Long-term care insurance (LTCI)
In exchange for your premium payments, a long-term care insurance (LTCI) policy pays a selected daily amount for a specified period to cover skilled, intermediate, or custodial care. Coverage applies in nursing homes and, in some cases, alternative settings such as home health care. Since Medicare and most health insurance plans do not cover custodial care, nursing home residents typically pay through personal assets, Medicaid or LTCI.
Long-term care includes a wide range of medical and personal services for people with chronic disabilities who cannot function independently. The need for care usually arises when physical or cognitive impairments prevent someone from performing basic activities like feeding, bathing, dressing, transferring and toileting.
Long-term care may be divided into three levels:
- 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 drawn up.
- Intermediate care–Intermittent nursing and rehabilitative care provided by registered nurses, licensed practical nurses, and nurse’s aides under the supervision of a physician.
- 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.
Tip: Note that the preceding terms may be defined differently by Medicare.
How LTCI Serves as a Protection Planning Tool
Long-term care insurance (LTCI) helps protect against the financial risk of a chronic, debilitating illness. The costs of extended nursing home stays or home health care can quickly exhaust life savings, making LTCI a critical component of an asset protection strategy. By purchasing a policy, you transfer this financial risk to an insurance company.
Several factors increase your likelihood of needing long-term care. Health conditions such as rheumatoid arthritis, Alzheimer’s disease, or Parkinson’s disease can make long-term nursing care more likely. Women generally face higher risk because they tend to outlive their spouses. Conversely, if you have a primary caregiver, like a spouse or adult child, your chance of a long nursing home stay may decrease-especially for men.
Real-Life Example
Consider Irene, a 75-year-old widow with two children, Donald and Maria. She owns a condominium and has $200,000 in liquid assets. After enjoying independence for many years, Irene suffers a stroke and requires assistance with bathing, dressing, and eating.
Donald and Maria explore home health care and discover it costs $1,500 per week, or about $78,000 per year. Without LTCI, Irene’s savings will largely go toward her care instead of being preserved for her children. A policy could cover these expenses and protect her inheritance.
Why Early LTCI Purchase Matters
Buying LTCI while you are healthy allows you to retain control over your assets until you actually need care. Unlike Medicaid planning, which often requires transferring assets years in advance to avoid penalties, LTCI provides coverage without forcing you to divest yourself of property prematurely. This gives you financial independence and peace of mind, knowing your care is funded without compromising your estate.
Transferring Assets While on Long-Term Care Insurance
If you transfer assets to your children while your LTCI policy covers nursing home expenses, whether you face penalties depends on several factors. One key factor is the duration of benefits you selected in your LTCI policy.
LTCI can also play a role in Medicaid planning. If you are wealthy and do not plan to apply for Medicaid, transferring assets usually has no effect. However, if you anticipate needing Medicaid to cover nursing home care, transferring assets within a few years of applying could create problems.
States enforce a look-back period for certain asset transfers. If you transfer assets below fair market value during this period, the state assumes you made the transfer solely to qualify for Medicaid. This assumption triggers a waiting period before Medicaid benefits can start.
By purchasing an LTCI policy, you can cover nursing home bills during this Medicaid ineligibility period. A properly structured policy lets you transfer assets to loved ones, enjoy coverage for care, and still qualify for Medicaid once your insurance benefits run out.
Example: Using LTCI to Protect Assets
Marge, a 75-year-old widow, purchased a five-year long-term care insurance (LTCI) policy. She enters a nursing home that charges $5,000 per month and simultaneously transfers $250,000 to an irrevocable trust to prepare for Medicaid once her insurance benefits end.
Because she transferred assets within the 60-month look-back period, Medicaid imposes a 50-month waiting period based on local care costs. During this time, Marge has no funds available to pay for her care. Fortunately, her LTCI policy covers her nursing home bills during the waiting period. Once her five-year policy benefits are exhausted, she qualifies for Medicaid.
