Long Term Care Insurance

Long-Term Care

Long-term care (LTC) is the term used to describe a variety of services in the areas of health, personal care, and social needs for individuals who are chronically disabled, ill, or infirm. LTC may include services such as skilled nursing home care, assisted living, home health care, or adult day care.

LTC in the United States today is, without doubt, expensive. In 2012, for example, the national average charge (regional costs can vary widely) for a semi-private room in a nursing home was $222 per day, just over $81,000 per year. This represented a 3.7% increase over the 2011 charge of $214 per day,1 or slightly more than $78,000 per year.

How long do most people need LTC? One federal government study found that the "average length of time since admission for all current nursing home residents was 835 days."2 Of course, not everyone will need LTC. And, in many cases, LTC will be needed for only a limited period of time. However long the need exists, for many individuals, paying for LTC can be a major challenge. Some resources which have been used to pay for LTC include:

Who Needs Long -Term Care?

The need for long-term care is generally defined by an individual's inability to perform the normal activities of daily living (ADL) such as bathing, dressing, eating, toileting, continence, and moving around. Conditions such as AIDS, spinal cord or head injuries, stroke, mental illness, Alzheimer's disease or other forms of dementia, or physical weakness and frailty due to advancing age can all result in the need for long-term care.

While the need for long-term care can occur at any age, it is typically older individuals who require such care.

What Is The Cost of Long -Term Care?

The need for long-term care is generally defined by an individual's inability to perform the normal activities of daily living (ADL) such as bathing, dressing, eating, toileting, continence, and moving around. Conditions such as AIDS, spinal cord or head injuries, stroke, mental illness, Alzheimer's disease or other forms of dementia, or physical weakness and frailty due to advancing age can all result in the need for long-term care.

Assisted Living $3,500 per month($42,000 per year)
Nursing home(private room) $240 per day($87,600 per year)
Nursing home(semi-private room) $212 per day($77,380 per year)
Home health aide $20 per hour
Homemaker/companion $19 per hour
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Paying for Long Term Care

