LONG-TERM CARE INSURANCE (LTCI)
(OVERVIEW)
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. For information about Medicare
and other government programs that cover only a limited amount
of long-term care expenses.
In general, long-term care refers to a broad range of medical
and personal services designed to provide ongoing care for people
with chronic disabilities who have lost the ability to function
independently. The need for this care arises when physical or
mental impairments prevent one from performing certain basic
activities, such as feeding, bathing, dressing, transferring,
and toileting--activities known as ADLs ("activities of
daily living").
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 created, and it is usually contemplated that the patient
will recover at some point.
- 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 help 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.
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.
Example(s): 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. For more information
about the cost of LTCI and examples regarding how Medicare and
Medigap may help defray some of the costs.
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). For more information
about ineligibility periods, see
- Look-Back Period for Medicaid.
Tip: 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?
Unfortunately, LTCI policies are not standardized. Provisions
contained in policies vary greatly, and premiums charged vary
as well. Therefore, you should compare policies to obtain the
best amount and combination of benefits for your premium dollars.
- 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. For a description of
the types of provisions typically contained in an LTCI contract.
- 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. For more
information.
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.
Additional Resouces:
Should you buy Long Term Care Insurance?
Five things to watch out for when buying LTCI
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