Planning for retirement nowadays means thinking about the resources needed for a period that could entail 30 years or more. While the focus of retirement planning is often on investments, Social Security and Medicare, one of the most significant perils is the risk of needing long-term care for a prolonged period.
The U.S. Department of Health and Human Services estimates that more than half of people turning 65 will need some form of long-term care services during their lifetime, with average care lasting about three years and costs routinely exceeding $100,000 annually in many parts of the country. To avoid depleting retirement assets, the burden of providing caregiving typically falls on a spouse, family member, or close friend. In addition to caretaker duties, they may also end up helping with financial support.
But long-term care is not solely an old age problem. The National Center for Health Statistics indicates that one out of every six long-term care residents is under the age of 65. Worse, the common misconception is that Medicare covers long-term care costs. The reality is that Medicare only pays for care following hospitalization, and the benefits are limited:
|
Type of Care |
Does Medicare Cover It? |
Duration/Limit |
|
Custodial Care (ADLs only) |
No |
N/A |
|
Skilled Rehab (Post-Hospital) |
Yes |
Up to 100 days (with daily copays after day 20) |
|
Assisted Living |
No |
N/A |
|
Home Health Aide |
Limited |
Only while receiving “Skilled Therapy” |
|
Dementia/Memory Care |
No |
Unless it requires medical care or skilled nursing |
How long-term care insurance works
Long-term care insurance (LTCI) is designed to cover the costs associated with assistance for daily living activities when a person is no longer able to live independently for an extended period. It is generally due to chronic conditions, cognitive impairment, disability, or the infirmity of living to an advanced age. When care is needed it can be provided at home, in an assisted living facility, an adult day care center, or a nursing home.
Every insurance policy is essentially a contract. That is why it’s extremely important to understand what is and is not covered. Having an insurance agent who has expertise with LTCI help navigate the options is extremely helpful.
A long-term care policy’s benefits are paid when the benefit “triggers” are met. The benefit triggers are tied to the insured’s ability to satisfy certain “Activities of Daily Living (ADLs).” Why are ADLs so important to LTCI?
There are essentially two ways to qualify under most LTCI policies:
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Inability to perform at least two of the six ADLs or
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Severe cognitive impairment typically involving Alzheimer’s disease or dementia
To help people understand what LTCI covers and to allow for comparisons, the Health Insurance Portability and Accountability Act (HIPAA) set forth a standardized list of ADLs for tax-qualified long-term care policies.
Defining Activities of Daily Living
Essentially, an individual satisfies the requirements to trigger LTCI benefits if they are expected to be unable to perform at least two of six defined ADLs for at least 90 days without substantial assistance from another person.
The six common ADLs are:
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Bathing — being able to wash oneself, including getting in and out of a tub or shower
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Dressing — selecting, putting on, and removing clothing and necessary braces or artificial limbs independently
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Eating — the ability to feed oneself, though not the preparation of food
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Toileting — the ability to get to and from the toilet, using it properly, and performing associated personal hygiene
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Transferring — being able to independently move in and out of a bed, chair, or wheelchair
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Continence — the ability to control bowel and bladder function
Severe cognitive impairment requiring substantial supervision
This criterion addresses people who may be physically able to perform some or all the ADLs like bathing or walking but cannot be left unsupervised on their own to prepare their meals or to walk to the store and return to their home.
How does an insurance company determine whether someone meets the criteria for cognitive impairment that requires substantial supervision? Most policies require a licensed healthcare practitioner to certify that the individual has a severe cognitive impairment that requires substantial supervision to protect them from threats to their own health and safety. As part of the assessment, most insurance companies require a cognitive test such as the Mini-Mental State Exam (MMSE) to determine eligibility for LTCI benefits.
LTCI policy nuances
LTCI policy language is critical in defining how the insurance company will handle a claim. There are distinctions among policy definitions, and an agent that deals with LTCI on a regular basis can help point out the difference between a “hands-on physical assistance” standard versus a “standby assistance” standard. The difference is that the standby assistance standard is broader and can help the insured qualify for benefits sooner than the hands-on physical standard.
