Long Term Care Insurance

Long-Term Care Insurance

Long term care insurance (LTCI) is an alternative to qualifying for Medicaid or paying all long-term care costs out-of-pocket.  It is designed specifically to pay for custodial long-term care services required due to a chronic illness or a condition lasting a prolonged period of time.  Coverage is triggered when an individual needs assistance with “activities of daily living” (e.g., bathing, continence, dressing, eating, toileting and transferring) or due to cognitive impairment.  LTCI is not designed to cover acute care services or be a substitute of Medicare, Medigap or senior HMO plans.  Depending upon the policy terms, LTCI may provide assistance at home, in the community, in an assisted living facility, or in a nursing home.   Many LTCI policies cover a certain dollar amount per day for a specified period of time.  For instance, a policy may provide a daily benefit level of $150 for three years of coverage.  Other policies may give a “bucket” of money and coverage lasts until it is gone.

The average cost of nursing home care nationwide is about $75,000 per year for a semi-private room (Massachusetts nursing home costs are well above the national average).  This amount only pays for room and board.  Assisted living facilities can cost more than half the nursing home cost and home care can be less or more expensive, depending on the amount and level of care required.   Not surprisingly, paying for in-home care or nursing home care can exhaust a person’s resources leaving far fewer options when funds run out.  By obtaining long term care insurance, a person can often remain in their home far longer than without the insurance.  It may help ensure that a spouse or other family member does not become impoverished by the cost of care.  In addition, LTCI can protect all of the careful financial and estate planning that has been done by insuring that assets will not be depleted on long term care and can pass on to the next generation.

A person may be exempt from MassHealth’s recovery rules if he or she purchases a long term care policy that meets certain specific minimum requirements.  The minimum requirements for a policy to satisfy the MassHealth exemption rules include the following: (1) the policy must cover nursing  and custodial care in a nursing facility licensed by the Massachusetts Department of Public Health; (2) the policy must have available benefits of at least $125 per coverage day in a nursing facility; (3) the policy must provide benefits sufficient to cover two years in a nursing facility; and (4) the elimination period (days that services must be provided before the policy will begin to pay benefits) may not be longer than one year or a deductible of no more than $54,750.

Massachusetts law measures these requirements at the time the policy is purchased. Thus, a person can use the qualifying long-term care insurance policy to pay for community-based home care before they enter a nursing home, without fear of being disqualified by the two-year requirement. The purpose of the law is to protect individuals who use their long-term care insurance for community-based care, so they can remain in their home as long as possible.

One of the most common questions people ask about LTCI is the cost.  The costs vary significantly, depending upon the applicant’s age and medical status at initial purchase, the amount of the nursing home benefit, the percent of home/community-based benefits, the duration of the policy, and the length of the elimination period (the deductible paid for by the policyholder before the policy starts to pay out).  If you purchase a “tax-qualified” policy, however, the premiums are tax-deductible to the extent that you spend in excess of 7.5% of your adjusted gross income on medical expenses.

Individuals age 50 or above should at least consider purchasing long term care insurance.  The younger an individual is, the lower the premiums will be and there is less of a chance that an individual will suffer from a health problem that could cause the premiums to be extremely high or prevent him or her from getting coverage altogether.  However, LTCI may not be appropriate for individuals that cannot pay premiums out of disposable income without changing his or her lifestyle significantly.

When evaluating a long-term care policy, the following factors should be considered:

Where can the care be provided? 

Many older LTCI policies restrict where the benefits will be triggered.  It is important to verify that the policy will cover a wide range of settings from care administered in your home by skilled professionals, to nursing homes, adult day care and assisted living facilities.

What types of caregivers can be paid by the policy? 

A policy should cover “skilled, intermediate and custodial care”, which would include someone who could assist with laundry and meal preparation.

What illnesses are covered? 

It is important to verify that illnesses such as Alzheimer’s are not excluded from coverage.

What is the trigger for qualifying for coverage? 

Most policies base qualification on cognitive impairment or the need for assistance in activities of daily living (dressing, toileting, eating, transferring, bathing and continence).  However, policies vary in the terms of how many ADL one must be unable to perform before coverage will start.

What is the daily benefit amount?  

The daily benefit is the amount that the LTCI policy will pay for home care, adult day care, assisted living or nursing home care.  The average private pay rate for a nursing home is $9,455 (in 2016) per month in Massachusetts.  This translates to roughly $310 per day.  The daily benefit amount should be $310 less the amount that can be paid from one’s income for care without significantly impacting one’s lifestyle or that of the spouse.   For example, if nursing home costs are $350 a day and one’s monthly income is $3,000, or $100 a day, then the daily benefit should be $250 a day.

What is the benefit period? 

The benefit period determines how long the LTCI policy will pay benefits.  This is often expressed in terms of a maximum dollar amount that the policy will pay. For example, a policy with a daily benefit of $150 per day and a lifetime maximum of $164,250 would provide three years of nursing home coverage at that level.   The shortest period of coverage available is two years.  Policies can be purchased for longer periods of time or for the insured’s lifetime.  The longer the policy’s coverage period, the more expensive the premium is.  However, most people do not need lifetime coverage.  The average nursing home stay is 2 – 3 years.  A good length of time is usually five years.  It is unusual someone to need care for more than five years.

What is the elimination period?  

The “elimination period” is the number of days that one must receive care that would otherwise be covered under his or her LTCI policy before the policy begins to pay benefits.  Long term care expenses must be paid privately during the elimination period.  Many policies have a 90 day elimination period for nursing facility benefits because this period of care may be covered by a Medicare supplement policy.  There is no coverage under a Medicare supplement policy for adult day care and assisted living care and very limited coverage under Medicare for home care.  Depending on one’s circumstances, a zero elimination period may be appropriate for home care, while a 90 day elimination period may be sufficient for skilled care.   Typically, the longer the elimination period, the lower the premium will be.

Does the policy provide inflation protection? 

This is an optional rider which helps to protect the insured from the rising costs associated with long term care.  An inflation rider increases the daily benefit amount by a fixed percentage annually.  What may seem like adequate coverage now may not be what one may need in 20 years if it does not keep up with inflation.  Purchasing a policy that fixes the daily benefit amount leaves the estate vulnerable to increasing costs of nursing care. On the other hand, inflation riders can significantly increase the annual premiums.

Does the policy notify a second person of any late premium payment? 

Many policies offer the option of naming a second person to receive notice of any late premium payment.  In the past, many policyholders stopped paying premiums due to the onset of cognitive impairment.  As a result, they lost the policies just when they needed them.  This option allows a second person, such as a child, to receive a 30 day notice before the policy can be terminated.  The policy allows the child to step in and save the policy before it is unintentionally terminated.

The above discussion is provided as general information only and does not constitute legal or investment advice. You should consult your attorney, financial advisor or qualified long term care insurance agent to evaluate any long-term care insurance product you are considering.