Types of Long-Term Care

What is long-term care?
In general, long-term care refers to a broad range of medical and personal services designed to assist individuals who have lost their ability to function independently. The need for this ongoing care arises when you have a chronic disability or when physical/mental impairments prevent you from performing certain basic activities, such as feeding, bathing, dressing, transferring, and toileting.

"...services designed to assist individuals who have lost their ability to function independently."

What are the three levels of long-term care?
Because some long-term care insurance policies will subsidize only certain forms of long-term care, it is important to understand the accepted terminology. Long-term care may be divided into three levels:

  1. Skilled care - continuous "around-the-clock" care designed to treat a medical condition. This care is ordered by a physician and performed by skilled medical personnel, such as registered nurses or professional therapists. A treatment plan is established.
  2. Intermediate care - intermittent nursing and rehabilitative care provided by registered nurses, licensed practical nurses, and nurse's aides under the supervision of a physician.
  3. Custodial care - care designed to assist one perform the activities of daily living (such as bathing, eating, and dressing). It can be provided by someone without professional medical skills but is supervised by a physician.
Note that the above terms may be defined differently by Medicare.

How to Pay for Nursing Home Care

Ways to pay for nursing home care

You may be able to afford to pay for nursing home care by using your own savings. To determine this, consider how much monthly income you will have after you retire. You may be able to liquidate some investments or sell your house to come up with additional funds if you need to. You might also be able to borrow against your cash value life insurance policy. (Note, though, that the death benefit available to your survivors will be reduced.) If you are seriously ill, and the policy permits, you can take accelerated benefits from the policy. However, when you determine how much retirement income you will have and how much your nursing home costs will be, don't forget to account for price increases and inflation. Consider also what will happen if your money runs out. Will you be able to qualify for Medicaid, or will you have to rely on your children for help?

If you plan on self-insuring, it would be wise to consult a financial professional well in advance of retirement, due to the complexity of self-insuring and the numerous estate planning and taxation issues involved.

Buy LTC insurance
LTC insurance pays for the cost of nursing home (or sometimes in-home) custodial care. It pays a fixed dollar amount of benefits per day to cover nursing home care, so it may not pay the total cost of nursing home care. LTC insurance is expensive, but the premium you pay depends upon at what age you buy the policy. The premium is fixed as of the date of purchase and only goes up if the insurance company raises its overall rates. Your premium is also affected by the elimination period you choose. (The elimination period is the time between when care begins and when the insurance company starts paying benefits.) Some policies give lifetime coverage, while others only give coverage for a specified number of years.

Marvin bought a LTC policy at age 66. His annual premium is $3,000. He chose a 15-day elimination period and 3-year coverage at $100 per day. This means that if Marvin enters a nursing home at age 76, his LTC policy will pay the nursing home $100 per day for three years, but his coverage won't start until he has been in the nursing home for 15 days.

Like any insurance policy, the features and price of a LTC policy may vary from one company to another, so you have to comparison shop.

Use government benefits
If you meet certain eligibility requirements, three types of government benefits can help you pay the cost of nursing home care: Medicare, Medicaid, and veterans' benefits.

Medicare does not pay the cost of custodial nursing home care. However, it may pay part of the cost of skilled nursing care/rehabilitative care in a hospital or nursing home under the following conditions:

  • You have been hospitalized for at least three days prior to entering the nursing home (and entered the nursing home within 30 days of being discharged from the hospital)
  • A doctor certifies that you need skilled nursing care
  • The nursing home or hospital is a Medicare-certified skilled nursing facility
Relying solely on Medicare to pay for nursing home care is a mistake, because Medicare defines skilled nursing care narrowly and pays limited benefits for care. For instance, if skilled care in a Medicare facility is approved, Medicare will pay for the first 20 days of care, and then will pay only part of the cost for days 21 to 100.

Medicaid does pay for custodial nursing home care (and in some states, in-home care), but only for low-income individuals who have few assets. If you have income and assets higher than the Medicaid limits, you will not be eligible for Medicaid. However, if you enter a nursing home and pay for care yourself for months or years, you may qualify for Medicaid once your money runs out. In addition, you may be able to qualify for Medicaid if you spend down or transfer your assets. For more information, consult an attorney who has experience with Medicaid planning.

Veterans' benefits
If you are a veteran age 65 or over, you may be eligible for treatment in a Veterans Administration (VA) nursing home. You don't have to have a service-connected illness or injury to get treatment, but since nursing home space is limited, veterans with service-connected conditions will be admitted first. Their treatment will be free; for others, treatment will be free only if certain eligibility rules are met. In addition, the VA runs other community retirement facilities that you may be eligible to enter. For more information, contact your local Veterans Administration office.

Tax considerations

You may be able to deduct LTC insurance premiums
LTC insurance premiums are deductible as medical expenses within certain limits. How much you can deduct depends upon your age at the end of the tax year.