Before purchasing coverage it’s important to understand how the insurance company handles LTCI claims. A critical aspect is who makes the determination, which will usually involve an in-home evaluation. LTCI policies that will allow the insured’s doctor to certify that the criteria are met to trigger policy benefits are preferable.
Basic LTCI contract provisions
There are several contract provisions that impact the cost and value of an LTCI policy:
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Elimination period: Also known as the waiting period, usually 30, 60, 90, or even 180 days, after you are certified for benefits but before the policy begins paying. The longer the waiting period, the lower the premium, as costs can run $10,000 or more a month.
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Daily or monthly benefit amount: Policies will provide payment based on a daily or monthly maximum benefit basis. Choosing a monthly benefit amount is more flexible as it allows the insured to use lower benefit cost days to offset higher benefit cost days during the month to maximize their monthly LTCI benefit.
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Benefit period: This is how long the policy will pay, which is typically for two, three or five years, or unlimited (lifetime). Generally, for people who have adequate savings to fund the waiting period themselves, selecting a longer benefit period and elimination period — 90 days, for example — will help protect them from incurring catastrophic long-term care expenses. This is important as incapacity due to dementia or Alzheimer’s may last for many years.
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Inflation protection: Health care-related expenses have increased faster than inflation. To protect the value of the amount your policy can purchase in the future, it is important to consider inflation protection. Typical inflation options are 3% or 5% annually. The age when the policy is purchased impacts the cost as younger purchasers will find that the cost of 5% versus 3% will be substantial. Again, a good trade-off will be selecting a longer elimination period such as 90 or even 180 days to lower the premium cost.
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Facility vs. home care: When LTCI was first introduced, it was often referred to as “nursing home care.” However, most people prefer to stay in their own home as long as possible, so it is critical that the policy covers treatment in the home and community-based care, rather than requiring admission to a nursing home. Receiving care at home can also extend the duration of the policy to the benefit of the insured. Be sure that the policy includes in-home caregivers, adult day care, assisted living, and memory care facilities along with skilled nursing facilities. Comprehensive LTCI policies can provide a lump-sum payment to modify the home to allow the person to receive care at home. A common home modification benefit limit is $5,000 to $10,000, or it can be paid as a multiple (typically 30 – 50 times) of the daily benefit. If the person has qualified, the modifications can start prior to the elimination period, so they are in place when benefits start.
How LTCI premiums work
LTCI premiums have increased dramatically over the years. This is due to the nature of LTCI, bases premiums on the aggregate projected claims experience of the group rather than just on the individual. Because the rate is not guaranteed, the insurance company can file for rate increases from each state insurance department to meet future expected claims.
Since the inception of LTCI there have been many insurance companies that underpriced the cost and have had to dramatically raise premiums. In response, some policyholders have opted to reduce their coverage to offset premium increases.
How to verify reputable LTCI insurance companies
LTCI benefits can be very nuanced, and consumers who purchase LTCI want to make sure that the insurance company treats their policyholders fairly when it comes to paying claims. To start, you can review consumer complaints at the NAIC (National Association of Insurance Commissioners) website. They maintain a central database that aggregates complaint data from every state. It provides a “Complaint Index,” with a score of 1.00 representing the national average. Scores that are below 1.00 mean the insurance company has fewer complaints than average for its size. Scores above 1.00 have an above average complaint rate. Be sure to use the “Life & Health” filter for “Business Type.”
You can also go directly to a state insurance department’s website to read their insurance company reviews, which may include Market Conduct Reports, Consumer Complaint Comparisons, and Administrative Actions. The information can contain fines that have been levied, “Orders,” or other citations and enforcement actions. Be sure to keep context in mind in comparing insurance companies of different sizes. Red flags for consumers to check include “Denial of Claim” or “Denial of Processing” complaints.
Why the financial ratings of insurance companies’ matter
Insurance policies represent a promise to provide a future benefit in return for current insurance premiums. To fulfill that promise, insurance companies must make assumptions on inflation, mortality, future claim estimates, investment returns, expenses, and the lapse rates of their policyholders. As a result, insurance companies need to be on solid financial footing. To learn how a particular insurance company is rated, consumers can check financial ratings from A.M. Best or other credible ratings services. When comparing insurance companies, focus not just on the current premium rate but also review what their rate increase history has been on their prior LTCI business.
