Introduction

For nursing home care in the San Francisco Bay Area the average cost is approaching $7,500 a month for a semi-private room and as much as $10,320 per month for a private room.  In some cases, such as where the resident is on a ventilator, the cost can approach $25,000 per month or more.  Urban areas tend to be more expensive than rural areas in the state.  Further, a long-term need for care can deplete even the best-planned estate. As a result, many seniors purchase long-term care insurance to cover this risk. One great advantage of this insurance is that most policies now cover home care and assisted living care as well as nursing home care, causing some insurance agents to describe it as “avoid nursing home” insurance.

Unfortunately, the industry is young and has gone through some growing pains. Until Congress began regulating the industry as part of the Health Insurance Portability and Accountability Act of 1996, many of the policies were poor, containing bars to coverage that could make them unavailable just when needed. Some companies that went into the business with great optimism have found that they were not making money and have gone out of the business. Others have put up roadblocks to claims on the policies. However, as the industry has improved, the more reputable companies appear to be the ones with staying power and having the insurance can be a lifesaver for a senior needing care, as well as for his or her spouse and children.

The biggest problem with policies now is the cost – the premiums being out-of-reach for most seniors in their late 70’s and 80’s – and the refusal of insurance companies to guarantee their rates. Another problem with long-term care insurance is that by the time many people look into purchasing policies, they may be uninsurable due to health problems. If you are uninsurable, you cannot purchase a policy.  One solution to this problem, of course, is to purchase policies while you are young and healthy. The other solution is to shop around. Every company has its own underwriting criteria.

What to Look for In a Long-Term Care Insurance Policy

In shopping for long-term care insurance, the first step is to choose a solid insurance company. Because it is likely you won’t be using the policy for many years, you want to make sure the company will still be around when you need it. Make certain that the insurer is rated in the top two categories by one of the services that rates insurance companies, such as A.M. Best, Moodys, Standard & Poor’s, or Weiss.

Typically, policies provide a daily benefit up to a specified dollar amount for a specified period of time. For instance, a policy may provide a daily benefit level of $150 for three years of coverage, for a total potential benefit of $165,000. On this basis alone, it would seem relatively easy to compare two policies. But then the variables begin:

• What is covered? You should purchase a policy that is comprehensive, meaning that it covers nursing home care, as well as home health and assisted living care. Most policies today cover care no matter where it is provided, while older policies may be more restrictive.
• What is the trigger for qualifying for coverage? In California, policies base qualification on cognitive impairment or the need for assistance in at least two activities of daily living (dressing, toileting, eating, transferring, bathing and continence).
• Inflation riders. While $150 with your income may be sufficient to cover your cost of care today, what about 10 or 20 years from now? Buyers are given the option of purchasing an inflation rider with the policy, which typically provide that the daily benefit increases by 5 percent a year, either on a flat or compound basis. Such riders can significantly increase the annual premiums. A rule of thumb some advisors follow is that purchasers under age 70 should purchase an inflation rider and those over age70 should not.
• Elimination period. The next choice is the length of the elimination period, which is the period of time the insured must wait before the policy will kick in. You will have to pay long-term care expenses while you wait. This waiting period can be between 0 or 90 days, or even longer. The longer the elimination period, the lower the premium.  We generally suggest a shorter waiting period, as the savings on a longer waiting period may not be significant.
• Claims record. The most important variable in choosing between companies has to do with their claims record. Do they honor claims on their policies on a timely basis without too much hassle, or do they put up roadblocks every step of the way? An article in the March 27, 2007, issue of The New York Times describes the practice of some insurance companies setting up bureaucratic barriers to the filing of claims for coverage in order to save money. The article focused on three companies, Conseco, Penn Treaty, and Banker’s Life and Casualty, which appear to purposely create roadblocks to coverage claims. For more info, click here. Keep in mind that if in order to qualify for insurance you fail to tell the insurer about an illness, the company may refuse you coverage at the time benefits are needed. It is better to be denied a policy at the time of application, and to be able to plan knowing that coverage is not available than to believe that coverage will be forthcoming, only to have it denied when it is needed.

Policies also offer the option of naming a second person to receive notice of any late premium payment. In the past many policyholders stopped paying premiums due to the onset of cognitive impairment, losing the policies just when they needed them. Now, at least, someone else can be given notice and the opportunity to step into the breach and save the policy.

Many potential purchasers of long-term care insurance object to the fact that in the best case scenario they’ll never use the policies and will never reap a benefit from their investment. As a result, some companies are beginning to offer combined long-term care and life insurance products. The buyer will have to determine whether this is a better deal than separate long-term care and life insurance policies. There are now also products that combine features of Long Term Care Insurance with Annuities, that may work well together, especially if someone is otherwise uninsurable.

One of the drawbacks of long-term care insurance is that companies are usually unwilling to guarantee that the premiums will not rise over time. One solution is an option offered by some companies known as “10-pay” policies. These policies only require 10 annual premium payments and then the policies are paid up for life. Of course, the premiums are higher over those 10 years, but when done the client’s long-term care funding is complete.

For a list of questions to ask before purchasing long-term care insurance, click here.

For more information on what a long-term care insurance policy should include, click here.

