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Long-term care insurance is a type of coverage that protects you against the risk that you may need long-term nursing home, assisted living or custodial care. Some long-term care insurance plans also cover home health care. This type of care is not normally covered under major medical plans, nor under Medicare, except in certain very narrow circumstances.
Who Needs Long-Term Care Insurance?
Long-term care insurance is a way to hedge against the high costs of long-term skilled nursing home care or assisted living facility support, typically for seniors. Last year, the median cost for long-term care support and assistance were:
- Adult day care facilities: $1,517 per month
- Assisted living facilities: $3,750 per month
- Nursing home care: $7,148 per month (semi-private room); $8,141 per month (private room)
The U.S. Department of Health and Human Services estimates that about 52 percent of Americans turning 65 today will require long-term care services at some point in their lives, and about one in seven adults will have a disability for more than five years.
The monthly cost of long-term care over a sustained period of time can be devastating to a family that is relying on a limited retirement portfolio or pension. Without long-term care insurance, the cost of a skilled nursing or assisted living facility for an elderly parent can easily consume the entire monthly income of their pension.
Furthermore, long-term care insurance is also used as a way to protect family assets from seizure by state Medicaid authorities when the insured dies.
How Does Long-Term Care Insurance Work?
Generally, long-term care insurance pays up to a set daily benefit if you qualify for long-term care. This maximum daily benefit can range from $50 to over $500, depending on your policy. You can also choose a maximum benefit period: the number of years over which the long-term care insurance policy will pay out claims.
Your lifetime maximum benefit is equal to your maximum daily benefit multiplied by your maximum benefit period.
Any long-term care insurance benefits that are not used during your lifetime typically remain with the insurer, except under specific "nonforfeiture" provisions discussed below.
Note: Unlike life insurance policies, long-term care insurance carriers do not typically guarantee level premiums beyond the first few years. Premiums can and do increase based on the performance of the company, so policyholders should anticipate that there may be future rate increases on in-force policies. This is where nonforfeiture features of long-term care insurance policies may become important. You may want the opportunity to get some of your premiums back if you choose to cancel a policy before it has paid benefits on your behalf.
Long-Term Care Insurance Eligibility Requirements
To qualify for benefits under most long-term care insurance policy definitions, a health care provider must certify that you have lost the ability to perform two or more of the following activities of daily living (ADLs) without direct hands-on or standby (within arm's reach) assistance.
Alternatively, you may qualify for benefits under a long-term care insurance policy if you exhibit a severe cognitive impairment, such as Alzheimer's disease or dementia. Generally, the criteria for receiving benefits for cognitive impairments are:
- You are at substantial risk of harming yourself or others as a result of your cognitive disability, and you therefore require substantial supervision; and
- Your cognitive deterioration is measurable via standardized tests that assess a) short or long-term memory; b) orientation to people, places and time; or c) deductive or abstract reasoning.
Types of Facilities that Long-Term Care Insurance Covers
Facilities and services that may qualify for paid benefits under a long-term care policy include:
- In-home care, including housekeeping and cooking/cleaning support
- Family care
- Respite care
- Adult day care facilities
- Assisted living facilities
- Alzheimer's/specialized care facilities
- Skilled nursing facilities
Some long-term care policies will help pay for in-home care, housekeeping, cooking/cleaning support and family care, and other policies exclude them. We recommend you first determine your needs, as the breadth of coverage will impact your premiums. Then, verify what your insurer covers in the actual policy language before purchasing a long-term care policy.
The cost of a long-term care insurance policy varies based on the following factors:
- The maximum daily benefit
- The maximum number of days or years you design your policy to pay
- Covered services
- Your elimination period
- Your age at the time you buy your policy
- Your health at the time you buy your policy (expect to take a medical exam during underwriting)
- The inflation protection you select
- Any additional riders you select
Qualifying for Long-Term Care Insurance with Pre-Existing Conditions
Some carriers will underwrite applicants with a pre-existing condition, which is defined as a condition for which you have received treatment or medical advice, or for which you have experienced symptoms, within a certain time period prior to your application. The "look-back" period is different for different long-term care insurance carriers.
Also, your LTC insurance policy may exclude benefits for care related to your pre-existing condition for a certain time period after your policy becomes effective. Six months is common, although some carriers have longer exclusion periods and some may impose no exclusion, if you pass underwriting.
Waiting Period for Long-Term Care Insurance
Few people purchase long-term care insurance policies that provide full benefits from the very first day you have a qualifying disability. The vast majority of policies impose an elimination period, or waiting period, during which you are responsible for costs out of your own savings. A 90-day elimination period is common, but you may be able to select your own elimination period, based on your own budget and the amount of savings you have available. However, if you purchase a home care benefit, some policies will provide a benefit for home care from the first day it's needed. Also, some insurance companies will shorten the elimination period if you use their case management service.
The longer the elimination period you choose, the more affordable your long-term care insurance premiums will be. The shorter your elimination period, the lower the risk to your savings, but the higher your premiums will be, all other things being equal.
