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.
CONTENTS
■ Factors to Consider in Purchasing Long-Term Care Insurance
■ Understanding the Levels of Long-Term Care
■ How to Analyze a Long-Term Care Policy
■ Tax Treatment of Long-Term Care Insurance
■ Selecting an Insurer
■ FACTORS TO CONSIDER IN PURCHASING LONG-TERM CARE INSURANCE
Leaving an Estate
How important is it to you to leave an “estate” (i.e., some minimum target amount) that will 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 $50,000 per year towards the living costs of his disabled daughter, Marion, who is now age 33. He’s afraid that if he himself needs long-term skilled nursing care for several years, which may cost around $150,000 per year, there will not be enough left at his death to fund a trust that he wants to establish for Marion. 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 Marion’s benefit.
By contrast, what if all your children are self-sufficient and frankly do not need to receive an inheritance from you, or if you do not have any children?
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 $1.5 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 $12,000 per month for such care, she will have reduced her estate by $720,000. (Note that this calculation does not take into account Sheila’s Social Security benefits and distributions from her IRA, which will reduce the actual amount that she will have to pay out of her own savings.)
Since Sheila has substantially more than $720,000 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.
Affordability
Premiums are determined by several factors, including the gender of the insured, their age, the state of their health, and whether the benefits will remain flat or grow at a set percentage rate, and with or without compounding.
For an example, below is the annual Price Index survey of leading LTC insurers for 2020, as published by the American Association for Long-Term Care Insurance
| Annual Premium – Age 55 – Average of Leading LTC Insurance Companies | ||
|---|---|---|
| Single Male, Age 55 (Select Health) benefits grow at 3% yearly | $ 1,700 | |
| Single Female, Age 55 – benefits grow at 3% yearly | $ 2,675 | |
| Couple, Both Age 55 (cost shown is COMBINED for the couple) 3% annual growth | $ 3,050 | |
Rates above are for an initial pool of benefits equal to $164,000 (each at age 55). Value of benefits when policyholder reaches age 85 equals $386,500 each. Prices for State of IL. Prices can vary by State. Calculated: January 2020
| Annual Premium – Age 65 – Good Health vs. Some Health Issues When Applying | ||
|---|---|---|
| Single Male, Age 65 (Preferred Health) | $ 1,400 | |
| Single Male, Age 65 (Some Health Issues) | $ 2,100 | |
| Single Female, Age 65 (Preferred Health) | $ 2,100 | |
| Single Female, Age 65 (Some Health Issues) | $ 3,100 | |
Rates shown above are for an initial pool of benefits equal to $162,000 (each at age 65). If you have some health issues, call the Association to discuss. Prices for State IL. Prices can vary by State. Calculated: February 2020
Alternative of Self-Insurance
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.
In Pennsylvania, for 2021 the average cost of long-term care in a skilled care facility over a three-year period was $401,646 ($133,882 per year). With enough assets, one can always self-insure against the risk of nursing home costs. (See Example 2 above describing Sheila’s situation.)
Also consider the alternative of staying in your own home and being cared for in place by an ongoing nursing care service, which can provide for advanced or specialized medical care, medical monitoring, and rehabilitation services. Another possible alternative is living 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 by all parties.
■ UNDERSTANDING THE LEVELS OF LONG-TERM CARE
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.
■ HOW TO ANALYZE A LONG-TERM CARE POLICY
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, $120 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
- Lifetime.
■ TAX TREATMENT OF LONG-TERM CARE INSURANCE
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, their spouse, or a dependent, to the extent that such expenses exceed 10% of the taxpayer’s adjusted gross income. Eligible long-term care insurance premiums, subject to certain limitations, can be included in such expenses.
For 2022 the deduction for premium amounts is based on the following age-based table
Age 40 and below $450
Age 41-50 $850
Age 51-60 $1,690
Age 61-70 $4,510
Age 71 and over $5,640
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 $390 per day (2022). 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.
■ SELECTING AN INSURER
✔ 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.