You may be able to exclude LTC insurance reimbursements from income
Money you receive under your LTC insurance contract may be excludable from income for tax purposes (subject to certain limitations). In addition, if your employer provides coverage for you under a LTC insurance contract, the value of coverage is generally excludable from your income, unless the coverage is provided through a cafeteria plan or if you are reimbursed under a flexible spending account.

Grant's LTC insurance contract states that the company will pay for nursing home care beginning on the 16th day after care begins. Grant enters a nursing home that charges $125 a day. His total expenses for 60 days are $7,500. His insurance company sends him a check for $5,625 (45 x $125). The $5,625 he receives is excludable from his income for tax purposes when he files his annual income tax return.

When deducting your medical and dental expenses from your income taxes, you must reduce your total medical and dental expenses for the year by reimbursements you receive under a LTC or other insurance contract.

You may be able to deduct nursing home costs for which you are not reimbursed

Long-Term Care Insurance (LTCI)

What is long-term care insurance (LTCI)?
Long-term care insurance (LTCI) is a contractual arrangement that pays a selected dollar amount per day for a selected period of time for skilled, intermediate, or custodial care in nursing homes and other settings (such as home health care). Because Medicare and other forms of health insurance do not pay for custodial care, many nursing home residents have only three alternatives for paying their nursing home bills: their own assets (cash, investments), Medicaid, and LTCI.

How is it useful as a protection planning tool?
The risk of contracting a chronic debilitating illness (and the resulting catastrophic medical bills incurred) is considered by many to be one type of risk best passed on to an insurance company through the purchase of a LTCI policy.

A number of factors can increase your risk of requiring long-term care in the future. Naturally, your health status affects your likelihood of incurring a long stay in a nursing home. Indeed, people with chronic or degenerative medical conditions (such as rheumatoid arthritis, Alzheimer's disease, or Parkinson's disease) are more likely than the average person to require long-term nursing home care. And because women usually outlive the men in their lives, women stand a greater chance of requiring long-term nursing home care. However, if you already have a primary caregiver (like a spouse or child), your likelihood of needing a long stay in a nursing home will be less, particularly if you're a man. Because the cost of long-term care can be astronomical and may exhaust your life savings, purchasing LTCI should be considered as part of your overall asset protection strategy.

Sue is a 75-year-old widow with two children, John and Jill. Sue owns her condominium apartment and has $200,000 in liquid assets. After enjoying independence much of her life, Sue suffered a stroke and now needs help with such things as bathing, dressing, and eating. John and Jill look into home health care and discover that it will cost $1,500 per week (or $78,000 per year). The money that Sue had hoped to pass on to her children will instead be spent on expenses that may otherwise have been covered by an LTCI policy.

How much does it cost?
Although purchasing LTCI seems to be the easy answer to the problem of escalating long-term care costs, the premiums for LTCI can be, depending on benefit levels selected, quite expensive.

Your yearly premium for an LTCI policy depends on a number of considerations, including your age when you purchase the policy, your health, the length of the coverage period (for instance, three years, five years, or lifetime benefits), the amount of the daily benefit provided, and whether you purchase inflation protection. When buying an LTCI policy, you must also consider not only whether you can afford to pay the premiums now but also whether you'll be able to continue paying premiums in the future, when your income may be substantially decreased.

Who should purchase LTCI?
During the "golden years," when income typically declines, the purchase of LTCI should be carefully considered. People with significant discretionary income and substantial resources to protect for spouses, children, and other loved ones should seriously consider purchasing LTCI. Individuals with modest resources (e.g., less than $50,000 net worth) may find the premiums unaffordable, and may qualify for Medicaid by spending down their assets and/or engaging in a little Medicaid planning.

How much coverage is enough?
Insurance protects against an event that might happen in the future. Therefore, buying enough protection is important, but affordability must also be considered. In terms of cost, you need to consider the amount of the daily benefit you want to purchase and also the length of the benefit period.

  • Daily benefit--Most policies will let you choose your amount of coverage, typically running anywhere from $40 to $150 or more per day. Of course, the greater the daily benefit and the longer the benefit period, the more the policy will cost. Also, note that the cost of nursing home care varies greatly from one metropolitan area to another, so you need to know where you'll be living out the remainder of your years. Certainly, it wouldn't make sense to purchase a policy with a daily benefit of $40 if the average daily cost of nursing homes in your area is $250 per day--unless, of course, you have substantial resources and plan to use some of your own income to pay for care. Consumers should generally buy enough coverage to cover 50 to 100 percent of nursing home costs. If you don't plan on using your own income to supplement, you should buy enough insurance to cover 100 percent of the nursing home costs.
  • Length of benefit period--When purchasing LTCI, you'll be asked to select a benefit period. Benefit periods generally range from one to six years, with some policies offering a lifetime benefit. You'll want to choose the longest benefit period you can afford. If you can't afford a lifetime benefit, consider choosing a benefit period that coordinates with the look-back period for Medicaid (five years).

