Long-term care insurance
Long-term care insurance (LTC or LTCI), is an insurance product sold in the United States, United Kingdom and Canada that helps provide for the cost of long-term care beyond a predetermined period. Long-term care insurance covers care generally not covered by health insurance, Medicare, or Medicaid.
Long-term care is a type of personal care you may need if you are unable to care for yourself because of a physical illness, a disability, or a cognitive impairment, such as Alzheimer’s disease.
Long-term care is different from traditional medical care that tries to treat or cure illnesses. Long-term care helps you keep your current lifestyle, but it may not improve or fix your medical problems. You can receive care at home or in a hospice, adult day care center, nursing home, or assisted living facility.
If you have an illness or disability, you may need assistance with your normal daily activities, such as eating or getting around. If you are cognitively impaired, you may need supervision, protection, or reminders to take medicines or perform other activities. Long-term care may also include services to evaluate your overall needs.
Paying for long-term care
In-home or nursing home care required by an elderly or disabled individual can be very expensive. Most types of insurance do not provide coverage for such care, the main exception being Medicaid, which provides coverage for qualified low-income individuals. Under Medicaid, individuals have a restricted choice of providers.
Long-term care can be funded in a variety of ways, including:
Long-term care insurance (LTCI) fills the gap in most health insurance policies, providing coverage for long-term care without requiring the individual to impoverish him/herself as is required for Medicaid coverage.
LTCI premiums depend on the level of benefits:
- skilled nursing care--the highest level of physician directed care provided in traditional nursing homes,
- intermediate nursing care--similar to skilled nursing care but provided occasionally instead of daily,
- custodial care--assistance with daily tasks, not necessarily ordered by a physician,
- home health care--care provided part-time in the home, and
- adult day care--similar to child day care but for adults.
LTCI policies may include other features similar to health insurance policies such as waiver of premium during benefit periods, elimination periods, and limits on duration of benefits.
Below are some points to observe when investigating policies:[note 4]
- Check out the companies’ rate increase histories
- Don’t buy more coverage than you need
- Don’t be misled by advertising: Medicare does not endorse or sell long-term care insurance policies. Be wary of any advertising that suggests Medicare is involved.
- Be sure you look at your policy during the free-look period: You generally have up to 30 days to decide on keeping or canceling the policy.
- Check on the financial stability of the company you’re thinking about buying from
Is long-term care insurance appropriate?
Long-term care insurance can help protect your assets against the high cost of extended long-term care. However, long-term care insurance usually only makes sense if you have significant assets to protect other than your home, car, and a small amount of cash.
Long-term care insurance is probably not a good idea if you have trouble stretching your income to pay for utilities, food, or medicine. If you don’t have significant assets, you may have to pay for your care out of pocket until you exhaust, or spend down, your assets enough to qualify for Medicaid.
To determine whether long-term care insurance is right for you, consider your personal risk factors (life expectancy, gender, family situation and health history), assets, income, costs, and available alternatives. The NAIC's A Shopper’s Guide to Long-Term Care Insurance contains a set of worksheets that can help you decide if long-term care insurance is needed (pages 7, 56).
You may be able to deduct part of the premium you pay for a tax-qualified long-term care policy from your taxes as a medical expense. In addition, you are generally not required to claim your qualified long-term care policy benefits as taxable income. However, in the case of an indemnity policy, you might have to pay taxes on any benefits the policy pays above costs that pay for care.
All policies sold before January 1, 1997, are automatically tax-qualified and policies sold later are either tax-qualified or non-tax-qualified. To determine whether your policy is tax-qualified, look for a statement on your policy similar to this: “This policy is intended to be a qualified long-term care insurance contract as defined by the Internal Revenue Code of 1986, Section 7702B(b).”
Qualified LTCI premiums or care are medical expenses that can be paid from a health savings account or itemized as a medical expense (subject to AGI restrictions) from the tax return, subject to age restrictions. See IRS Pub. 502.
Qualified long-term care services are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, rehabilitative services, and maintenance and personal care services that are:
- Required by a chronically ill individual, and
- Provided pursuant to a plan of care prescribed by a licensed health care practitioner.
