RALPH S. ROBBINS, CFP^©

A CERTIFIED FINANCIAL PLANNING PRACTITIONER

specializing in

elder care and special needs planning

LONG-TERM CARE INSURANCE

View an informative introductory video:

What is Long-Term Care Insurance?

What is Long-Term Care?

Any discussion of long-term care insurance must start with an overview of exactly what long-term care is.  As you will soon learn, definitions become very important when it comes to determining who pays for what, where, and when.

Long-term care is the full range of services and support (medical, personal and social services) required for day-to-day living when frailty, prolonged illness, an accident, or a disability prevents one from caring for themselves.

Long-term care can be delivered by a multitude of providers and venues including home health care agencies, adult day care centers, assisted living facilities, traditional nursing homes, and continuing care retirement communities. 

The possibility of needing long-term care increases with age. At age 65, seniors face a 40% lifetime chance of a nursing home stay, according to the U.S. Department of Health and Human Services. For about 10 percent of those seniors, this stay will last five years or longer.

Levels of Long-Term Care 

Long-term care is further defined by the intensity or level of services being delivered.  These definitions become important when determining Medicare reimbursement or public benefit eligibility.

Skilled Care – Medically necessary acute care rendered by skilled personnel usually on a 24-hour basis.  Patient must have a prognosis of achieving medical stability. 

Intermediate Care – Medically necessary care for stable conditions.  Supervised by, but not necessarily rendered by, skilled personnel. 

Custodial Care – Primarily personal care to assist with activities of daily living such as bathing, dressing, eating, transferring, etc. 

Homemaker/Companion Services – Services rendered by non-skilled personnel to assist primarily with chores and to provide stand-by assistance. 

All of these levels of care be delivered in one’s own home or one of a multitude of venues.

How Expensive is Long-Term Care?

Long-term care services are not inexpensive.  For home health care and companion services hourly rates in Broward County, FL for example, range from about $15.00 to $18.00 per hour ($120.00 to $144.00 per eight hour shift).  Adult day care ranges from $60 to $90 per day and custodial nursing home charges start from $140 to $225 per day.  For a graphic illustrating the cost of long-term care services in other geographic locations click here. 

Whether delivered in the home or a facility, estimated costs for full-time care, including the maintenance of the home if that is where care is received, will run anywhere between $40,000 to well over $100,000 per year.

Who Pays for Long-Term Care?

Financing for long-term care services can only come from three sources: 

1. Private funds

2. Long-term care insurance

3. Medicaid or other public programs

Most who receive long-term care will have Medicare as their primary health insurer and most are still under the misapprehension that Medicare will pay for long-term care services.  This is only true as follows: 

Important Note:  Medicare only pays for Skilled Nursing Care; the most intensive level of care as described above.

In a facility – Medicare will cover the cost of Skilled Nursing care if the care is:

1. followed by a three day hospital stay,

2. if care is then received in a Medicare approved facility within 30 days of that hospitalization and,

3. care is received for the same condition for which hospitalization occurred. 

If these conditions are met Medicare will pay for the full cost of care for the first 20 days and all but $133.50 per day (in 2009) for the next 90 days per benefit period.  Supplemental policies will generally cover the $133.50 per day copayment.

At home – Medicare will pay for intermittent skilled services per a physician’s prescription.  Some home health aide services may also be provided.  Continual personal care is not covered.  Medicare pays 100% of costs. 

What is Long-Term Care Insurance? 

Long-term care insurance is offered by private insurance companies to provide coverage for the cost of the broad range of services one may require as described above.  

There is no standardization in the design of policies as there is for Medicare supplement insurance and therefore comparing contracts can become a mind numbing process. 

Generally, policies will pay either a fixed dollar amount when a triggering event occurs (known as an indemnity policy) or they will reimburse based on the cost of care up to a contracted amount (known as a reimbursement policy).  Both designs will stipulate the total amount payable in a given time frame (such as per day or per month) and set a limit on the total aggregate amount of policy benefits usually expressed in years, dollars, or both.

Who should buy long-term care insurance?

Long-term care insurance premiums can be expensive often running close to $3,000 per year for someone in their mid sixties to over $7,000 per year for someone in their mid seventies.

Premium, however, is not the only consideration.  The individual’s personal financial goals, as well as their ability to qualify for a policy from a health standpoint, will also deserve consideration. 

The general recommendation is that an individual should spend no more than 5% of their income on a policy.  If this guideline is followed then an annual income of at least $60,000 would be required to fund a $3,000 annual premium. 

