Long Term Care Insurance
Is it better to have insurance and not need it, or to need insurance and not have it?
Long term care is expensive & care giving impacts the lives of people we love.
Living a long life is a near certainty, planning for it is a necessity.
Most people would like to stay in their homes as long as possible. However, with most private agencies requiring 4-hour minimums of care, and when care is necessary two or two times a day or in the middle of night, cost of home care can become very expensive. Home care can also be isolating. Assisted living settings and continuing care communities have become inviting alternatives. Most people cannot afford this level of care or at least do not want to fully fund this care and derail their estate plan.
Nursing homes have become places for the very sick and the poor, not a good financial mix. When needed, the wealthier population will often choose a private nursing home at much greater expense.
LTC insurance provides a way to fund or affordably co-fund the cost of LTC. Equally important, LTC insurance provides a direction for the family; an intent to minimize burden by providing funding to hire caregivers or funding a facility rather than an expectation of family providing care to preserve the estate.
Payment Sources for LTC:
Medicare is the government’s skilled insurance program paying for doctors, nurses and therapists. Most LTC is unskilled; Medicare does NOT pay for custodial long term care.
Medicaid is the government’s medical insurance for the poor. In order to qualify, you must spend down your assets to poverty levels and any income will be used to offset the cost of care over a minimal level.
Types of Policies
Traditional/Stand-Alone: Typically provides the greatest return for premium paid. HSA’s and MSA’s may fund these products up to age based limits. Tax benefits for the self-employed and business owners. Potential to meet MA Health Lien Protection Limits and Partnership Requirements.
Hybrid: A hybrid is a combination of life insurance and long term care insurance that leverages the long term care benefit vs. the death benefit.
Key features of a hybrid products which vary from product to product
Return of Premium (at whim or at death)
Single Payment Premiums, Limited Pay Premiums, Lifetime Premiums
Cash benefit options
Life Insurance with LTC Rider: A life insurance product with a rider allowing a portion or all of the death benefit to be eligible for funding qualified long term care expenses.
Life insurance products are designed to optimize the death benefit. When a long term care rider is added, the value of the long term care benefit is limited by the death benefit and does not have an inflation benefit option.
Many permanent life insurance products now offer life a long term care or (a chronic illness rider ) rider. The riders come at an additional cost. Depending on the product and company, the long term care benefit may be a percentage of the death benefit at the time of purchase or at the time of claim.
Keep in mind that if the primary purpose of the life insurance benefit is to provide a death benefit, if the long term care rider is exercised, it is the death benefit that is being depleted to fund the care.
Options for Underwriting Challenges
Life Insurance with Chronic Illness Rider: Chronic illness riders are like similar to long term care riders. They require the 2 of 6 impairments in daily living skills or a severe cognitive impairment. However, while some companies have modified their definition of chronic illness riders to mimic the long term care definition, others still require the expected long term care need to be permanent.
The value of a Chronic illness riders is that since it is part of the base contract, the underwriting is based on mortality risk vs long term care risk so that those that may be denied long term care insurance may still be eligible for life insurance.
Annuities with Long Term Care Riders: There are annuities with long care riders and annuities with added long term care benefits. The difference is in the tax deductibility of the long term care benefit when claimed. Long term care rider benefits are typically tax-deductible whereas accelerated or doubling of payments for long term care are not. However, the benefits received for long term care expenses can be offset by the expenses themselves often off setting any taxes owed.
Underwriting is much more lenient with the annuity combination products. Inflation protection is offered on some annuity products but is often delayed to after the annuity is liquidated first.
Important: Not all long term care benefits apply to home care and assisted living. It is important to make sure when purchasing a product, that the long term care benefit is comprehensive.
Home Care Contracts: A home care contract can be used independently or in conjunction with a long term care policy. The home care contract is NOT insurance. The contract is a purchase of care hours instead of dollars to purchase care. The elimination period is met by counting 90 days post application. The policy can be used for any new or exacerbation of a problem that requires you to need assistance with shopping, laundry, food preparation or daily living skills. The contract can only be used in a home or apartment not in independent living or continuing care community or any other facility. The contract provides up to 5 hours a day of care Monday-Friday. This policy is meant to enhance people’s ability to stay in their own home. It is not a replacement for long term care insurance. It can also be used for short term care, post-surgery, a pneumonia, post a fall, when someone is tired or limited and needs a little extra assistance. There is no underwriting or claims process. To qualify for the contract, one needs to be independent in all aspects of daily and community living. Diagnosis or adaptive devices are not exclusions.
Since there is no crystal ball… The real question: is it better to have insurance and not need it, or to need insurance and not have it?
If you had LTC insurance & did not need it:
Loss of premium paid on traditional insurance
Loss of interest on premium with a hybrid policy
Reduced the need for a trust for a primary home in MA
Reduced the need for life insurance knowing a partnership policy allows utilization of Medicaid without a full a full spend down of assets.
Provided a plan and funding if LTC had been needed
If you needed LTC insurance & did not have it:
Problems might include:
Making decisions of which funds to liquidate during crisis
Conflict between siblings regarding responsibilities and finances
Decline in lifestyle and health for the care giving spouse
Stress on children as care giving impacts their employment and relationships.
Inability to afford optimal caregiving or care setting
Losing the home to Medicaid repayment
Inability to leave an inheritance
Regret that this could have been covered with a LTC policy
Added Catastrophic Protections:
Massachusetts: Medicaid may put a lien on your house for the amount it spends on your long term care expenses. A LTC policy may provide more than $870,000 of Medicaid lien recovery of your MA home.
Partnership States: Partnership provides protection from Medicaid spend-down up to the total benefit of the qualified long term care policy.
Tax qualified policies may be eligible for tax deductions
Individuals may use their HSA’s or MSA’s to fund long term care premiums, up to age based limits.
Self-Employed, Partnerships, S-Corps may take age based premium deductions.
Corporations may take full deductions for premiums paid for employees without a taxable event to the employee.
Regardless of whether the premiums are taken as a tax-deduction by the employee or the employer, tax qualified long term care benefits are received tax free.