A qualified long-term care insurance contract is an insurance contract that provides only coverage of qualified long-term care services. The contract must:
- Be guaranteed renewable,
- Not provide for a cash surrender value or other money that can be paid, assigned, pledged, or borrowed,
- Generally not pay or reimburse expenses incurred for services or items that would be reimbursed under Medicare, and
- (see IRS Pub 502 for additional exceptions)
You can include the following as medical expenses on Schedule A (Form 1040), subject to the 7.5% AGI (Adjusted Gross Income) limit:
- Qualified long-term care premiums, for each person, is limited to the following amounts (tax year 2013):
- Age 40 or under – $360.
- Age 41 to 50 – $680.
- Age 51 to 60 – $1,360.
- Age 61 to 70 – $3,640.
- Age 71 or over – $4,550.
- Unreimbursed expenses for qualified long-term care services.
- Qualified long-term care premiums, for each person, is limited to the following amounts (tax year 2013):
Premiums for non-tax-qualified long-term care policies are not tax deductible. In addition, you might have to pay taxes on any benefits the policy pays above costs that pay for care.
How policies work
- Benefit criteria: Policies have different benefit eligibility criteria (also called triggers) that you must meet before the company will pay benefits. These are based on how many of the six activities of daily (ADLs) you cannot perform or whether you have a cognitive impairment.[note 5]
- Tax-qualified policies require that you be unable to perform two of the six ADLs without substantial assistance for at least 90 days or have a cognitive impairment, such as Alzheimer’s. You must also have a plan of care prescribed by a doctor.
- Non tax-qualified policies may offer a different combination of benefit eligibility criteria but most are based on ADLs and cognitive impairment. Criteria are not restricted to two ADLs. Medical necessity or other measures of disability can be offered as benefit criteria.
- Elimination period: The elimination period is the amount of time you have to wait before a policy will pay any benefits. The most common options are for benefits to start at zero, 20, 30, 60, 90, or 100 days after you enter a nursing home or start receiving other services.
- Benefit period: A benefit period is the amount of time a policy will pay benefits. Benefit periods may range from a minimum of one year to a lifetime. The most commonly offered benefit periods are one, two, three, or five years, or for a lifetime.
How benefits are paid
Benefits are generally paid using one of three different methods: the expense-incurred method, the indemnity method, or the disability method. It is important to read the literature that accompanies your policy (or certificate for group policies) and to compare the benefits and premiums.
- Expense-incurred: Policies using the expense-incurred method only pay benefits when you receive an eligible service. The company will pay the benefit amount – either the cost of the expense or the dollar limit of your policy, whichever is less -- to you or your provider. Most policies today pay benefits using the expense-incurred method.
- Indemnity method: Policies using the indemnity method pay a set dollar amount up to the limit of the policy regardless of the cost of the service you receive. For tax qualified policies that pay benefits using the indemnity method, benefits that you receive in excess of the costs of long-term care services may be taxable.
- Disability method: When the disability method is used, you are only required to meet the benefit eligibility criteria. Once you do, you receive your full daily benefit,even if you are not receiving any long-term care services.
Services covered by long-term care insurance
Long-term care insurance policies may pay for several types of care, including:
- Nursing home care in a licensed nursing home.
- Assisted living care in a licensed assisted living home.
- Home health care services that may include skilled nursing care and physical therapy. A licensed home health agency generally must provide this care.
- Adult day care in a licensed center. Typical benefits include nursing or therapeutic care, social and educational activities, or personal supervision.
- Other services. Some policies will pay for hospice care, respite care (care to allow family members who are caregivers to have time off), care after a hospital stay, help with household chores, or caregiver training for family members.
- Coverage amounts: A policy may pay different amounts for different types of long-term care services.
- Daily, weekly, and monthly benefit limits: Policies normally pay benefits by the day, week, or month. For example, a policy that pays with the expense-incurred method might pay a daily nursing home benefit of up to $200 per day or $6,000 per month, and a weekly home care benefit of up to $1,400 per week.
- Maximum benefit limit: Most policies limit the total benefit they will pay over the life of the policy. Some policies state the maximum benefit limit in years (one, two, three, or more, or lifetime). Others policies list the maximum benefit limit as a total dollar amount. The maximum benefit limit may be called a total lifetime benefit, a maximum lifetime benefit, or a total plan benefit.
Long-term care policies may exclude coverage for some conditions, either completely or for a limited time. Policies typically exclude:
- Preexisting conditions. A preexisting condition is an illness or disability for which you received medical advice or treatment in the six months prior to applying for long-term care coverage. A long-term care policy can delay coverage of a preexisting condition for up to six months after the policy’s effective date.