Those with large assets are less likely to need to insure for the risk of long-term care expenditures but may have an interest in preserving assets for the benefit of heirs.  Those with smaller assets and corresponding incomes may be better advised to investigate community resources and qualifications for public benefits.  Those “in the middle” will have to carefully weigh the cost/potential benefit of purchasing a policy. 

To qualify for long-term care insurance one must be in relatively good health.  Insurance companies are not so much concerned with mortality issues such as a heart condition as they are with morbidity issues such as diabetes or dementia.  Those with common conditions such as high blood pressure, mild arthritis, even controlled diabetes, may qualify for coverage.  However once diagnosed with more serious ailments it is unlikely that a policy will be issued.

How to Select an Insurance Company 

Over the past 20 years many insurance companies have come and gone in the long-term care insurance marketplace.  Of greater issue has been the mispricing of insurance policies and the subsequent dramatic increase in premiums to existing policyholders by those companies that did not have the actuarial experience to handle this unique form of insurance. 

A long-term care contract represents a tremendous liability to an insurance company and the ability of the insurer to meet its obligation over time at a stable premium can make the difference between financial disaster and peace of mind to the policyholder. 

For this reason a policy should only be purchased from the strongest insurance companies with long experience issuing, servicing, and paying claims.  Look for those companies that have the highest ratings from rating agencies such as A.M. Best, Standard & Poor’s, Moody’s, Duff & Phelps, and perhaps most importantly, Weiss  Ratings (aka "The Street Ratings").  See the Resources page on this web site for links to rating agencies. 

As important is to know how long the insurance company has been in the business of underwriting and administering long-term care policies specifically.  New entrants should be avoided.  Also find out the company’s history in raising rates to existing policyholders.

How to Select an Insurance Agent

Most insurance agents are reputable professionals.  Insurance agents must take classes and pass certain tests to become licensed. In addition to required exams, some agents choose to take further courses. These courses are optional and provide the agent with additional training in various areas of insurance and financial planning. These courses often lead to professional designations which help the consumer and other professionals identify those with certain aptitudes. There are many questionable “designations” about these days but the State of Florida recognizes the following in their literature:

CFP – Certified Financial Planner

CEBS – Certified Employee Benefits Specialist

ChFC – Chartered Financial Consultant

CIC – Certified Insurance Counselor

CLU – Chartered Life Underwriter

LUTCF – Life Underwriting Training Council Fellow

RHU – Registered Health Underwriter

Others, such as "Certified Senior Advisor" or "CSA" have come under sharp criticism by regulatory authorities as lacking credibility when it comes to advanced knowledge of pertinent issues.

 Working with an “independent” agent who can legitimately represent many companies versus a “captive” agent who is beholden to one particular company is advantageous to the client for obvious reasons. 

Some captive agents may say they have the ability to represent more than one company but if the agent’s card has the name of a particular insurer affixed thereto you can be sure there will be extra incentive for a particular policy to be, shall we say, “highlighted”.

Commissions paid to an agent for selling long-term care insurance are quite ample and you should expect an agent to spend as much time as is necessary to fully explain all contract provisions and to thoroughly answer all of your questions.  Do not feel you are "imposing" on him or her if you do not understand something.

Important Note:  Only work with an agent that is certified to sell “Partnership” programs that qualify under Florida's Partnership for Long Term Care (see details below).  Agents so certified have taken an additional 8 hours in continuing education hours to obtain knowledge regarding this program.  If not working with an agent certified to offer Partnership plans you may not be offered one of the most important developments in long-term care planning in recent times.

What Coverage Should be Purchased? 

Long-term care insurance, like any insurance purchase, should be purchased to manage the risk associated with the event.  If the approximate cost of care in today’s dollars is known, and if the individual knows what they are likely to be able to afford out of pocket, then an approximation can be made for the amount that should be insured (the amount at risk). 

For example, if we know that the average cost of care as cited above is about $170 per day, and $10,000 of income would be available out of pocket (self insured amount), then a reasonable insurable amount would be $150 per day (before considering the effects of inflation).

As mentioned previously, there is no standardization when it comes to long-term care insurance policies.  In fact, many offerings are not specific to long-term care and “combine” benefits such as life insurance and annuities with a long-term care benefit.  It has been the author’s experience that these “combination” policies do not generally offer good value.  Stick with a pure long-term care policy and if you are interested in life insurance or annuities purchase them separately. 