Generally, the long-term care insurance policy will pay reimbursement or indemnity benefits directly to you, depending on the type of policy you have. It wouldn't pay benefits directly to care providers, unless you or your power of attorney elect to assign the benefit over to the nursing home or other facility.
What about Medicaid and Medicare?
Medicare does not provide a benefit for long-term custodial care or care for chronic conditions. Medicare does provide limited benefits for a nursing home stay, but only for acute (temporary) conditions immediately following a hospitalization. If your disability is chronic, rather than acute, it's not covered under Medicare.
Medicaid does provide assistance with basic long-term care needs, but only for those who meet strict income and asset limits. Generally, you must also spend all your assets down to poverty levels prior to qualifying for Medicaid assistance. Some assets, like home equity, a funeral plot and a modest vehicle, may be exempt from consideration. Medicaid eligibility and requirements for long-term care assistance vary by state.
If Medicaid pays benefits for you, the state may be able to seize your assets after your death or the death of your spouse (if your spouse survives you). For example, if you spend your other assets down to qualify for Medicaid benefits, but you have home equity, the state may provide long-term care benefits or other benefits under Medicaid, but it will take a lien on your house. When you and your spouse pass away, the state will have first claim on the house when it goes through probate. Your heirs will have to pay back Medicaid, or the house will be sold to pay off the debt. Your heirs will receive only what's left.
Federal Long-Term Care Partnership Programs
The Long-Term Care Partnership Program is a federally supported program that allows consumers to protect family assets from having to be spent down to qualify for Medicaid.
If you purchase a qualified long-term care insurance policy, the state will exempt the amount of benefits your policy pays from its Medicaid recovery program. The state does this to provide consumers an incentive to provide for their own long-term care expenses and take the burden off of Medicaid. And if your state participates in the Long-Term Care Partnership Program and you own a qualifying long-term care insurance policy, you won't need to spend your assets down in order to qualify for Medicaid.
As an example, suppose your state requires you to have no more than $2,000 in countable (nonexempt) assets in order to qualify for Medicaid. If you buy a qualified long-term care insurance policy with a total benefit of $200,000, you will be able to retain $202,000 in assets and still qualify for Medicaid. If your state does provide Medicaid benefits on your behalf, it will pay up to $202,000 before it will put a lien on your home or other assets.
Some states allow you to protect an unlimited amount of assets using a long-term care partnership-qualified policy. For example, let's say you live in New York and you buy a policy with a minimum benefit of three years' worth of nursing home care or six years' worth of home care. Once those benefits are exhausted, you can qualify for Medicaid assistance with any amount of assets.
Your long-term care insurance policy must be tax-qualified in order to qualify under the Long Term Care Partnership Program.
As of August 2018, all states have enacted some form of Long Term Care Partnership Program except Alaska, Hawaii, Illinois, Massachusetts, Mississippi, Utah and Vermont. Most but not all states will recognize long-term care insurance policies purchased in other states for the purpose of calculating Medicaid eligibility and exemption from the state Medicaid Recovery Program.
When Is Long-Term Care Insurance Tax-Deductible?
Long-term care policies may be tax-qualified or nontax-qualified. If your policy is tax-qualified, you may be able to deduct some or all of your long-term care insurance premiums. Also, all benefits paid under tax-qualified plans are not subject to federal income tax.
Tax-Qualified Long-Term Care Insurance Policies
In order to be considered tax-qualified, long-term care insurance policies must meet a number of specific criteria. The policy must pay benefits if a medical professional certifies that you have a chronic illness likely to last at least 90 days and you are unable to perform at least two of the activities of daily living (ADLs) listed above, or that you have a severe cognitive impairment that that will require substantial supervision. Mere "medical necessity" will not trigger benefits under a tax-qualified policy.
Tax-qualified policies must also include:
- An optional inflation protection benefit.
- An optional nonforfeiture feature.
- Third-party notification, alerting loved ones if a policy is in danger of lapsing for nonpayment of premiums.
Premiums for qualified long-term care insurance may be deductible, to the extent your overall medical expenses, including your long-term care premiums, exceed 7.5 percent of your adjusted gross income. Nontax-qualified policies may have less stringent criteria for qualifying for benefits, including a more general "medically necessary" criteria. But you will not be able to deduct any part of your long-term care premiums with a nonqualified policy.
The specific amount you can deduct varies each year, and it changes based on your age at the end of the tax year. Here are the premium deductibility limits for 2018:
|Age at end of tax year||Maximum deductible premium|
|40 or younger||$420|
|Over 40 but not over 50||$780|
|Over 50 but not over 60||$1,560|
|Over 60 but not over 70||$4,160|
|70 or over||$5,200|
Deductibility for Self-Employed Individuals
Self-employed individuals can deduct 100 percent of LTC insurance premiums paid out of pocket up to these amounts, including premiums paid to cover spouses and dependents. But amounts paid in excess of these limits are not counted as a medical expense. You do not have to meet any thresholds to take advantage of this deduction.