Method
Personal Assets
How It Works Assets that an individual (or a family) has managed to accumulate through work, savings and investment, or inheritance.
Pros
  • Allows you to choose when, where, and how you receive care.
  • No concerns about being healthy enough to qualify for LTC insurance or other types of insurance policies.
  • Funds not needed for LTC can be used for other purposes or left to family or friends at your death.
Cons
  • Investment returns are variable and subject to both gain and loss.
  • May need to sell illiquid assets (such as the family home) to free-up the cash needed to pay LTC costs.
  • LTC expenses may exceed the amount of available assets.
Family caregiving
How It Works Assets that an individual (or a family) has managed to accumulate through work, savings and investment, or inheritance.
Pros
  • No need to pay for care provided by family members.
  • Family support may alos be available to meet other needs besides LTC.
  • To the extent that personal funds are not spend on LTC, they can be left to family or friends at your death.
Cons
  • Family members may be unwilling or unable to provide the needed care.
  • Some family members may feel that the burden of providing care is unequally on their shoulders.
  • You must pay for care that family members cannot or are unable to provide.
Reverse mortgage
How It Works A special type of mortgage that allows a homeowner to convery a portion of his or her home equity into cash.
Pros
  • No income or medical requirements to qualify.
  • Provides cash needed to pay for LTC.
  • Cash gives you control over where, when and how you receive care.
  • Funds not used to pay for LTC can be used for other purposes or left to family and friends at your death.
Cons
  • Owner must meet certain requirements to qualify.
  • Funds from a reverse mortgage are "income" and could affect eligibility for Medicaid or other assistance programs.
  • LTC costs could exceed the cash received.
  • A borrower may be forced to seel the home to repay the loan.
Long-term care insurance
How It Works Private insurance designed to help pay for many types of LTC services.
Pros
  • Provides a known benefit for a specificed period of time. Benefits paid under a "tax qualified" LTC policy are general received income tax free.
  • Gives you more control over where, when, and how you receive care.
  • Funds not spent on LTC can be used for other purposes or left to family or friends.
Cons
  • Insured must generally be healthy to qualify for the policy.
  • Continuing premiums required to keep the policy in force.
  • Premiums may increase over time, benefits may decrease, or both.
  • If the insured does not use the policy benefits, there is a sense the money was not well spent.
  • LTC costs could exceed policy coverage amount.
Life insurance policy surrender
How It Works A life insurance policy with accumulated cash values is "surrendered" to the life insurance company.
Pros
  • Provides cash needed to pay for LTC.
  • Cash gives you control over where, when and how you receive care.
  • Funds not used to pay for LTC can be used for other purposes or left to family and friends at your death.
Cons
  • Cash surrender value is usually less than the policy's death benefit.
  • A portion of the proceeds from the sale may be taxable.
  • LTC costs could exceed the cash received.
Life settlement
How It Works The healthy owner of a life insurance policy sells it to a third party for a percentage of the death benefit.
Pros
  • Provides cash needed to pay for LTC.
  • Cash gives you control over where, when and how you receive care.
  • Funds not used to pay for LTC can be used for other purposes or left to family and friends at your death.
Cons
  • Maybe be difficult to find a buyer.
  • You generally receive only a portion of the policy's death benefit.
  • A portion of the proceeds from the sale may be taxable.
  • LTC costs could exceed the cash received.
Viatical settlement
How It Works The owner of a life insurance policy who is either "terminally" or "critically" ill sells the policy to a third party for a percentage of the death benefit.
Pros
  • Provides cash needed to pay for LTC.
  • Cash gives you control over where, when and how you receive care.
  • If certain requirements are met, proceeds of sale are not taxable.
  • Funds not used to pay for LTC can be used for other purposes or left to family and friends at your death.
Cons
  • Maybe be difficult to find a buyer.
  • You generally receive only a portion of the policy's death benefit.
  • LTC costs could exceed the cash received.
Accelerated death benefit
How It Works Some life insurance policies will pay a portion of the death benefit if the insured becomes "terminally" ill.
Pros
  • Provides cash needed to pay for LTC.
  • Cash gives you control over where, when and how you receive care.
  • Funds not used to pay for LTC can be used for other purposes or left to family and friends at your death.
Cons
  • You generally receive only a portion of the policy's death benefit.
  • LTC costs could exceed the cash received.
Borrow from accumulated cash values
How It Works Cash-value life policies typically allow the owner to borrow from the accumulated cash value, often at favorable interest rates.
Pros
  • Provides cash needed to pay for LTC.
  • Cash gives you control over where, when and how you receive care.
