Is Traditional Long-Term Care Insurance Still a Viable Option?

Jackie Bedard
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Attorney, Author, and Founder of Carolina Family Estate Planning

In our office, we use the term “Traditional Long-Term Care Insurance” to refer to policies that:

  • Insure against future long-term care expenses;
  • Require an annual premium;
  • That do not have any cash value or death benefit; and
  • Premiums can increase in the future.

A Traditional Long-Term Care Insurance policy functions a lot like your homeowner’s policy. You pay your premiums each year and if you have a claim, you file the claim. But if you never have a claim, you never collect any benefits from the policy. Further, the insurance company can increase the insurance premiums in the future.

Policy Structure

Typically, these policies begin with a strict health underwriting process. In order to qualify for coverage, you need to be in reasonably good health for the company to offer you a policy.

The policy coverage is usually quoted as a daily benefit for a specified number of years, such as $150/day for up to 3 years. For most policies, this benefit is then translated into a total pool of funds: $150 x 365 days x 3 years = $164,250 benefit pool. If you eventually need long-term care, the maximum that the insurance company will pay is up to $150/day for a maximum total of $164,250. If, for example, your cost of care is only $100 per day, then the policy will last you longer than 3 years: $164,250 / $100 per day = 1,642.5 days = 4.5 years.

An annual premium must be paid to renew coverage each year. The insurance company may also give you the option to pay the premium semi-annually, quarterly, or monthly. If you do not pay the premium, the policy will lapse and be canceled by the insurance company (though many modern policies allow for a 6-month grace period for an unintentional lapse if the lapse was due to cognitive or physical impairment).

It’s also critical to understand that traditional long-term care insurance is a lot like health insurance in that the annual premiums can increase in the future. When you purchase your long-term care insurance policy, you are part of a “class” of policy-holders. When the insurance company issued the policies, the company estimated the cost to maintain the policy and pay claims under the policy. However, over time, if the policies end up being more expensive to maintain than expected—either due to increasing costs of long-term care, higher claim incidents, or other factors, the insurance company can increase the premiums for all policyholders in the applicable “class.”  

If the premium increases, the insurance company will generally offer you the option to pay the increased premium to keep the existing coverage or, continue paying the same premium you were accustomed to paying, but your benefits under the policy will be reduced.

When Long-Term Care Insurance Coverage Is Triggered

Benefits are triggered under the policy once you meet the policy criteria. Older policies were “nursing home” only policies but most modern policies cover in-home care, assisting living care or nursing home care.  Some policies reduce the daily benefit for in-home care or assisted living care vs. nursing home care.

For most policies, the first step to triggering coverage is a physician’s assessment that:

  • You need assistance with 2 or more Activities of Daily Living (CROSS LINK) (toileting, bathing, dressing, eating, transferring from bed or chair, and continence); or
  • You have severe cognitive impairment.

Most policies then have an applicable “elimination period” during which you must pay for any care out of pocket. Generally, the elimination period is either 30, 60, or 90 days. Some policies will waive the elimination period for in-home care.

Payment of Policy Benefits

The long-term care insurance policy will specify how benefits will potentially be paid. There are three potential methods that may be used:

  1. Reimbursement policies require you to submit receipts documenting covered care or services that you paid for out of pocket and then the insurance company will reimburse you up to the maximum daily benefit.
  2. Indemnity policies pay the full daily benefit once you qualify for coverage and prove that you received at least one service per day.
  3. Cash benefit policies pay the full daily benefit without requiring you to show proof of paying for any care.

Policies Have Many Moving Parts & Available Riders

Traditional long-term care insurance policies can vary dramatically based on different coverage and riders added to the policy. Other than the obvious variations in benefit amounts and benefit periods, here are examples of the potential riders or benefits that a policy may offer:

  • Benefit amounts may vary depending on the type of care. Some policies pay the same benefit amount regardless of whether it’s used for in-home care, assisted living, or nursing home care. Other policies may only pay a 50% benefit for in-home care or assisted living care. Still, other policies might not offer any coverage for in-home care and are for facility-only coverage.
  • Some policies will allow in-home care to be provided by a family member.
  • The length of the applicable elimination period or waiting period before payment of benefits begins can vary.
  • Some policies will cover a “bed reservation.” For example, many nursing homes having waiting lists for beds. If you are in a nursing home and then must be hospitalized, a long-term care insurance policy that has “bed reservation” coverage will continue to pay for your nursing home bed for up to a specified number of days so that your nursing home bed is not given away to a new resident while you are in the hospital.
  • Some policies will provide coverage for home modifications if you are still residing in your home.
  • Some policies will provide coverage to hire a care manager or care coordinator to help develop a plan of care.
  • Some policies will cover a specified number of days of respite care—temporary care in an assisted living facility or nursing home to give your in-home caregivers a break or allow them to take a vacation.
  • Many policies offer a waiver of premium. Once you qualify for benefits under the policy, you no longer have to continue paying your premiums.
  • Some policies offer a survivorship option—if both husband and wife purchase a policy, when the first spouse dies any unused coverage in their policy will roll over to the surviving spouse.
  • A return of premium rider provides that upon your death, the premiums that you paid for the policy (usually reduced by any benefits paid under the policy) will be refunded to your estate or to a named beneficiary.
  • Inflation riders increase the benefit amount annually in an effort to keep up with rising costs of care. Some inflation riders are based on simple interest, others are based on compound interest. The method of calculation can make a dramatic difference to your benefits in the long-run.

