Long-Term Care Insurance

LONG-TERM CARE INSURANCE

INTRODUCTION

In recent years long-term care (or nursing home) insurance has become widely available as an alternative source for the funding of long-term care expenses, whether received in an institutional setting or at home. Such policies are extremely flexible, and can be designed to pay for all long-term care costs indefinitely and without regard to Medicaid eligibility, or as a supplement to Medicaid payments. They can also provide benefits during the limited period of ineligibility caused by having excess countable resources, including the situation where assets have been transferred during the look-back period.

Under recent amendments to the Internal Revenue Code, policies are issued as either tax qualified or non-tax qualified. The tax treatment of qualified long-term care policies is described below.

LEVELS OF CARE

In understanding long-term care policies, the different levels of care should be recognized:

Skilled care is acute nursing and rehabilitative care given by a RN or therapist, usually daily (i.e. around the clock) and supervised by a physician.

Intermediate care involves occasional (not around the clock) nursing and rehabilitative care under the supervision of skilled medical personnel.

Custodial care involves assistance in performing the activities of daily living. This level of care can be given by non-medical personnel, whether in a nursing home, adult day care center, or in an individual's home.

Home care includes part-time skilled care, therapy, home health aides, etc. at the individual's home.

HOW TO ANALYZE A LONG-TERM CARE POLICY

SCOPE OF COVERAGE

Institutional Care and Home Care. Coverage can be for one or more of the four levels of care described above. Specifically, it is important to know where the services can be received for a particular level of care -- in a nursing facility, at home, or a combination of both. Because most individuals will want to stay at home for as long as possible, home care coverage is an important feature to include in a policy, usually as a rider.

Does the policy state that custodial or home care has to be provided by a licensed or certified professional, or can it be done by a non-professional, e.g., a family member?

The policy may permit non-professionals to provide care, but such flexibility will likely come at the cost of an increased premium.

COMMENCEMENT OF COVERAGE. The policy should clearly define when coverage will begin. These starting points, commonly referred to as "benefit triggers," have progressed from the strict standard of "medical necessity" to a finding that the insured is unable to perform a minimum of two of the "Activities of Daily Living" (referred to as "ADL's").

Coverage can be "first day" protection, or there can be a waiting (elimination) period (generally 20 to 365 days) before coverage begins.

LENGTH OF COVERAGE. Policies can have a set benefit period, typically two to four years, for any one stay in a nursing facility, or they can remain in effect for the insured's lifetime.

AMOUNT OF BENEFIT. The amount of the benefit payable to the insured will be a function of three components:

1. Set dollar amount specified in the policy (for example, $100 per day).

The home health care benefit can be less than (typically 50%) or equal to the nursing home benefit.

2. Inflation factor, simple or compounded.

Inflation protection is an important consideration in order to guard against increases in nursing facility expense.

3. Length of coverage -- whether for:

A set number of years (or a set maximum amount) or

Lifetime.

WAIVER OF PREMIUM. Once the elimination period has been satisfied, the policy should allow a waiver of premium.

TAX TREATMENT OF LONG-TERM CARE INSURANCE

Income Tax Deduction for Premiums Paid. The Internal Revenue Code generally allows the taxpayer to deduct medical expenses paid during the taxable year, if they are not reimbursed by insurance or otherwise, for the medical care of the taxpayer, his or her spouse, or a dependent, to the extent that such expenses exceed 7.5 percent of the taxpayer's adjusted gross income. Eligible long-term care insurance premiums, subject to certain limitations, can be included in such expenses.

Taxation of Benefits Paid. Payment of benefits under a qualified long-term care insurance contract will be excluded from taxable income, up to a maximum exclusion of $250 per day for 2006. (This amount is subject to adjustment for inflation every year.) However, if the policy pays for the actual costs of nursing home care and the costs exceed $250 per day, then the excess will also be excluded from income.

FACTORS TO CONSIDER IN DECIDING ON

THE PURCHASE OF LONG-TERM CARE INSURANCE

Affordability. Premiums for someone in their 60's can range from $750 to $3,000 per year, depending on which features are selected. Premiums increase rapidly as the insured ages.

Alternative of self-insurance. With enough assets, one can always self-insure against the risk of nursing home costs.

Example: 60 months (projected stay in nursing home) x $6,000 (projected monthly cost) = $360,000. If someone has substantially more than that amount in liquid assets, is long-term care insurance necessary?

Family history may indicate the likelihood of needing long-term care at some point, and the duration of that need.

Statistics indicate that 45 percent of the people who attain age 65 will require long-term care in a nursing home. Half of those who enter will stay at least one year. The average stay is 2 ½ to 3 years.

Alternative of living at home or with family -- issues of availability, reliability, and desirability.

Leaving an Estate - How important is it to leave an "estate" to one's children? Is that goal worth the price of insurance premiums in order to preserve one’s current assets?

SELECTING AN INSURER

Don't buy long-term care insurance from a company that you might outlive! Check the ratings of the company from services such as A.M. Best, Standard & Poor's, and Moody's.

Use a broker who specializes in long-term care policies.

Risk of increased premiums. A long-term care policy may be called "guaranteed renewable," but the company will still have the right to increase premiums. With companies that lack sufficient underwriting experience in the long-term care area, there is a risk they will conclude that their policies have been underpriced, thus resulting in substantial increases in premiums.

The danger is that elderly couples will let their long-term care policies lapse if the premiums become too high, thus ending coverage before they need it.

DISCLAIMER

Martin J. Hagan is licensed to practice law in the Commonwealth of Pennsylvania. This website is intended solely for informational use and is not intended to solicit clients. Likewise, any information contained in or obtained from this web site is for informational purposes only and is not intended to be used as legal advice.

IRS CIRCULAR 230 DISCLAIMER: Pursuant to Treasury guidelines, any tax advice contained in this website (or any link from it) does not constitute a formal opinion. Accordingly, any tax advice contained in this website (or any link from it) is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be asserted by the Internal Revenue Service. You should seek advice based on your particular circumstances from an independent tax advisor.

Send mail to mhagan@haganlaw.net with questions or comments about this web site.

Copyright © 2008 Martin J. Hagan, One Gateway Center - 8 South; Pittsburgh, PA 15222-1435

Last Updated: 05/28/08