Tax benefits of buying LTCI
When you look to purchase a LTCI policy, make sure that it is a tax-qualified policy, which means that when you qualify for benefits you will not be subject to federal income tax. This is important not only for receiving benefits but also to deduct the payments as a business expense when the business (C corporation) is paying for the premiums (subject to IRS rules). Self-employed persons — sole proprietors, S Corp shareholders, and LLCs — may also deduct the amount of the premiums on their federal income tax return as a medical expense (subject to the IRS age-based limits, which are adjusted annually).
When you receive payments from a tax-qualified LTCI policy, you don’t have to pay taxes on the benefits received (whether as reimbursement of expenses or up to the IRS per-diem limit). This is a significant benefit when you consider that if you were taking money out of IRA to pay for LTC expenses you would first pay income taxes on the amount withdrawn. If you itemize deductions, you can include the LTCI premiums or the amount you actually paid (not the insurance company) for eligible LTC expenses along with other medical expenses to the extent that they exceed 7.5% of your adjusted gross income. Note: if you have a health savings account, you can use those funds to pay for LTCI premiums up to the annual IRS limits.
Other ways to purchase LTCI
Due to the cost of coverage and the tight underwriting that insurance companies now use, there are alternative ways to purchase coverage that involve using riders to life insurance and annuity products. These are often referred to as “hybrid” policies. However, it makes comparisons more challenging in determining what type of approach and policy best fits your needs. An insurance agent specializing in LTCI, life insurance, and annuities can help you understand the nuances and trade-offs of each approach.
Permanent life insurance policies with LTCI riders provide a way to use a portion of the death benefit to pay for eligible LTC expenses that meet the ADL standards. The LTCI riders usually are fixed at the time the policy is taken out. If the LTCI rider is not used, the full death benefit is paid to the policy’s beneficiaries. This approach may be a viable option for someone who could not satisfy the underwriting for a standalone LTCI policy. Again, the nuances are important as an LTCI rider may not be as comprehensive in paying for LTC benefits compared to a LTCI standalone policy.
Another option is to purchase a “hybrid” annuity that provides for withdrawals for eligible LTC expenses. Usually, the benefit is set as a multiple of the annuity’s value. For example, a $100,000 hybrid annuity’s rider may allow for eligible LTC benefit payments that are two or three times the annuity’s value, that is, $200,000 or $300,000.
The advantage of this approach is that it may allow more people to gain LTCI coverage by using savings or an existing annuity. Again, the trade-offs include the cost of the rider and that the rider may not have as comprehensive coverage as a standalone LTCI policy.
The partnership plan approach
Many people are concerned about draining their retirement savings to pay for care and not being able to provide their beneficiaries with an inheritance. Also, they don’t want to rely on Medicaid — which pays for benefits after most assets are exhausted — and worry about constraints around the quality of facility Medicaid will cover.
To incentivize people to purchase LTCI rather than to try to spend down their assets via transfers to relatives, “Partnership-Qualified” (PQ) policies were created between private insurers and state Medicaid programs. When someone purchases a PQ policy, for each dollar of LTC benefit that is paid out from the policy’s benefit pool, an equal amount — known as an “Asset Disregard” — is credited to exempt the person’s assets from Medicaid. For example, a person purchasing a PQ with a $300,000 benefit pool, means that when the $300,000 LTCI policy pool is exhausted, Medicaid will carve out the $300,000 from the person’s Medicaid estate.
As part of the Partnership program, most states participate in the National Reciprocity Agreement, so if someone moves from New Jersey to Florida, the PQ Asset Disregard will still apply for Florida’s Medicaid program.
How to approach the LTCI decision
Whether to purchase LTCI and what approach is right for you is a very personalized decision. To start, it involves a review of your finances, health and family support. Learning about local resources and facilities will also play a role. But in terms of the policy-specific aspects such as tax rules, policy provisions, insurance companies’ financial strength, underwriting and claims practices, it makes sense to seek an agent who represents several insurance companies to help you arrive at the right decision. To find an insurance agent near you to guide you through discovering policy choices and choosing coverages, click HERE.
For more information regarding LTCI, check out the National Association of Insurance Commissioners (NAIC) Shopper’s Guide.