- Mental and nervous disorders. A long-term care policy can exclude coverage of some mental and nervous disorders, but the policy must cover Alzheimer’s disease and other age-related disorders. (However, a company can deny to sell a policy to a person already suffering from Alzheimer’s.) A long-term care policy must also cover all serious biologically based mental illnesses and brain diseases, such as schizophrenia or major depressive disorders.
- Care by family members. Most policies will not pay members of your family to take care of you. However, some policies will pay to train family members to be caregivers.
Companies must offer inflation protection and a nonforfeiture benefit. The benefits are usually available for an additional premium.
Policies must offer inflation protection in at least one of the following ways:
- Benefits automatically increase by 5 percent or more each year, compounded annually.
- Your original benefit amount increases by 5 percent or more compounded each year on the policy’s renewal date. If you don’t want the increase, you must reject it in writing within 30 days after the policy renewal date.
- The policy covers a specified percentage of actual or reasonable charges for as long as you own it, with no maximum daily limit or policy limit.
The company must give you a graphic comparison of benefits on a policy with and without inflation protection over a 20-year period. If you don’t want inflation protection, you must reject it in writing.
Companies must offer you a guarantee that you will receive some of the benefits you paid for even if you later cancel or lose coverage. This guarantee is called a nonforfeiture benefit. In most cases, the longer you pay premiums on the policy, the larger the nonforfeiture benefit will be.
Generally, a nonforfeiture benefit will either pay up to the total amount of all premiums paid or 30 times the daily nursing home benefit at the time the policy lapsed, whichever is greater.
A nonforfeiture benefit can significantly increase a policy’s premium. If you decide not to buy a nonforfeiture benefit, you must reject the offer in writing and the company must explain its contingent nonforfeiture benefit.
- Medicare’s skilled nursing facility (SNF) benefit does not cover most nursing home care. Medicare will pay the cost of some skilled care in an approved nursing home or in your home, but only in specific situations. Do not depend on Medicare to pay for long-term care. (A Shopper’s Guide to Long-Term Care Insurance, from NAIC, page 4.)
- Private insurance that helps pay for some of the gaps in Medicare coverage, such as hospital deductibles and excess physician charges above what Medicare approves. Medicare supplement policies do not cover long-term care costs. However, four Medicare supplement policies—Plans D, G, I and J— do pay up to $1,600 per year for services to people recovering at home from an illness, injury or surgery. The benefit will pay for short-term, at-home help with activities of daily living. You must qualify for Medicare-covered home health services before this Medicare supplement benefit is available. (A Shopper’s Guide to Long-Term Care Insurance, from NAIC, page 4.)
- Medicaid pays most long-term care expenses for eligible individuals with low incomes. Medicaid is a state and federal assistance program. To qualify for Medicaid, you must meet state and federal guidelines for income and assets. Many people pay for long-term care with their own money until they become eligible for Medicaid. (A Shopper’s Guide to Long-Term Care Insurance, from Texas Department of Insurance)
- The NAIC's A Shopper’s Guide to Long-Term Care Insurance, pages 33 to 36, contains a comprehensive list; including a list of insurer rating agencies.
- The six ADLs are bathing, eating, dressing, using the bathroom, continence, and moving from a bed or chair.
Page numbers are from Adobe, not as shown on the report.
- A Shopper’s Guide to Long-Term Care Insurance, by the National Association of Insurance Commissioners (NAIC), (link downloads from the New York Life website)
- A Shopper’s Guide to Long-Term Care Insurance, from Texas Department of Insurance
- IRS Publication 502, Medical and Dental Expenses: PDF, Online
- Long-Term Care Cost Study, from Prudential. 2010. Consumer perceptions and cost trends by state and key metropolitan areas for: Nursing home care, assisted living facilities, and home health care.
- Society of Actuaries Long - Term Care Section has links to actuary data useful for a detailed understanding of Long-term Care needs within the U.S.
- 40 Must-Know Statistics About Long-Term Care by Christine Benz, Morningstar.com (August 9, 2012)
- Retirement Planning's Greatest Gap: Funding Long-Term Care by Kaplan, Richard L., Lewis & Clark Law Review, Vol. 11, No. 407, 2007
- The Role of Private Insurance in Financing Long Term Care by by Howard Gleckman IB#7-13 (September 2007)