Outside Economics

Long-term care (LTC) insurance allows people to pay a known premium to help protect against the risk of much larger out-of-pocket expenses down the road. This article will help you understand some of the things to consider when purchasing an LTC polciy.

Taxation

When considering policy taxation, there are two general types of long term care policies, they are:

• Tax qualified (TQ) policies which are the most common policies offered. As per HIPPA, a TQ policy requires that a person 1) be expected to require care for at least 90 days, and be unable to perform 2 or more activities of daily living (eating, dressing, bathing, transferring, toileting, maintaining continence) without substantial assistance (hands on or standby); or 2) for at least 90 days, need substantial assistance due to a severe cognitive impairment. In either case a doctor must provide a plan of care. Benefits from a TQ policy are non-taxable.
• Non-tax qualified (NTQ) which was formerly called traditional long term care insurance. It often includes a "trigger" called a "medical necessity" trigger. This means that the patient's own doctor, or that doctor in conjunction with someone from the insurance company, can state that the patient needs care for any medical reason and the policy will pay. NTQ policies may include walking as an activity of daily living and usually only require the inability to perform 1 or more activity of daily living. The Treasury Department has not clarified the status of benefits received under a non-qualified long-term care insurance plan. Therefore, the taxation of these benefits is open to further interpretation. This means that it is possible that individuals who receive benefits under a non-qualified long-term care insurance policy may risk facing a large tax bill for these benefits.

Fewer non-tax qualified policies are available for sale. One reason is that consumers want to be eligible for the tax deductions available when buying a tax-qualified policy. The tax issues can be more complex than the issue of deductions alone, and it is advisable to seek good counsel on all the pros and cons of a tax-qualified policy versus a non-tax-qualified policy, since the benefit triggers on a good non-tax-qualified policy are better.

Most benefits are paid on a reimbursement basis and a few companies offer per-diem benefits at a higher rate. Most policies cover care only in the continental United States. Policies that cover care in select foreign countries usually only cover nursing care and do so at a rated benefit.

Partnership Plans and Medicaid

The Deficit Reduction Act of 2005 makes Partnership plans available to all states, although not all states participate in this program. Partnership plans provide “lifetime asset protection" from the Medicaid spend-down requirement.

In return for purchasing partnership policies, a portion of a policyholders’ assets will be disregarded when determining their eligibility for Medicaid long-term care services, if and when they apply for such services. Traditionally, to be eligible for Medicaid, applicants’ assets cannot exceed certain financial eligibility thresholds.

When applying for Medicaid long-term care benefits, the Partnership program allows individuals who purchase qualifying insurance policies to retain one dollar in assets for each dollar of long-term care insurance benefits paid by the policy. For example, the typical asset limit for an individual applying for Medicaid nursing home services is $2,000. If an applicant received $100,000 in benefits through a partnership program insurance policy, they may retain up to $102,000 in assets.

Deductibles

Most policies have an elimination period or waiting period similar to a deductible. This is the period of time that you pay for care before your benefits are paid. Elimination days may be from 20 to 120 days. The longer the elimination period the lower the premium.  Some policies require that the policy for long-term care be paid up to one year before becoming eligible to collect benefits.

What About Inflation

Because the daily or monthly benefit amount you buy today may not be enough to cover higher costs years from now, most policies give you the option of adding an inflation protection feature, for an additional premium cost. With automatic inflation protection, the initial benefit amount increases automatically each year at a specified rate, such as 3%.

Another form of inflation protection is the guaranteed purchase option. This gives you the option of increasing your benefit amount and your premium every few years. Policies without inflation protection cost less, but their benefit amounts do not increase and may be inadequate if you need long-term care many years from now.

Nonforfeiture Option

Some people feel that if they pay premiums on an insurance policy for years but later drop the policy, they should receive some payment. A policy with nonforfeiture provision does this. Most companies offer nonforfeiture options on long-term care policies. However, that can add from 20% - 100% to the cost of the premium.

Asset Based Policies

Other LTC policies are “asset based” meaning that they are based on an annuity, or a cash value life insurance policy. The benefit of these types of policies are the favorable underwriting, which is a blend of LTC and life insurance underwriting, giving people who may not qualify for one specific type of policy, be able to get a policy this way. Or LTC and annuity underwriting again may provide a benefit to the insured.

An example is a person who for one health reason, like diabetes who was turned down for regular LTC insurance, may be able to obtain a policy via an asset based policy.

This can also provide additional stability for other investments. A fixed annuity provides a solid fixed rate of return, even at three percent, it is much higher than zero! Also with the right annuity you may be able to withdraw money income tax free when those funds are used for qualified long-term care expenses.

A problem with long-term care insurance is that statistically 30 percent of people don’t end up using it and they feel like they have wasted all those expensive premiums. So the asset based policy solves this problem, it is not a “use it or lose it” policy. If you use it for long-term care great, if not then it is left to your heirs as part of your estate plan, either way the policy is preserving your estate. If the policy holder decides to cash it in then they can do that also, in some cases getting more than what they put in the policy.

