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Protect Your Future: Learn the Basics of Long-Term Care

Nancy B. Crowley, CPA

Did you know that 70% of people turning the age of 65 can expect to need some form of long-term care during their lives?  Not planning for a long-term care event can significantly impact your financial situation and plans for retirement.  Ideally, everyone would like to have a long-term care insurance policy.  Knowing that you are prepared should you become ill or disabled would be very reassuring and can bring peace of mind.  The trade-off is the cost of the policy, which can be expensive, and may outweigh your actual need. 

Below are some basic questions and answers to help you determine if a long-term care insurance policy is right for you:

What is long-term care?

The U.S. Department of Health and Human Services defines long-term care as “care that you need if you can no longer perform everyday tasks (activities of daily living - ADLs, which include bathing, eating, dressing, toileting, continence and transferring) by yourself due to a chronic illness, injury, disability or the aging process.  Long-term care also includes the supervision you might need due to a severe cognitive impairment (such as Alzheimer’s disease).”

This type of “care” is not intended to cure you.  It is chronic care that you might need for the rest of your life.  You can receive long-term care in your home, a nursing home or another long- term care facility, such as an assisted living facility.

What are the types of policies?

There are traditional and combination/hybrid policies.  A traditional policy is like other types of insurance, such as automobile and home insurance, in which you pay the premiums on an on-going basis.  Traditional policies are typically tax-qualified policies.  Tax-qualified policies have two tax-benefits. First, the premiums are considered a medical expense and are tax deductible if you have enough medical expenses to get over the deduction threshold. Secondly, benefits received under a tax-qualified policy are not taxable.

Combination/hybrid policies are a combination of long-term care insurance and life insurance.  These policies require you to pay either a lump sum or pay a premium over a limited period, usually no more than 10 years.  The hybrid policy covers either long-term care payouts, or a death benefit to your heirs.  If you decide to cancel the policy after the surrender charge period, you can get most of your premiums paid back to you.  While this sounds great, the return is not terrific in that the death benefit may be close to the amount paid in premiums.  The premiums for the contribution period are significant with $50,000 being the minimum that will provide you with some long-term benefit. This type of policy is not considered a tax-qualified policy.

There are pros and cons to tax-qualified and non-tax-qualified policies that should be carefully reviewed when purchasing a policy.

What do the policies cover?

There are many coverage options to consider when purchasing a policy such as:

When will the benefits start?  Insurance companies use the term benefit trigger when referring to the requirements that must be met for coverage of long-term care insurance.  The benefit triggers may include not being able to do two or three of the six ADLs.  For cognitive impairment, be wary. If you have Alzheimer’s disease or other dementia but you can do most of the ADLs, the policy most likely will not pay benefits at that time as there is only one qualifying benefit trigger.

In addition to benefit triggers, there is an elimination period which can be 20, 30, 60, 90 or 100 days after you start using long-term care before benefits are paid out.  Some policies use calendar days and other policies use the days that you received long-term care service in calculating the elimination period.  Some policies use consecutive days, while others include non-consecutive days.

Other policy provisions you should consider reviewing:

  • Is there inflation protection?

  • Can the insurer increase the premium cost?

  • Can the policy be downgraded?

  • Is there a waiver of premium once the company starts to pay benefits?

  • Is there a nonforfeiture benefit so that some value is repaid if the policy is dropped?

  • What are the underwriting procedures?

How are benefits paid? Most policies have a limitation on the amount that will be paid for benefits with the limitation being stated in years or a specific dollar amount.

The three most common methods of paying benefits are the expense-incurred method, the indemnity method, and the disability method.  The expense-incurred method requires that the insurance company determine if you are eligible for benefits and then either the expense or the dollar limit of the policy, whichever is less, is covered.  The indemnity method is a set dollar amount not based on the specific services received.  Once the insurance company determines you are eligible, the payments are made directly to you. It is possible to be paid more than the actual expense.  The disability method requires that you meet the eligibility criteria and then you receive your daily benefit, even if you are not receiving any long-term care services.

Does the insurance company offer joint or pooled benefit policies? These are policies that cover more than one person, such as a husband and wife or domestic partners or related adults.  The total benefit applies to all of the individuals covered.  If one party collects benefits that amount is subtracted from the total policy benefit.

What services are covered?  Policies may cover: nursing home care, home health care, respite care, hospice care, personal care in your home, services in assisted living facilities, services in adult day care centers, and services in other community facilities.  You need to know what types of facilities and care the policy covers.

Who should consider purchasing a Long-Term Care policy?

Many factors will come into play in considering whether a long-term care policy is right for you.  One rule of thumb is that if you have minimal assets, you should consider spending those assets down and qualifying for Medicaid coverage.  If you have $2,000,000 or more in assets, you will probably be better off self-insuring as even if you incur $200,000 in costs, you will have sufficient remaining assets.  Those in the middle, anywhere from $300,000 to $2,000,000 in assets, may want to consider purchasing a policy as you have the most to lose. 

A second rule of thumb is that premiums should not be more than 7% of your income. Other decision making factors to consider include: 1.) evaluating how important is it to you to not be perceived as a burden on others should you become ill, and 2.) knowing that a long-term care policy will allow you to choose where and how you receive your needed care.

One final option to consider is a Short-Term Care policy which provides coverage for up to 360 days.  This type of policy would pay for home care assistance, assisted living, and skilled nursing home care costs.  A short-term care policy is an option for those concerned about the cost of long-term care policies and for those who may have waited too long to invest in a long-term care policy.

Each person must evaluate his/her own circumstances to determine if long-term care insurance is needed.  If you have any questions or need help in evaluating your specific situation, please contact your RINET advisor.  Additional resources can also be found at the U.S. Department of Health and Human Services’ Long Term Care website.