What are the Downsides of Traditional Long-Term Care Insurance?
There are significant downsides of traditional long-term care insurance: 1) these policies are “use or lose”; (2) historically the premiums for these policies have drastically increased after someone purchases a policy; (3) Most insurance companies have exited the traditional LTC insurance business, and some have even gone bankrupt or into receivership by the state. Accordingly, most people are better off considering hybrid products, such as ones that combine a life insurance policy or an annuity with a long-term care benefit. There are even products that allow you to effectively use tax-free dollars to pay for long-term care coverage through a provision in the Pension Protection Act. Evan Farr, principal attorney of the Farr Law Firm, is also the owner of Lifecare Financial Services, LLC, which helps clients plan for and purchase, when appropriate, LTC insurance or hybrid products that provided LTC benefits.
What is Virginia’s Qualified State Long-Term Care Insurance Partnership?
Virginia’s Long-Term Care Insurance Partnership Program, which became effective September 1, 2007, allows consumers to obtain Long-Term Care Insurance as part of a Medicaid Asset Protection Plan. Virginia’s Partnership Program allows individuals obtaining Partnership-qualified policies to protect assets that otherwise might have to be paid to a nursing home prior to obtaining eligibility for Medicaid benefits.
A Partnership-qualified policy enables policyholders to protect one dollar of personal assets for every dollar the policy pays out in benefits.
One of the main purposes of the Long-Term Care Insurance Partnership Program is to offer government-endorsed “Medicaid Asset Protection” to consumers who buy Long-term care insurance, enabling these consumers to protect an additional dollar amount of personal assets and still remain eligible to apply for Medicaid coverage of Long-term care services.
The amount protected with a Partnership-qualified policy will be equal to the sum of all benefits paid under the Partnership-qualified policy when the applicant seeks to qualify for Medicaid. The total amount of assets that a policyholder may protect as a result of a Partnership-qualified policy is above and beyond the basic allowances that a client and a client’s spouse may keep under the Medicaid program.
It is critical to understand that, in addition to protecting assets under the Long-Term Care Partnership program and the basic allowances that a client and a client’s spouse may keep under the Medicaid program, there exist numerous other methods by which clients can protect significant assets and still qualify for Medicaid.
Why Purchase Partnership LTC Insurance?
Long-term care insurance is one way to provide for you future long-term care needs. With the baby boomers facing projected federal deficits, possible future reductions in Medicaid spending, as well as rapidly rising costs of long-term care, it is clear that alternative methods of financing long-term care support are critical.
What is Medicaid Asset Protection?
This Medicaid Asset Protection program promoted by the federal and state governments represents a tremendous shift in policy by the government, away from the old philosophy that thought of Medicaid as a “welfare” program for people who were “impoverished” and toward the reality that individuals may be entitled to Medicaid even if they still own significant assets, provided that those assets have been properly and legally protected under the law – something that Elder Law Attorneys have been helping clients do for decades.
What Elder Law Issues Must Be Considered When Purchasing LTC Insurance?
When shopping for a long-term care insurance policy, it is crucial to consider carefully the entire financial situation of both spouses and to consider the possible alternative of not purchasing long-term care insurance. Failure to do so can result in purchasing too little coverage, which can actually be worse than purchasing no coverage at all.
For example, consider Joe and Linda, a married couple, facing Joe’s nursing home costs of $9,500 per month. Joe has $4,000 in monthly retirement income, as well as a long-term care insurance policy with a monthly benefit of $6,000 (based on a daily benefit of $200). Linda’s only income is Social Security of $700 per month.
At first glance, the couple seems better off with the long-term care policy — they have an extra $6,000 per month, without which they could not afford the nursing home. They can pay for Joe’s nursing home and have an extra $500 per month to put towards Linda’s monthly expenses. Unfortunately, Linda’s regular expenses are approximately $2,400 per month, so with only $1,200 per month of income she is unable to make ends meet.