Because long-term care policies are purchased by more people at or near retirement in preparation for what may happen in near the end of life. The question is this; is your retirement plan complete without some sort of long-term care plan in place? For most Americans, 93% of them, older than 60 years old, the answer is NO. And then for those who are younger than 60 what about your parents? What do they have in place? If they have nothing, will they be moving in with you? If you have questions about who needs long-term care insurance read Who Needs Long-Term Care Insurance.

Remember:

It's been said, "It isn't happy people who are grateful, it is grateful people who are happy!"

November as we know is the month in which we celebrate Thanksgiving, perhaps the most celebrated and gratefully under-commercialized holiday of the year, for which I am truly thankful. I love Thanksgiving – it is my favorite holiday. November is also Long-Term Care awareness month.

Long-Term Care is so very important to plan for. Throughout our lives we are bombarded with taking care of risks we are exposed to, auto accidents, home owners’ problems, life and disability, etc., but often we do not plan much for the end of our lives (actually few people die with a valid will in place). And what is left for our loved ones is literally a financial mess on top of the emotional challenges of losing a family member.

Below is some information from two studies I would like to use, they lay out some statistics about Long-Term Care. The people who are prepared or ill-prepared for such a catastrophic problem might find the motivation to look for more information to help their unique situation.

According to researchers at Georgetown University and Pennsylvania State University, about 70% of individuals 65 and older will need some kind of long-term care—whether at home, in an assisted-living facility or nursing home.

But how many of them should purchase a long-term-care insurance policy? That number, it turns out, is far lower—at 19% of men and 31% of women, according to a new study published by Boston College’s Center for Retirement Research. (Women live longer on average, and so they’re statistically more likely to incur long-term-care costs; my own mother lived 27 years past my father.)

Surprise - most “individuals should not buy insurance,” wrote the authors of the paper, which was published in November 2014. However, this study only looks at strictly “nursing home care” and ignores assisted living facilities or home health care. Neither of these two levels of care are provided for by any government programs.

Most people do not need the coverage because they do not have a sufficient level of assets to protect. People work their whole lives to provide for themselves and their families, what is left over at the end they want to pass on to their heirs, Long-term Care insurance can help protect that final nest egg, so there is something left.  The value of owning a Long-term Care policy is related to the amount of assets one has and the estimated amount needed to cover the catastrophic cost of long-term care. Additionally the authors found, that for many people of modest means the coverage provided by of Medicare and Medicaid are adequate to cover most of their needs. 

To assess the odds of needing long-term-care, the researchers used government data to “calculate monthly probabilities of transitioning among various health states” from age 65 on. The “health states” are: “healthy, requiring home health care, living in an assisted living facility, living in a nursing home and deceased.” The data show that 44% of men and 58% of women will spend at least some time receiving nursing-home care.

However, many people spend only short spells in nursing homes. Government data show that, on average, men who require nursing-home care spend an average of less than a year in such care over their lifetimes. For women, the figure is about one year and four months.

As the study notes, “many short-duration stays in nursing homes are covered by Medicare,” which covers stays of 100 days or less following a hospital stay of more than 3 consecutive days, Half of all men and 40% of women who use nursing-home care fall within this coverage window, and Medicare picks up their tabs.

At the other end of the spectrum, Medicaid picks up the tab for extended stays in nursing homes for those who run out of money. There are also those people of modest means who try to game the system by spending their assets and thus causing self-inflicted poverty to qualify for Medicaid.

So who should consider buying coverage? According to Anthony Webb, a senior research economist at the Center for Retirement Research and a co-author of the paper, those with significant assets—of a couple hundred thousand dollars or more ($200,000)—should look into a policy. The target market, he adds, is “people who have a sizable amount of household financial assets and would be unlikely to qualify for Medicaid.”

Two things to remember: 1) The study primarily focused on nursing home care, and that type of care is far more comprehensive care than assisted living care and Home Health Care, both of which is covered with Long-Term Care, but not covered by Medicaid or Medicare. People tend to spend more time in assisted living facilities and using home health care then nursing home care. Nursing home care is truly an end of life type of care.

2) What triggers the receiving of long-term care benefits is the loss of two of six activities of daily living, which often allows a person to remain at home, but simply need help on a daily basis to tend to certain activities.

It is likely that in your adult stage of life, most people have experienced a friend or relative that has needed and or used, home health care, assisted living care, and/or nursing home care. There are many different types of policies to choose from. You will want a policy which is simple to understand and yet is flexible enough to cover your needs, while at the same time not being subject to massive rate increases. Or worse, a reduction of the benefits you have paid for, because you can’t afford the new rate increase.

My family has several times expressed gratitude for the policy my mother had, which kept her estate intact and left more to her heirs. It was a wonderful blessing for which I am truly grateful. But more than that it made it possible for my sisters, who were responsible for her, to be care managers rather than care givers – a significant difference between the two roles – and a major difference in the quality of life for both the care manager and the one receiving the care.

With that - I wish y'all a very happy Thanksgiving!

Remember

“When you walk with gratitude, you do not walk with arrogance and conceit and egotism, you walk with a spirit of thanksgiving that is becoming to you and will bless your lives.” - Gordon B. Hinckley