Tax-Qualified Long-Term Care Insurance Policies

While most are familiar with HIPAA (Health Insurance Portability and Accountability Act) in the context of medical privacy laws, HIPAA also created certain tax benefits for qualified long-term care insurance policies.

For a long-term care insurance policy to be tax-qualified, the policy must meet the following requirements:

  • The insured cannot receive benefits for medical needs (because medical needs are covered by health insurance).
  • To be eligible for benefits, the insured must be certified by a licensed health care professional as: either unable to perform, without substantial assistance, at least two activities of daily living for at least 90 days; or you require substantial supervision to protect yourself due to a severe cognitive impairment (such as Alzheimer’s disease or dementia).
  • If the insured receives a return of any premium or earns dividends, the funds can be used to reduce future premiums or to increase the policy’s benefits, otherwise, such funds will be taxed.
  • The policy cannot have a cash surrender benefit.
  • The policy cannot be assigned, pledged, or borrowed against.
  • Reimbursement-based policies cannot pay for benefits covered by Medicare.

If the policy meets the above requirements, then any benefits paid by a reimbursement long-term care policy will be tax-free or benefits paid by an indemnity long-term care policy will be tax-free up to $370 per day (in 2019) or the actual cost of care, whichever is higher.

In addition, if the policy meets the above requirements, then you may be able to deduct all or a portion of the premiums paid each year. The tax code sets forth limits for the amount of the policy that may be deducted based on your age and such expenses constitute a medical expense for income tax purposes, so you also must be eligible to deduct medical expenses.

Biggest Complaints Regarding Traditional Long-Term Care Insurance

We do still help our clients explore traditional long-term care insurance policies compared to other long-term care planning options, but more and more often, we’re seeing people opt for other options citing the following complaints:

  • You generally must be very healthy to qualify for a policy. Many people end up finding they do not qualify for coverage due to pre-existing medical conditions.
  • Long-term care insurance is ‘use it or lose it’—if you pay premiums for years and never need long-term care, then you never benefit from the policy. [Arguably, you still gain peace of mind of having the protection and you could purchase a return of premium rider if you’re concerned about this risk.]
  • There’s no cash value to the policy. Again, this goes back to the ‘use it or lose it’ nature of the policy.
  • The policy coverage may be inadequate, especially if you don’t include an inflation rider. For those that had parents or grandparents that purchased long-term care insurance policies, the policies often didn’t kept up with inflation.  We’ve frequently seen clients with long-term care insurance policies with daily benefits of $50 per day or $75 per day but the current average cost of care in the Raleigh area is $189 per day for assisted living or $234-263 per day for nursing home care. This is why it’s critical to consider not just the current cost of care but also your age and potential inflation in the future.
  • The biggest complaint, however, is the rising premiums. Time and time again, we’ve seen people that bought the policies in their 50’s or 60’s. They picked a policy that was affordable and that they’d be able to continue to afford during retirement. Then, in their 70’s the insurance company hits them with huge premium increases and the policyholders end up either significantly reducing their coverage under the policy in an effort to keep the policy affordable, or they end up dropping the policy entirely!

Fortunately, there are many alternatives to traditional long-term care insurance that address these concerns that we’ll cover in the upcoming articles in this series. 

We Can Help You Develop a Long-Term Care Plan

Having assisted many Wake County clients with long-term care planning, our team at Carolina Family Estate Planning understands that developing a long-term care plan is about not just protecting your own independence and dignity, but also protecting those you love from the physical, emotional, and financial toll that caring for a loved one can take.

We’ve helped many clients take an interdisciplinary approach to their long-term care planning by exploring both legal and financial options. Usually, a well-rounded long-term care plan will involve a combination of legal, health care, and financial tools to meet your goals and maximize your protection. To get started, register an upcoming seminar to learn more or call our office at 919-443-3035.

 

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