Joe is not eligible for Medicaid assistance because his income (including the long-term care insurance benefit) is greater than the nursing home bill. In this example, Joe’s long-term care insurance policy does not provide enough of a benefit to allow Linda to have sufficient income to meet her needs. If Joe’s long-term care insurance policy provided a $7,500 monthly benefit ($250 per day instead of $200), then $2,000 of Joe’s retirement income would be available for Linda’s monthly expenses, so Linda would have $2,700 per month — enough income to live on.
If Joe and Linda had recognized this shortfall and decided to not purchase the long-term care insurance, or if they could not afford the increased premiums for the increased monthly benefit, they could instead use Medicaid assistance to help pay for Joe’s nursing home costs. Most of Joe’s $4,000 per month of income would normally be required to pay the nursing home expenses; Linda would keep her $700 per month.
However, because Linda’s income is so low, the Medicaid rules would allow Linda to receive part of Joe’s income to help her with her monthly living expenses. Linda could receive a monthly maintenance needs allowance of up to $2,841 (including her income) which includes allowances for housing and utilities. Therefore, in this case, Joe and Linda would have the nursing home costs paid, and Linda would have $2,841.00 monthly for her support – more than enough for her regular needs.
The bottom line? Be sure to buy enough coverage, and be sure to buy it for the right spouse (see Answer to Question 9). It doesn’t make sense to pay insurance premiums and then be bankrupted by nursing home fees anyway because of insufficient coverage. As with other medical expenses, the inflation rate in nursing home fees is currently quite high. In 10 years, the cost of the nursing homes, at the current rate of inflation, will be about twice what it is today.
How Much Coverage Do You Need?
I don’t recommend anyone purchasing more than five years of long-term care insurance coverage. For one reason, the average nursing home stay is only approximately 2.9 years. Secondly, after moving to a nursing home, your family can commence the process of Medicaid Asset Protection, provided you have an appropriate Long-Term Care Plan in place.
1. For example, you could transfer your assets into an Asset Protection Trust that will managed by your children. After five years have passed, the lookback period will have expired. If you are still alive, you should then be able to qualify for Medicaid to pay you nursing home costs (provided you are otherwise eligible based on income, assets, and medical condition). Using this strategy, there would be no need to purchase more than five years of long-term care coverage.
2. Another example of how Long-term care insurance can be used as part of a Medicaid Asset Protection Plan is to cover the potential need for long-term care during the five-year lookback period. Using this approach, you could purchase five years of Long-term care insurance (with the lifetime payment option in order to minimize the annual premium) and, at the same time, transfer all of your assets into an Asset Protection Trust to be managed by your children. At the expiration of the five-year lookback period, you can simply stop paying the long-term care insurance premiums and allow the policy to lapse, knowing that Medicaid will be available to cover nursing home costs. Alternatively, the policy can be kept in force to cover 5 years of home health care, with the idea that Medicaid can then be used to cover additional time in the nursing home if necessary.
How Do I Know If I Can Afford LTC Insurance?
You should generally only purchase long-term care insurance if you can pay the premiums out of your disposable income, i.e, if the premiums are affordable using income that you would otherwise add to your savings.
How Can You Reduce the Expense of LTC Insurance?
There are five ways to reduce the cost of Long-term care Insurance. First, request a one-hundred day elimination period since Medicare may pay some or all of the first hundred days (to the extent skilled nursing care is required). Second, the daily benefit purchased can be reduced by income from pensions and Social Security, to the extent these items may not be needed by a spouse.
Third, the benefit period should be limited to five years since this will encompass the majority of claims and the Medicaid look-back period for transfers does not exceed that period. Fourth, work with an independent agent who can provide at least three premium quotes. Some clients end up paying too much due to transactions with captive agents.
When is the Best Time to Purchase Coverage?
If you decide that long-term care insurance is the right decision to protect your assets and your family’s financial future, the best time to buy it is now, because the older you get, the more expensive the policy becomes in the long run. By buying now:
1. You avoid the risk of needing care that you will have to pay for out-of-pocket.
2. You avoid the risk of developing a condition that would make you uninsurable later.
3. You pay lower premiums now, rather than paying higher premiums later.
The sample table below shows, for a 44-year old male, the cost of waiting and buying Long-term care insurance later, assuming that premiums do not change and the applicant remains insurable. The Daily Benefit is increased 5% for each year of waiting, to cover the increased cost of care over time.
|Premium||Premiums Paid to
Q9. Which Spouse Should Get Coverage?
