LONG-TERM CARE INSURANCE: IS IT RIGHT FOR YOU?
Long-term care (or nursing home) insurance has emerged over the past 20 years as an alternative source for funding long-term care expenses, whether received in an institutional setting or at home.
Such policies are extremely flexible, and can be designed to pay all long-term care costs indefinitely and without regard to Medicaid eligibility, or as a supplement to Medicaid payments.
Long-term care insurance can also be part of Medicaid planning, since it can provide short-term benefits during the limited period of ineligibility caused by having excess countable resources, including the situation where assets have been transferred during the look-back period.
Under the Internal Revenue Code, policies are issued as either tax qualified or non-tax qualified. The tax treatment of qualified long-term care policies is described below.
To understand long-term care policies, you should first be familiar with the different levels of nursing care:
✔ Skilled care is acute nursing and rehabilitative care given by a RN or therapist, usually daily (i.e., around the clock) and supervised by a physician.
✔ Intermediate care involves occasional (not around the clock) nursing and rehabilitative care under the supervision of skilled medical personnel.
✔ Custodial care involves assistance in performing the activities of daily living. This level of care can be given by non-medical personnel, whether in a nursing home, adult day care center, or in an individual’s home.
✔ Home care includes part-time skilled care, therapy, home health aides, etc. at the individual’s home.
Scope of Coverage: Institutional Care and Home Care
Coverage can be for one or more of the four levels of care described above. Specifically, it is important to know where the services can be received for a particular level of care — in a nursing facility, at home, or a combination of both.
Because most individuals will want to stay at home for as long as possible, home care coverage is an important feature to include in a policy, usually as a rider.
Who Can Provide Care?
Does the policy state that custodial or home care has to be provided by a licensed or certified professional, or can it be done by a non-professional, e.g., a family member?
The policy may permit non-professionals to provide care, but such flexibility will likely come at the cost of an increased premium.
Commencement of Coverage
The policy should clearly define when coverage will begin. The starting point, commonly referred to as the “benefit trigger,” usually requires a finding that the insured is unable to perform a minimum of two of the six Activities of Daily Living (viz., eating, bathing, dressing, toileting, transferring (walking) and continence).
Coverage can be “first day” protection, or there can be a waiting (elimination) period (generally 20 to 365 days) before coverage begins.
Length of Coverage
Policies can have a set benefit period, typically two to four years, for any one stay in a nursing facility, or they can remain in effect for the insured’s lifetime.
Waiver of Premium
Once the elimination period has been satisfied, the policy should allow a waiver of premium.
Amount of Benefit
The amount of the benefit payable to the insured will be a function of three components:
✔ Set dollar amount specified in the policy (for example, $100 per day).
The home health care benefit can be less than (typically 50%) or equal to the nursing home benefit.
✔ Inflation factor, simple or compounded.
Inflation protection is an important consideration in order to guard against increases in nursing facility expense.
✔ Length of coverage — whether for:
- Set number of years (or a set maximum amount) or
Income Tax Deduction for Premiums Paid
The Internal Revenue Code generally allows the taxpayer to deduct medical expenses paid during the taxable year, if they are not reimbursed by insurance or otherwise, for the medical care of the taxpayer, his or her spouse, or a dependent, to the extent that such expenses exceed 10% of the taxpayer’s adjusted gross income (7.5% of AGI for tax years ending before January 1, 2017 if the taxpayer or the taxpayer’s spouse has attained age 65 before the close of the tax year).Eligible long-term care insurance premiums, subject to certain limitations, can be included in such expenses.
Taxation of Benefits Paid
Payment of benefits under a qualified long-term care insurance contract will be excluded from taxable income, up to a maximum exclusion of $330 per day for 2014 ($320 for 2013). This amount is subject to adjustment for inflation every year. However, if the policy pays for the actual costs of nursing home care and the costs exceed the applicable per diem amount, then the excess will also be excluded from income.
Leaving an Estate
How important is it to you to have an “estate” (i.e., some minimum target amount) that you can pass on to your beneficiaries at your death? Are you currently supporting a child or other family members who cannot support themselves, and who will likely need continued support after your death? Is the goal of ensuring that these beneficiaries will be provided for after your death worth the price of the long-term care insurance premiums that you will have to pay to preserve your current assets for them?
Example 1. Andrew, age 67, is currently spending $40,000 per year towards the living costs of his disabled daughter, who is now age 33. He’s afraid that if he needs long-term skilled nursing care for several years, which may cost around $120,000 per year, there will not be enough left at his death to fund a trust that he wants to establish for his daughter. Purchasing long-term care insurance by Andrew will mean that his assets can stay intact, even if he needs years of long-term care, which can then pass at death into the trust for his daughter’s benefit.
Example 2. Sheila, age 83, is widowed with no children, and no one who is dependent on her for continued support. The beneficiaries named in her Will are her nieces and nephews, but she is not especially close to them. Sheila has about $1 million in assets, most of it in liquid form. She estimates that if she would have to reside in a skilled nursing facility for 60 months and spend $10,000 per month for such care, she will have reduced her estate by $600,000. Since Sheila has substantially more than $600,000 in assets, and no family members who will need to be supported by her after her death, long-term care insurance appears to be unnecessary in Sheila’s case.
Premiums for someone in their 60’s can range from $750 to $3,000 per year, depending on which features are selected. Premiums increase rapidly as the insured ages.
Alternative of Self-Insurance
With enough assets, one can always self-insure against the risk of nursing home costs. (See Example 2 above describing Sheila’s situation)
Your family’s health history relating to old age and longevity may indicate the likelihood of needing long-term care at some point, and the duration of that need.
Statistics indicate that the average stay in a skilled care facility is 2 ½ to 3 years, and that half of those who enter will stay at least one year.
Also consider the alternative of staying in your own home or at the residence of a child or other family member. However, issues of the availability, reliability, and desirability of such an arrangement must be honestly addressed.
✔ Don’t buy long-term care insurance from a company that you might outlive! Check the ratings of the company from services such as A.M. Best, Standard & Poor’s, and Moody’s.
✔ Use a broker who specializes in long-term care policies.
Be Careful of Increased Premiums
A long-term care policy may be called “guaranteed renewable,” but the company will still have the right to increase premiums. With companies that lack sufficient underwriting experience in the long-term care area, there is a risk they will conclude that their policies have been underpriced, thus resulting in substantial increases in premiums.
The danger is that elderly couples will let their long-term care policies lapse if the premiums become too high, thus ending coverage before they need it.
Back to Top