Note: If you're self-employed, you can't deduct premiums for any month in which you or your spouse is eligible for an employer-subsidized long-term care insurance premium. You also cannot use a flexible savings account (FSA) to reimburse yourself for tax-qualified long-term care insurance premiums.
HSAs and Long-Term Care Insurance
If you have a health savings account, you can use it to pay long-term care insurance premiums with tax-free dollars, up to the annual premium limits listed above. This is true even if your HSA is employer-sponsored and you have employer contributions.
Coverage Options and Alternatives for Long-Term Care Insurance
Depending on your insurer, you may be able to add additional benefits and adjust the coverage levels of your long-term care policy, usually for an additional premium.
If both spouses in a household own long-term care insurance, and one spouse exhausts his or her benefits, then the other spouse's policy will cover the disabled spouse, up to the policy's limits.
The advantage of this long-term care insurance rider is that it ensures that your benefits under the policy increase in size to keep up with inflation. There are three kinds of inflation protection riders:
- A flat annual increase in benefits, for example, a 2 percent benefit increase per year.
- An annual increase benchmarked to the consumer price index. Some policies allow you to buy a guaranteed benefit increase beyond inflation, such as CPI+1% or CPI+2%.
- An option to buy additional insurance each year to keep up with inflation, regardless of your medical condition.
Long-term care costs have historically increased faster than inflation, and most states will require policyholders to specifically opt out of inflation protection if they don't want it. And in order to be tax-qualified, policies must contain an inflation protection provision.
A nonforfeiture benefit rider is important to consider as part of a long-term care insurance policy, as it allows you to recover at least some of the premiums paid if you cancel the policy or let it lapse before it pays significant benefits. A contingent nonforfeiture benefit allows you, in the event your carrier increases premiums on your in-force policy, to stop paying premiums and have your policy converted to "paid-up" insurance. Your policy's maximum benefit will be at least equal to all the premiums paid since you purchased it.
Return of Premium
This rider guarantees that the insurance carrier will return any unused premiums to your estate or heirs upon your death, or the death of the last individual who could be a beneficiary on the policy. For example, let's say you pay $20,000 in premiums over your lifetime, and the long-term care insurance policy only pays out $5,000 in benefits prior to your death and doesn't pay any spousal benefits. Upon your death, the policy will pay out the remaining $15,000 as a return of premium.
Not every state authorizes the return of premium rider, and some carriers don't offer it. Usually, the policy has to be in effect for a certain number of years in order to pay a benefit. This return of premium is taxable, to the extent you took a tax deduction for the premiums you paid.
Home Health Care Rider
Nearly all newly issued long-term care insurance policies now include at least some coverage for home health care. This is because it's now required for policies to qualify for favorable tax treatment under the Health Insurance Portability and Accountability Act (HIPAA) and under guidance from the National Association of Insurance Commissioners.
However, some older policies only covered home health care as an optional rider. If you happen to own one of them and you want to add home health care coverage, contact your insurer and see if you can add the rider. Consider whether it makes sense to buy a new long-term care insurance policy.
With a respite care benefit, you can hire a temporary aide to give a caregiving family member some time off from caring for a disabled family member in the home.
Waiver of Premium
The waiver of premium rider guarantees that no further premiums are due, or only a portion are required, once you have made a claim and are receiving covered care. If your long-term care insurance claim is denied, as the care isn't for a covered cause, the waiver of premium rider would not go into effect.
Restoration of Benefits
Under a restoration of benefits rider or feature, if you qualify for benefits, but then your condition improves and you can come off benefits for a specific period of time (frequently six months), your maximum benefits under the policy are restored.
Combined Life Insurance & Long-Term Care Insurance
Some life insurance companies include a long-term care rider that can be added to their life insurance policies. For example, if you buy a cash value insurance policy, the insurer may make five times your cash value available for long-term care benefits, if you qualify. The exact multiple depends on your age and health at the time you buy the policy. Often, these policies are bought with a single lump-sum premium.
Medical underwriting on hybrid life and long-term care insurance policies is usually strict, and it's difficult to qualify for, compared to either individual policy. If you are considering purchasing a life insurance with long-term care hybrid policy, apply for it when you are still in good health.
Should I Buy Long-Term Care Insurance?
Long-term care insurance may be appropriate if you have assets or a retirement income you want to protect against the high costs of long-term care, and you can afford the premiums. It may not be a good investment if you can easily afford to pay for long-term care without insurance, as you can assume the risk yourself without undue hardship on you and your family. You should also not purchase long-term care insurance if the monthly premiums would be a significant burden to you and there's a risk you would have to allow the policy to lapse. In this case, you would lose the premiums paid as well as your coverage. Instead, you may be better off committing premiums saved to investing, disability insurance or life insurance.
There are no general age limits for long-term care insurance, just those which might be set by your insurer, or specific times during the year when you should buy it. However, similar to life insurance, the cost of coverage increases as you get older, particularly if you have any health issues. Buying a long-term care insurance policy when you're younger and healthier can reduce your premiums, making it more affordable to maintain as you get older without a lapse in coverage.