Basics of Long Term Care Insurance
Updated: Sep 15, 2021
We have received a number of questions about Long Term Care Insurance recently, so we thought it was a good time to post a primer on the basics of this type of insurance, from a source that doesn't sell insurance.
What is Long-Term Care (LTC) Insurance?
LTC Insurance exists to provide the insured with a source of cash to pay for services, such as a nursing home, that are not otherwise paid for by other forms of insurance. Due to the likelihood of being used and the cost of care, stand-alone LTC policies are becoming increasingly rare. This writeup focuses on Tax-Qualified stand-alone policies rather than life insurance with LTC riders.
What is covered by LTC Insurance?
Most policies cover confinement in a nursing home or assisted living facility, home health care, hospice care, and adult day care.
How do claims work?
Once an individual needs help with two of six “Activities of Daily Living (ADLs)” (bathing, continence, dressing, eating, toileting, transferring) or has cognitive impairment requiring continual supervision and is utilizing one of the aforementioned covered services, their “Elimination Period” begins. This is insurance lingo that equates to paying your deductible. If your elimination period is 90 days, you’ll have to pay out of pocket for a 90-day period before your policy takes over.
Are there Coverage Limits?
Usually. Since long term care is so expensive and may be needed for extended periods of time, insurance companies have ways to cap the amount of coverage they provide. Some of the ways they cap benefits are with a time limit, overall dollar limit, and daily dollar limit. For example, a policy may have a benefit period of 4 years, a policy limit of $200,000, and a benefit amount of $120 per day. If LTC use exceeds those limits, the insured (or their family) will have to cover the rest.
What about Medicare?
There is a very common misconception about Medicare coverage of LTC. While Medicare does technically cover some LTC, that coverage is limited to hospital stays when individuals are expected to fully recover. For example, if an individual had an extended hospital stay while they recovered from an accident, Medicare Part A would pay. It will not pay if the same individual went to a nursing home.
On the other hand, Medicaid is the largest provider of LTC insurance in the US. Since it is a needs-based program, people seeking to use Medicaid must exhaust most of their other resources before they become eligible. Of note: Medicaid is a state-run program, so eligibility will vary somewhat depending on your state of residency.
Are there other benefits to LTC Insurance?
If the policy adheres to federal coverage requirements it may be considered a “Tax-Qualified” policy. As such, policy premiums are tax deductible and benefits are tax-free. Additionally, if an individual with a LTC insurance policy becomes eligible for Medicaid, the policy limit ($200k in the above example) is excluded from Medicaid’s “spenddown provisions.” Without diving too deeply in the Medicaid rabbit hole, that means the individual would be able to keep an additional $200k in assets above the Medicaid maximum resource limit ($2,000 per person in ID).
Is there a downside to LTC Insurance?
There are a few.
First, LTC insurance is becoming increasingly expensive. According to the U.S. Department of Health and Human Services, nearly 70% of all 65-year-old people will need LTC in their lives. Since the insurer has such high odds of needing to pay a benefit, insurers must increase premiums to make a profit.
Secondly, like term life insurance, the insured must continue paying premiums to keep the insurance policy. That means you’ll continue paying premiums in retirement until you either start a claim or the policy becomes “paid up” sometime in your 90’s.
Finally, unused benefits are lost when the insured dies. So, if you never need you benefit or if you only use a portion of it, it dies with you.
Should I get a LTC policy?
If you’d like to discuss your situation and possible alternatives, give us a call. Since we don’t sell insurance, we can guarantee you won’t be subjected to a sales pitch, just fiduciary advice!