  • Funds not used to pay for LTC can be used for other purposes or left to family and friends at your death.
Cons
  • When death occurs, outstanding policy loans and interest will be subtracted from the face amount.
  • LTC costs could exceed the cash received.
Life insurance - LTC combination policy
How It Works A life insurance policy that links a traditional cash-value life policy with a LTC benefit.
Pros
  • Provides cash needed to pay for LTC.
  • Cash gives you control over where, when and how you receive care.
  • If LTC benefits are not needed, life insurance policy proceeds pass to named beneficiaries at your death.
Cons
  • Insured may be required to qualify for the underlying life insurance policy.
  • Typically funded with a large, single premium payment.
  • Insured must be either "critically" ill or "terminally" ill to qualify for tax-free accelerated death benefit treatment.
Annuity-LTC combination contract
How It Works An annunity contract that links a traditional annuity with a LTC benefit.
Pros
  • Provides cash needed to pay for LTC.
  • Cash gives you control over where, when and how you receive care.
  • If LTC benefits are not needed, annuity can provide additional retirement income or pass to named beneficiaries.
Cons
  • Typically funded with large, single cash payment.
  • Accumulated values within the annuity are used first to fund LTC expenses.
  • Tax-free LTC distributions typically require that an individual be "chronically ill."
Medicare
How It Works A health insurance program operated by the federal government.
Pros
  • Part A helps pay for a limited amount of skilled-nursing or home health care.
  • Part B covers doctor's services and certain medical services/supplies.
  • Part B home health care is available if not covered under Part A.
  • Part D can help pay for needed medications.
  • Supplemental (Medigap) policies can help meet some expenses not covered by Medicare.
Cons
  • Part A skilled nursing facility care is limited to a maximum of 100 days.
  • Medicare does not pay for custodial care.
  • Individual is responsible for paying costs not covered by Medicare.
Medicaid
How It Works A federal-state program which provides medical care to those with very low resources and income.
Pros
  • For qualifying individuals, Medicaid pays for LTC services at home, in the community, and in a nursing home.
  • Individual must meet Medicaid standards for low income and resources.
  • Nursing home services usually limited to a Medicaid licensed facility with an available Medicaid bed.
  • State may see post-death recovery of amounts paid for LTC.
Cons
  • Typically funded with large, single cash payment.
  • Accumulated values within the annuity are used first to fund LTC expenses.
  • Tax-free LTC distributions typically require that an individual be "chronically ill."
MethodHow It WorksProsCons
Personal Assets Assets that an individual (or a family) has managed to accumulate through work, savings and investment, or inheritance.
  • Allows you to choose when, where, and how you receive care.
  • No concerns about being healthy enough to qualify for LTC insurance or other types of insurance policies.
  • Funds not needed for LTC can be used for other purposes or left to family or friends at your death.
  • Investment returns are variable and subject to both gain and loss.
  • May need to sell illiquid assets (such as the family home) to free-up the cash needed to pay LTC costs.
  • LTC expenses may exceed the amount of available assets.
Family caregiving Assets that an individual (or a family) has managed to accumulate through work, savings and investment, or inheritance.
  • No need to pay for care provided by family members.
  • Family support may alos be available to meet other needs besides LTC.
  • To the extent that personal funds are not spend on LTC, they can be left to family or friends at your death.
  • Family members may be unwilling or unable to provide the needed care.
  • Some family members may feel that the burden of providing care is unequally on their shoulders.
  • You must pay for care that family members cannot or are unable to provide.
Reverse mortgage A special type of mortgage that allows a homeowner to convery a portion of his or her home equity into cash.
  • No income or medical requirements to qualify.
  • Provides cash needed to pay for LTC.
  • Cash gives you control over where, when and how you receive care.
  • Funds not used to pay for LTC can be used for other purposes or left to family and friends at your death.
  • Owner must meet certain requirements to qualify.
  • Funds from a reverse mortgage are "income" and could affect eligibility for Medicaid or other assistance programs.
  • LTC costs could exceed the cash received.
  • A borrower may be forced to seel the home to repay the loan.
Long-term care insurance Private insurance designed to help pay for many types of LTC services.
  • Provides a known benefit for a specificed period of time. Benefits paid under a "tax qualified" LTC policy are general received income tax free.
  • Gives you more control over where, when, and how you receive care.
  • Funds not spent on LTC can be used for other purposes or left to family or friends.
  • Insured must generally be healthy to qualify for the policy.
  • Continuing premiums required to keep the policy in force.
  • Premiums may increase over time, benefits may decrease, or both.