LTCI Partnership Programs
The Deficit Reduction Act of 2005 allows states to create long-term care partnership programs. These programs combine private LTCI with Medicaid, letting individuals pay for care while preserving some of their wealth.
Although programs differ by state, people who buy partnership-approved LTCI policies and exhaust their benefits typically qualify for Medicaid without having to spend down all their assets, as long as they meet income and eligibility requirements. Currently, only a few states offer these programs, but more states are expected to adopt them in the future.
When can it be used?
You should consider long-term care insurance (LTCI) if you anticipate needing long-term care, want to protect your assets for loved ones, and can afford the premiums.
When purchasing an LTCI policy, think not only about your ability to pay premiums now but also whether you can maintain payments in the future, especially if your income decreases. Overall, LTCI is a smart choice for older Americans who are financially comfortable, want to retain control over their assets, and wish to pass on homes or other property to family members.
Strengths
Subsidizes nursing home bills
Aging is inevitable, and many people worry about gradually losing the ability to function independently. Entering a nursing home can feel daunting, but the high cost of care is often an even greater concern.
Purchasing a long-term care insurance (LTCI) policy can provide peace of mind. It covers at least part of the cost for the first few years of nursing home care. Additionally, nursing homes may limit the number of beds available for Medicaid patients. With LTCI coverage, you may have a wider choice of facilities compared with relying solely on Medicaid.
Allows you to protect your assets
Purchasing a long-term care insurance (LTCI) policy lets you transfer assets to your loved ones even after you enter a nursing home. A properly structured policy will cover your nursing home bills during any Medicaid ineligibility period caused by the asset transfer.
Without LTCI, you would either need to transfer assets years before entering a nursing home or pay for care out-of-pocket during the Medicaid waiting period. An LTCI policy allows you to maintain control over your assets and preserve them for your loved ones instead of spending them on nursing home expenses.
Tradeoffs
May be expensive
The cost of LTCI varies depending on your age, the benefits you choose, the insurer, and other factors. When buying an LTCI policy, you must consider not only whether you can afford to pay the premium now, but also whether you’ll be able to continue paying premiums in the future (when your income may be substantially decreased).
Risk is involved
Paying insurance premiums each year in the expectation that you might (at some future time) require nursing home care is a risky move. There is always the possibility that you will remain healthy and able to function independently as you grow older. The money you pay out in premiums is money that you cannot give to your children or other loved ones, so be aware of the tradeoff.
May not be necessary if you’ll qualify for Medicaid
If you have modest resources, very likely, you can qualify for Medicaid by spending down some assets and/or engaging in a little Medicaid planning a few years ahead of time. That way, you’ll be able to avoid paying the high cost of premiums over a number of years.
How to do it
If you are interested in purchasing LTCI, there are a couple of steps you should follow:
Compare policies and check the financial security of the companies you’re reviewing
You can determine the financial security of a company by reviewing its A. M. Best’s rating along with the ratings of other services, such as Moody’s or Standard & Poor’s, at your local library. You should select a company that has received a rating of A or A+ from A. M. Best.
Review the policy’s provisions carefully to ensure that it offers the features you require
There are a number of factors you should be concerned about, such as inflation protection, a full range of care (including home health care), and exclusions for pre-existing conditions.
Tax considerations
Income tax
Benefits you receive from a “qualified” LTCI policy are not taxable to you as income and are treated as excludable benefits received for personal injury and sickness to the extent that such benefits do not exceed a per diem limitation. However, benefits received from a policy that is not a tax-qualified one might be taxable as income.
Deductibility
Federal law allows you to deduct all or part of the premium paid for a tax-qualified (LTCI) contract. A portion of your LTCI premium should be added to your other deductible medical expenses. To claim a tax deduction, the total of your medical expenses must exceed 10 percent of your adjusted gross income.
Caution: Not all long-term care contracts are tax-qualified–your policy must meet certain federal standards
