also referred to as hybrid policies). Life insurance and long-term care benefits are combined into one policy. Generally, the underlying policy is a life insurance policy with a rider which provides for an acceleration of a portion or all the life insurance death benefit in the event the insured requires long-term care. Any unused portion would be paid to named beneficiaries at the death of the insured.
Are Premiums Tax Deductible and Benefits Non-Taxable?
Premiums paid on an LTC policy may be eligible for a federal income tax deduction depending upon age. A state tax credit equal to 20% of the premiums paid is available to New York State taxpayers (individuals, estates or trusts and beneficiaries thereof, partners and members of LLC’s and New York S Corporation shareholders) who pay for approved individual or group tax qualified LTCi.
As far as benefits paid, tax qualified policies are the most common policies offered. Benefits paid under those policies are non-taxable as long as the recipient is expected to need care for at least 90 days. A doctor must provide a plan of care.
Non-tax qualified policies require a “medical necessity” trigger in which the patient’s doctor can state that the patient needs care for any medical reason. Such policies include walking as a seventh activity of daily living (ADL) and usually only require the inability to perform 1 activity of daily living. The IRS has not clarified the status of benefits received under a non- tax qualified plan potentially making benefits received taxable. So, although you may lose the tax benefit you have a lower threshold to be eligible for coverage.
- Once a person purchases a policy, the language cannot be changed by the insurance company, and the policy usually is guaranteed renewable for life. It cannot be canceled by the insurance company for health reasons. But it can be canceled for non-payment.
- Long-term care insurance rates are determined by six main factors: the person’s age, the daily (or monthly) benefit, how long the benefits pay, the elimination period, inflation protection, and the health rating (preferred, standard, sub-standard).
- Most companies will offer couples (including same-sex couples) and families discounts on individual policies.
- Premiums may be paid annually, semi-annually, quarterly or monthly. Options such as spousal survivorship, non-forfeiture, restoration of benefits and return of premium are available with most plans.
LTC Partnership Plans?
The Deficit Reduction Act of 2005 made LTC Partnership plans available to all states that wished to offer them. Partnership plans provide for “asset protection” from state Medicaid spend-down requirements. Most states have Long Term Care Insurance Partnership programs.
The NYS Partnership for Long-Term Care (NYSPLTC) is a Department of Health program combining long-term care insurance and Medicaid Extended Coverage (MEC). Its purpose is to help New Yorkers financially prepare for the possibility of needing nursing home care, home care, or assisted living services someday. Individuals or couples who purchase a Partnership insurance policy may exempt part or all assets from the spend down requirement under the Medicaid program once their LTC coverage is exhausted.
Partnership policies have the following additional characteristics and benefits:
- 3.5% or 5% annual compounded inflation protection required at purchase ages 79 and younger
- Minimum daily benefit amounts ($315 for nursing home care in 2018)
- Elimination period of no more than 100 days
- Care management services
- 14 days of respite care per year
- Nursing home bed reservation, 20 days per year
- 60 day grace period to ensure the premium is paid if you have designated someone to be notified when you fail to pay your premium on time
- Hospice care
- Coverage of alternate level of care status in a hospital while awaiting nursing home placement or at-home services
- Review of denied benefit authorization requests
- Guaranteed renewable
- Level premiums (individual policy premiums cannot be raised, but premium rates on a class basis may be raised with the approval of the New York State Department of Financial Services when the solvency of the class of policies is in question)
- Portability—coverage under the private insurance can be used outside New York State
Insureds become eligible to receive Medicaid Extended Coverage after the minimum policy durations have been satisfied and may keep some or all their assets as follows. Assets may be kept or transferred without penalty.
- Dollar for Dollar Policies – the insured can retain an amount of non-exempt assets equal to the amount paid out for care under the policy.
- Total Asset Protection Policies (offered only in New York and Indiana) – can keep unlimited amount of assets
Note: While the insured may protect assets under the Partnership program, the income rules under Medicaid continue to apply.
Deciding what type of Long Term Care Insurance (LTC) policy is right for you can be complex. With so many features and options available it is important to have someone to advise you properly. Benjamin Katz, Esq. has the experience and knowledge needed to guide you through the process and integrate your LTC coverage with other estate planning tools.