Today, it is rare to find policies that only pay for nursing home care or only pay for home health care from major, stable, companies.  More common are "comprehensive" policies that pay for virtually all forms of care in virtually all venues.  From a planning point of view, the purchase of a comprehensive policy makes more sense unless, of course, you have access to that proverbial crystal ball and can anticipate the type of care that will be required under what circumstances. 

There are many similarities between benefits offered by the major insurers so it is relatively easy to establish a basic policy construct as follows:  

1. Daily Benefit - Determine at risk amount as above and include inflation options as described below under "Florida Partnership for Long-Term Care".

2. Maximum Benefit Period - Expressed in years or in dollars, this is the total benefit available to the insured.  Recent law has created a 5 year "look back" for divested assets when qualifying for Medicaid and this represents a common sense recommendation.

3. Elimination Period - Premiums can be dramatically reduced if the insured will wait a period of time before receiving benefits.  The elimination or "deductible" period is the number of days the insured agrees to pay for care out of pocket before benefits begin.  A good compromise between cost and benefit is to select a 90 day elimination period for facility care and a 0 day elimination period for home care.  The rationale is that facility care is generally a final decision and other funds, such as those used to maintain the home (and the home itself) may be available.  It may also be the case that Medicare benefits will be available on the front end of an extended facility stay.

The Florida Partnership for Long-Term Care

Along with the implementation of new Federal regulations pertaining to Medicaid in Florida in November of 2007, a provision was also passed creating “The Florida Partnership for Long-Term Care”.  The notion is that by creating a “compact” between the individual and the state an incentive will exist to encourage the individual to purchase long-term care insurance where appropriate. 

The Partnership simply states that if an individual purchases a long-term care insurance policy that qualifies as a Partnership plan, then the insured will be able to qualify for Medicaid benefits without having to meet Medicaid asset spend down requirements to the extent of the benefit purchased if those benefits are exhausted. 

For example:  Assume an individual purchases a contract that qualifies as a Partnership plan with a total aggregate benefit of $150,000.  In the event that individual exhausted the entire policy benefit he/she would not be required to divest themselves of the first $150,000 of personal assets to qualify or Medicaid.  So, if the total estate of the insured was $150,000 or less at the time the policy benefit was exhausted, then the insured would be able to qualify for Medicaid benefits without having to spend down the $150,000. 

The importance of this provision cannot be over-emphasized.

 Therefore, as noted above, it is crucial that the consumer work with an agent that is certified to sell Partnership plans. 

Always seek a Partnership plan.  It is difficult to imagine a situation where such a plan would not be to a client’s advantage. 

An agent must tell you if a plan qualifies as a Partnership plan or not, but is required to do so only if asked. 

Partnership policies are not particularly unique in benefit structure other than that they must be a “tax-qualified” plan as defined by Federal law and must have inflation provisions as follows:

Benefits greater than those specified will still qualify the policy as a Partnership program. 

Existing long-term care policies may qualify for the Partnership program.  The terms of qualification are dependent upon the law enacting the Partnership in the state in which the insured purchased their policy and may be different than in Florida. 

In Florida, the law implementing the Partnership states that a policy issued after March 1, 2003 must be exchanged for a policy that qualifies as a Partnership policy.  Simply because the policy was issued after March 1, 2003 does not mean it is automatically a Partnership policy. 

Companies have made it very easy to accomplish this and all policy holders in Florida whose contracts would qualify for exchange should have been already notified by their respective insurers. Those who have not been so notified or who are not certain if their policy is eligible for exchange should contact the issuer of their policy.

Tax deductibility of long-term care insurance

A portion of long-term care insurance premiums may be deductible as a medical expense.  The amount of premium that can be deducted is based on attained age in a given tax year as follows.

Medical expenses are only deductible to those who itemize deductions and only to the extent that the sum total of medical expenses (including the allowable portion of long-term care insurance premiums) exceed 7.5% of adjusted gross income.

Summary

1. Don't buy long-term care insurance if you cannot afford the premium.

2. Do not over insure.

3. Purchase insurance only from a top rated company with long experience (20+ years) specifically in the underwriting, administering, and claims paying of long-term care insurance.

4. Only work with independent agents certified to offer Florida Long-Term Care Partnership plans.

The Top Eight Medicaid Eligibility Mistakes.

Don't miss one of our informative Medicaid Eligibility seminars! 

Have a Medicaid Eligibility or Long-Term Care Question?

 Just for Fun!