The Deficit Reduction Act of 2005 gave all states the option of enacting long-term care partnership programs that combine private LTCI with Medicaid coverage. Partnership programs enable individuals to pay for long-term care and preserve some of their wealth. Although state programs vary, individuals who purchase partnership-approved LTCI policies, then exhaust policy benefits on long-term care services, will generally qualify for Medicaid without having to first spend down all or part of their assets (assuming they meet income and other eligibility requirements). Although partnership programs are currently available in just a few states, it's likely that many more states will offer them in the future.

How do you compare policies and providers?

  • To compare policies, you should obtain sample policies and "Outlines of Coverage" from each carrier you are considering. The Outline of Coverage summarizes the policy's benefits and highlights the policy's important features. You need to read the policies carefully, ensuring that you understand each provision. There are a number of factors you should be concerned about, such as inflation protection, a full range of care (including home health care), exclusions for pre-existing conditions, and the amount of the daily benefit provided.
  • To compare providers, you should check out the financial strength of the companies by reviewing their A. M. Best Company's ratings along with the opinions of other rating services. You can also review the company's financial statements.

What are the tax ramifications?
If you purchase a "qualified" LTCI policy, part (or all) of the premiums you pay pursuant to the contract may be deductible on your federal income tax return. LTCI polices issued after January 1, 1997, must meet certain federal standards to be considered qualified. However, LTCI policies issued prior to January 1, 1997, that met the long-term care insurance requirements of the state in which the contract was issued are automatically considered qualified.

You may be only partially reimbursed for nursing home costs under your health insurance or LTC insurance contract. However, any expenses you have for which you are not reimbursed may qualify as medical deductions for income tax purposes.

Can your son or daughter be asked to guarantee payment to a nursing home if you don't qualify for Medicaid?
No. In fact, under federal law it's illegal for a nursing home to ask a child to personally guarantee payment for your care. However, the nursing home may require you to prove you have the money to pay for your care by asking you to provide bank statements or by asking you to put down a deposit.

Long-Term Care Partnership Policies

What are long-term care Partnership policies?
The high cost of long-term care has placed a financial burden on individuals and state Medicaid programs. As the number of older Americans grows, the strain is likely to worsen, and containing Medicaid costs has become a priority for states and the federal government. To encourage more individuals to purchase long-term care insurance, many states have enacted Partnership programs that authorize private insurers to sell state-approved long-term care Partnership policies.

Partnership policies are designed to help individuals plan for their long-term care needs while minimizing the risk of impoverishment should the policyholder need long-term care. They are similar in many respects to traditional long-term care insurance policies, but must include inflation protection, asset protection, and other features in order to qualify as Partnership policies. Individuals who purchase Partnership policies, then expend policy benefits on long-term care services, will qualify for Medicaid without having to first spend all or most of their remaining assets (assuming they meet income and other eligibility requirements). This gives people the incentive to buy long-term care insurance, potentially limiting state Medicaid spending.

Some background
In 1992, four states (California, Connecticut, Indiana, and New York) launched long-term care Partnership programs. Other states intended to develop programs, but the Omnibus Budget Reconciliation Act of 1993 (OBRA) halted the implementation of new programs due to the requirement that states recover assets from anyone receiving Medicaid. However, the four states with demonstration projects were allowed to continue selling Partnership policies under the pilot program.

The moratorium on new Partnership programs ended in 2006, after the Deficit Reduction Act of 2005 (DRA) authorized all states to adopt long-term care Partnership programs. As a result, many states have authorized the sale of Partnership policies, and others are still in the process of implementing them.

Partnership policies: A solution to rising Medicaid costs?
Medicaid is the single largest payer of nursing home bills in America. Although it's intended to be the last resort for people who have no other way to pay for long-term care services, more and more Americans with moderate incomes are relying on Medicaid, due to the rapidly rising cost of long-term care.

But as a program for individuals with limited income and assets, Medicaid has strict eligibility requirements. To qualify in most states, residents must meet certain medical criteria, and both their income and the value of their assets must fall below certain levels. Residents who have income and assets that are higher than state mandated levels may have to "spend down" or, in some cases, legally transfer income and assets in order to become eligible for Medicaid. States have the right to seek reimbursement from recipients for Medicaid payments made on their behalf, and can seek reimbursement from their estates, although they don't always do so.

California residents see http://www.rureadyca.org/ for details on the California specific partnership program.

Partnership long-term care insurance policies are only marketed by licensed insurance professionals who have completed special training required by the state of California.

Garth Williams is a licensed insurance professional who has completed the special training for the California Long term care partnership program. If you would like to find out more about this program please Email Us »

Hawaii residents: the state of Hawaii does not have a partnership program. You can get general long term care information from the http://www.insureuonline.org/ web site.

Garth Williams is a licensed insurance profession in the state of Hawaii. If you would like to find out more about long term care options in Hawaii, please Email Us »

(Content Prepared by Broadridge Investor Communication Solutions, Inc.)

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