  • If the insured does not use the policy benefits, there is a sense the money was not well spent.
  • LTC costs could exceed policy coverage amount.
Life insurance policy surrender A life insurance policy with accumulated cash values is "surrendered" to the life insurance company.
  • Provides cash needed to pay for LTC.
  • Cash gives you control over where, when and how you receive care.
  • Funds not used to pay for LTC can be used for other purposes or left to family and friends at your death.
  • Cash surrender value is usually less than the policy's death benefit.
  • A portion of the proceeds from the sale may be taxable.
  • LTC costs could exceed the cash received.
Life settlement The healthy owner of a life insurance policy sells it to a third party for a percentage of the death benefit.
  • Provides cash needed to pay for LTC.
  • Cash gives you control over where, when and how you receive care.
  • Funds not used to pay for LTC can be used for other purposes or left to family and friends at your death.
  • Maybe be difficult to find a buyer.
  • You generally receive only a portion of the policy's death benefit.
  • A portion of the proceeds from the sale may be taxable.
  • LTC costs could exceed the cash received.
Viatical settlement The owner of a life insurance policy who is either "terminally" or "critically" ill sells the policy to a third party for a percentage of the death benefit.
  • Provides cash needed to pay for LTC.
  • Cash gives you control over where, when and how you receive care.
  • If certain requirements are met, proceeds of sale are not taxable.
  • Funds not used to pay for LTC can be used for other purposes or left to family and friends at your death.
  • Maybe be difficult to find a buyer.
  • You generally receive only a portion of the policy's death benefit.
  • LTC costs could exceed the cash received.
Accelerated death benefit Some life insurance policies will pay a portion of the death benefit if the insured becomes "terminally" ill.
  • Provides cash needed to pay for LTC.
  • Cash gives you control over where, when and how you receive care.
  • Funds not used to pay for LTC can be used for other purposes or left to family and friends at your death.
  • You generally receive only a portion of the policy's death benefit.
  • LTC costs could exceed the cash received.
Borrow from accumulated cash values Cash-value life policies typically allow the owner to borrow from the accumulated cash value, often at favorable interest rates.
  • Provides cash needed to pay for LTC.
  • Cash gives you control over where, when and how you receive care.
  • Funds not used to pay for LTC can be used for other purposes or left to family and friends at your death.
  • When death occurs, outstanding policy loans and interest will be subtracted from the face amount.
  • LTC costs could exceed the cash received.
Life insurance - LTC combination policy A life insurance policy that links a traditional cash-value life policy with a LTC benefit.
  • Provides cash needed to pay for LTC.
  • Cash gives you control over where, when and how you receive care.
  • If LTC benefits are not needed, life insurance policy proceeds pass to named beneficiaries at your death.
  • Insured may be required to qualify for the underlying life insurance policy.
  • Typically funded with a large, single premium payment.
  • Insured must be either "critically" ill or "terminally" ill to qualify for tax-free accelerated death benefit treatment.
Annuity-LTC combination contract An annunity contract that links a traditional annuity with a LTC benefit.
  • Provides cash needed to pay for LTC.
  • Cash gives you control over where, when and how you receive care.
  • If LTC benefits are not needed, annuity can provide additional retirement income or pass to named beneficiaries.
  • Typically funded with large, single cash payment.
  • Accumulated values within the annuity are used first to fund LTC expenses.
  • Tax-free LTC distributions typically require that an individual be "chronically ill."
Medicare A health insurance program operated by the federal government.
  • Part A helps pay for a limited amount of skilled-nursing or home health care.
  • Part B covers doctor's services and certain medical services/supplies.
  • Part B home health care is available if not covered under Part A.
  • Part D can help pay for needed medications.
  • Supplemental (Medigap) policies can help meet some expenses not covered by Medicare.
  • Part A skilled nursing facility care is limited to a maximum of 100 days.
  • Medicare does not pay for custodial care.
  • Individual is responsible for paying costs not covered by Medicare.
Medicaid A federal-state program which provides medical care to those with very low resources and income.
  • For qualifying individuals, Medicaid pays for LTC services at home, in the community, and in a nursing home.
  • Individual must meet Medicaid standards for low income and resources.
  • Nursing home services usually limited to a Medicaid licensed facility with an available Medicaid bed.
  • State may see post-death recovery of amounts paid for LTC.
  • Typically funded with large, single cash payment.
  • Accumulated values within the annuity are used first to fund LTC expenses.
  • Tax-free LTC distributions typically require that an individual be "chronically ill."

