LONG-TERM-CARE INSURANCE (LTCI)
Long-term care insurance (LTCI) is designed to pay for care that is needed by insureds who suffer from chronic illness or disability. Long-term care insurance (LTCI) generally covers the cost of nursing homes, home health care, visiting nurse care, homemaker care, and respite care, depending on the provisions of the long-term care insurance policy. Medicaid usually pays benefits for long-term care or other health care services only for individuals with limited income and few tangible assets. To qualify for Medicaid long-term care benefits, a person must spend down assets to near poverty levels. However, when a person has long-term care insurance, these concerns diminish. Thus, LTCI provides a solution for funding long-term care needs for seniors who want:
- The freedom to choose where they receive their long-term care
- The peace of mind that comes with knowing they will not have to spend down their hard-earned assets to qualify for benefits
Required Levels of Care for LTCI
Long-term care policies typically cover three levels of care:
- Skilled care—This type of care can only be provided by medical personnel under a doctor’s orders. Skilled care is normally provided in an institution, such as a rehabilitation center.
- Intermediate care—This is ongoing care necessary to address a person’s condition but that is not needed 24-hours a day. Intermediate care is delivered by registered nurses, licensed practical nurses, and nurse’s aides, who are being supervised by a doctor. Typically provided to patients who are recovering from acute medical conditions, intermediate care is usually delivered in a nursing home, but depending on the individual case, it can also be provided at one’s own home, an assisted living facility, or a community-based center.
- Custodial care—Custodial care is provided when some assistance is required in meeting everyday needs, such as dressing, bathing, or eating. Custodial care does not need to be administered by skilled professionals and is frequently provided by nurse’s aides. Custodial care can be provided in nursing homes, assisted living facilities, adult day-care centers, respite centers, or a person’s own home.
LTCI Benefit Triggers
A long-term care policy will provide benefits after the insured meets a benefit trigger as defined in the policy. Benefits can generally be triggered by either:
- The insured’s inability to perform two or more activities of daily living (ADLs)
- The insured’s loss of cognitive ability such that it limits his or her ability to care for himself or herself without help or supervision (cognitive abilities include the ability to think, reason, perceive, or remember)
The activities of daily living (ADLs) include:
- Bathing—the ability to bathe oneself and to perform normal acts of hygiene
- Continence—the ability to control excretory functions
- Dressing—the ability to dress without assistance
- Eating—the ability to feed oneself
- Toileting—getting to and from the toilet, getting on and off the toilet, and performing associated personal hygiene
- Transferring—the ability to move from one place to another without assistance, such as from a chair to a bed
Selection of Benefits
LTCI policies offer a wide range of options for the insured to choose from. Policies often can be tailored to fit the needs and the pocketbooks of many applicants. Some of the features of long-term care insurance policies are the following:
- Elimination period—The elimination period is the number of days that the insured must pay for care before the policy starts paying benefits. Elimination periods generally range from 0 to 365 days. The longer the elimination period, the lower the premium payment in an otherwise identical policy. Elimination periods normally need be met only once by an insured and often need not be consecutive.
- Benefit period—The benefit period is the maximum length of time that benefits will be paid in a lifetime. Periods can range from two years to lifetime. The longer the benefit period, the higher the premium payment for an otherwise identical policy.
- Amount of daily benefit—This is the amount that will be paid for each day of nursing home care or other types of covered care. The daily benefit amount may range from $50 to $350 or more, usually in $10 increments. The higher the benefit paid, the higher the premium payment for an otherwise identical policy.
- Home health care—Home health care is usually optional at an additional cost. Home health care coverage options normally provide a benefit equal to 50 percent to 100 percent of the benefit chosen in the basic policy for institutional care.
Insurers must offer applicants the opportunity to purchase inflation protection. There are two types:
- Simple inflation protection increases the original benefit on a simple interest basis, usually by 5 percent per year. This option is generally recommended for insureds in their 60s or older.
- Compound inflation protection increases the original benefit on a compound interest basis, usually by 5 percent per year. This option is generally recommended for insureds younger than age 60.
The law requires the agent to offer and explain both types of protection.
Waiver of Premium
Most LTCI policies include a waiver of premium provision that waives the policy’s premiums if the insured becomes eligible to collect benefits. Some policies waive the premium on the first day that benefits become payable, while others require that benefits be paid for a specified period of time (e.g., 90 days) before premiums will be waived.
A nonforfeiture benefit is designed to protect the insured if the policy lapses. If the policyowner cancels the LTCI policy, a minimal amount of paid-up LTCI benefits will remain in force. These benefits are payable as cash or as a continuation of coverage for a shortened period. The amount of paid-up coverage is typically equal to the sum of premiums that were paid to fund the policy. This amount is treated as a pool of money subject to the daily benefit limit of the canceled policy.
All long-term care policies must be issued as guaranteed renewable. The insurer is required to continue an applicant’s coverage for as long as he or she pays the premium. Like most insurance, LTCI policies contain limitations and exclusions. In general, it’s common for long-term care policies to exclude coverage for services associated with any of the following conditions:
- Addiction to drugs and alcohol
- Injuries and/or illnesses caused by acts of war
- Treatment paid by the government
- Injuries that are self-inflicted, such as suicide attempts However, in most states, pre-existing conditions must be covered by LTCI policies, although insurers may impose a pre-existing condition waiting period of up to six months after policy issue. This means that benefits are not paid if the insured requires long-term treatment due to a pre-existing condition within the first six months a policy is in force. After the policy is in effect for six months, it will pay for covered benefits, no matter the reason services are needed.
Tax-Qualified LTCI Policies
Long-term care insurance policies are either tax qualified or non-tax qualified. Most LTCI policies issued today are tax qualified, which means they conform to the 1996 Health Insurance Portability and Accountability Act (HIPAA) and to IRS rules. Tax-qualified LTCI policies receive favorable tax treatment for premiums paid, out-of-pocket expenses, and benefit payments. A non-tax-qualified policy does not receive the same favorable tax treatment—its premiums do not qualify for a tax deduction. (Whether nonqualified policy benefits will be deemed as taxable income is uncertain because the IRS has not yet ruled on this issue).