Often a married couple will be able to afford coverage for only one spouse. Looking at statistics alone, the wife should purchase the policy, as women tend to live longer than men are therefore more likely than men to end up in a nursing home for a long period of time.
However, this is often the wrong answer! For a couple where the husband’s retirement income is much higher than the wife’s retirement income (see my Answer to Question 3), it is actually much more important to purchase coverage for the husband. The reason for this is partly revealed in the answer to Question 3. But the answer to Question 3 addresses only half of the story, i.e., what happens when the husband enters the nursing home first.
As explained in the answer to Question 3, if the husband enters the nursing without adequate long-term care coverage, the wife may wind up destitute or without sufficient income to live on. The other half of the story is what happens if the wife goes into the nursing home first. Using the fact scenario from the answer to Question 3, let’s now assume that Linda enters the nursing home first and does not have long-term care coverage. Is there any problem?
No, not at all, because we can get Linda’s nursing home paid for almost entirely through Medicaid assistance. Linda’s $700 monthly income would have to go to the nursing home, and Joe would have to contribute about 10% of his income, but Medicaid will pay the rest. Joe will be able to keep roughly 90% of his retirement income and, with proper Medicaid Asset Protection Planning, will be able to keep all of his assets.
What Is The Tax Deductibility Of Long-term Care Insurance Premiums?
Federal Income Tax: Under the Health Insurance Portability and Accountability Act (“HIPAA”), “qualified” long-term care insurance policies receive special tax treatment. To be “qualified,” policies must adhere to regulations established by the National Association of Insurance Commissioners:
1. The policy must offer the consumer the options of “inflation” and “nonforfeiture” protection, although the consumer can choose not to purchase these features.
2. The policies must also offer both activities of daily living (“ADL”) and cognitive impairment triggers, but may not offer a medical necessity trigger. “Triggers” are conditions that must be present for a policy to be activated.
3. Premiums for “qualified” long-term care policies will be treated as a medical expense and will be deductible from Federal Income Tax to the extent that they, along with other unreimbursed medical expenses (including “Medigap” insurance premiums) exceed 7.5 percent of the insured’s adjusted gross income. But the deductibility of premiums is limited by the age of the taxpayer at the end of the year.
State Income Tax: Under Virginia Code § 58.1-339.11, for taxable years beginning on or after January 1, 2006, any individual shall be entitled to a credit against the tax levied pursuant to § 58.1-320 for certain long-term care insurance premiums paid by the individual during the taxable year pursuant to an insurance policy entered into on or after January 1, 2006.
The amount of the credit for each taxable year shall equal 15% of the amount paid by the individual during the taxable year in long-term care insurance premiums for long-term care insurance coverage for himself, but in no event shall the total credits over the life of any policy exceed 15% of the amount of premiums paid for the first 12 months of coverage.
For purposes of this section, “long-term care insurance premium” means the amount paid during a taxable year for any qualified long-term care insurance contract as defined in § 7702B(b) of the Internal Revenue Code, as amended, covering an individual. If the amount of the credit as determined in subsection A exceeds the individual’s income tax liability for the taxable year, the amount that exceeds such liability may be carried over for credit against the income taxes of such individual in the next five taxable years or until the full credit is used, whichever occurs first.
The credit described in this section shall not be claimed to the extent the individual has claimed a deduction for federal or state income tax purposes for long-term care insurance premiums.
What are the Tax Deduction Limits for Long Term Care Insurance Premiums?
Each year the IRS typically increases the limits for destructibility of long-term care insurance premiums. These limits can be found here.
While deductions may not apply for individuals who are still working, they often can be taken during retirement when income stops and medical expenses often occur.
How Do You Know The LTC Insurance Company Won’t Go Out of Business?
You don’t, and that’s why it’s important to deal only with top-rated companies. But all the top-rated companies have been known to raise their premiums over the years, and this a huge reason why LTC Insurance is not very popular — only about 10% of the American population owns such coverage.