Choosing a Long -Term Care Policy

Assessing the need for long-term care (LTC) insurance is an important part of any risk management program. The heavy economic burden of paying for such care should be measured against your available resources. If you need LTC for even a short period of time, what effect will that have on your estate and any legacy you may wish to leave to your heirs? The decision to purchase LTC insurance, either individually or under a group plan, generally must be made while you are still healthy. Once a disabling condition occurs, it is too late to act.

Common Elements in Long-Term Care Insurance Policies

  • "Qualified" LTC policies: If a LTC policy meets certain criteria established by the federal government, the premiums for the policy are considered "medical care" and thus qualify for the medical expense itemized deduction. Federal law limits the amount of qualified LTC premiums that may be deducted each year.
  • Amount of the benefit: A policy will generally specify the maximum dollar benefit payable. A survey of local nursing homes can help determine the amount needed.
  • How benefits are paid: LTC benefits are generally paid under one of three methods:
    • Reimbursement (expenses-incurred) method - pays the lesser of the actual expenses incurred or the dollar limit specified in the policy.
    • Indemnity (or "per-diem") method - the entire daily benefit is paid as long as the insured requires and is receiving LTC services, regardless of the amount spent.
    • Disability method - once the eligibility criteria have been met, the full daily benefit is paid,even if no LTC services are being provided.
  • Inflation protection: Since costs inevitably increase, a policy without a provision for inflation may be outdated in a few years. Of course, an additional charge is incurred for this protection.
  • Guaranteed renewability: Almost all long-term care policies sold today are guaranteed renewable; they cannot be canceled as long as you pay the premiums on time and as long as you have told the truth about your health on the application. The fact that a policy is guaranteed renewable does not mean that the premiums cannot be increased; insurers typically reserve the right to raise premiums for an entire class or group of policyholders. Some policies sold in the past were not gua ranteed renewable and a few of these policies may still be in force.
  • Waiver of premium: Some policies will waive future premiums after you have been in the nursing home for a specified number of days, e.g., 90 days.
  • Prior hospitalization: This policy provision requires one to be hospitalized (for the same condition) prior to entering the nursing home or no benefits will be paid under the policy. Although prior hospitalization clauses have been prohibited in all states, some older policies still in force may contain this provision. Policies currently sold do not contain prior hospitalization clauses.
  • Place of care: Does the policy require that the nursing home be licensed or otherwise certified by the state to provide skilled or intermediate nursing care? Must the facility meet certain record keeping requirements?
  • Plan of care: A plan of care is part of the health care claims process. It is the result of an assessment prepared by the insured's physician, and a multi-disciplinary team, including practical nurses, social workers, and other health care professionals. The plan outlines the appropriate level of care needed to assist the insured in performing the activities of daily living.
  • Level of care: There are three generally recognized levels of care in an institutional setting:
    • Skilled care: Daily nursing and rehabilitation care under the supervision of skilled medical personnel,e.g., registered nurses and based on a physician's orders.
    • Intermediate care: The same as skilled care, except it requires only intermittent or occasional nursing and rehabilitative care.
    • Custodial care: Help in one's daily activities including eating, getting up, bathing, dressing, use of toilet, etc. Persons performing the assistance do not need to be medically skilled, but the care is usually based upon the physician's certification that the care is needed.
  • Pre-existing conditions: Depending on the state, a policy may limit coverage of pre­ existing conditions to discourage persons who are already ill from purchasing a policy. Many policies will provide benefits if the pre-existing condition was overcome six months or more prior to applying for the policy. Also, some policies will not pay benefits if the pre-existing condition re-occurs within six months after the effective date of coverage.
  • Deductible or waiting period: Most LTC policies require you to "pay your own way" for a specified number of days (generally ranging between zero and 120 days) before the insurance company will begin to pay benefits. Of course, the shorter the waiting period, the higher the cost will be. This is usually referred to as an "elimination period."
  • Alzheimer's disease: Most policies now include coverage for organic brain disorders like Alzheimer's disease.
  • Home health care (home care): Many long-term care policies can provide coverage in the insured's home. It is most often offered as a rider (requiring an additional premium) to nursing facility coverage, and reimburses the cost of long-term care received at home.
  • Rating the company: Companies should be financially sound and have a reputation of treating policyholders fairly.

Seek Professional Guidance

Finding adequate resources to pay for needed LTC services can be difficult. Failing to meet this need can result in essential care being unavailable or, when existing resources are exhausted, in an adverse change in the type or quality of care already being provided. For some individuals, the funds to pay for necessary care will come from multiple sources. The guidance of trained financial professionals can help in creating a program to meet this challenge.