When Should You Purchase Long-Term Care Insurance?

The younger you purchase a policy, the lower the premiums will be. But if you are in your 40s, do you want to purchase insurance that you are unlikely to need for 40 years? Given the changes in the long-term care market place and in long-term care insurance itself over the past 10 to 15 years, it is hard to imagine what the world will look like in 40 years.

But if you wait until you are in your 70s, the premiums will be extremely high and you may be uninsurable due to health reasons. In 2005, a policy offering a $143 per day long-term care benefit for 5.5 years, with an inflation rider, cost a 55-year-old a national average of $1,877 a year, while the same policy had an annual premium of $2,003 for a 65-year-old and $2,604 for a 79-year-old.

So, the ideal time is probably in your 50s and 60s. One approach is to see how the premiums fit into your life and other obligations. If you have children who have not yet graduated from college, they will be your major concern. You should carry enough life insurance to see them through. But after your children, if any, are on their own, you might take the funds you were using to pay for life insurance premiums and use them to long-term care insurance premiums.

How Much Insurance Should You Purchase?

A number of considerations go into how much insurance any consumer should buy. In many areas of the country, nursing homes cost as much as $300 a day and assisted living facilities can cost more than half that amount. Home care can be less or more expensive, depending on the amount and level of care required.

One easy way to calculate a daily benefit is to take the average cost of care where you live or are likely to live when needing care and subtract from that your daily income. If, for instance, nursing homes cost $300 a day and your income is $3,000 a month, or $100 a day, then your daily benefit should be $200 a day. Remember:  the insurance policy only covers care expenses; you will need to rely upon savings or other income sources to pay for other expenses, such as fool and utilities.

The next factor is what period of time the policy covers. The shortest period of coverage available is two years. But policies can be purchased for longer periods of time or for the insured’s lifetime. Of course, the longer the policy’s coverage period, the higher the premium.

Most people don’t need lifetime coverage, so a good length of time is usually five years. It is unusual for someone to need care for more than five years. In addition, as explained in the discussion of Medi-Cal, Medi-Cal penalizes asset “gift” transfers aimed at qualifying for Medi-Cal.   The length of that penalty will depend upon various factors, including the nature, amount and date of such transfer or transfers.  When the recently enacted Deficit Reduction Act is fully implemented in California, there could be as much as a five (5) year period of ineligibility resulting from large asset transfers. If you purchase five years of long-term care insurance coverage, you could transfer most or all of your assets to your children or into a special irrevocable trust, pay for your care with your insurance over five years and then, if your assets are spent down, qualify for Medi-Cal coverage.  You should, however, consult an Elder Law attorney before embarking upon such a plan.

A policy paying $200 a day for five years will be expensive, especially if it includes an inflation rider. For those who cannot afford such coverage, you could think of long-term care insurance as “avoid nursing home” insurance. Under this approach, you may purchase enough insurance to pay for home care or assisted living care, which are usually not fully covered by Medi-Cal.

So, in the example above, if you purchased insurance with a daily benefit of $100 a day, you would have $6,000 a month (insurance + your income) to cover your living expenses plus home care or assisted living costs. Since the premium for this policy would be half that for one with a daily benefit of $200, it would be much more affordable.

For a further discussion of “How Much Long-Term Care Coverage Is Enough,” click here.

For a more detailed discussion of how to reduce long-term care insurance costs, click here.

Which Spouse Should Get Coverage?

Often, a married couple will be able to afford coverage for only one spouse. Looking at statistics alone, the wife should purchase the policy. In our society women tend to live longer than men and to provide more care than men. The result is that women are much more likely than men to end up in a nursing home for a long period of time. In addition, the Medi-Cal rules provide some protection for the spouse of a nursing home resident. For these reasons, the best bet for couples who can afford the premiums for one policy only is to purchase it for the wife. Couples should bear in mind, however, that this is playing the odds and is not a sure thing.

On the other hand, some companies offer incentives for both spouses to purchase coverage. The incentive may be either a premium discount or allowing both spouses to share the same coverage.

Long-Term Care Insurance and Medi-Cal Planning

While in large part people who purchase long-term care insurance and those who plan to qualify for Medi-Cal coverage of long-term care costs fall into separate groups, there are at least two situations where they overlap.

The first group is seniors who cannot afford to purchase lifetime long-term care insurance coverage. These individuals may want to purchase long-term care insurance coverage for five years. They may then transfer assets to family members or to a trust, keeping enough funds so that with the long-term care insurance benefit they can pay for their care for the subsequent five years. After five years have passed, the Medi-Cal penalty for transferring assets will have expired, permitting them to be eligible for Medi-Cal coverage if their other assets have been spent down to the appropriate limit.

The second group is seniors who are healthy and wish to transfer assets now, but who don’t have enough funds to cover five years of care if they had a stroke or other adverse medical event soon after the transfer. These seniors could purchase long-term care insurance to cover the five-year period after the transfer. They may not have enough funds or income to pay the premiums indefinitely, but are able to do so for five years, at the end of which they can decide whether to continue the policy, perhaps with the assistance of children.

For example, suppose a senior owns a home that she wants to protect, but little else. She could protect the home by transferring it into an irrevocable trust, causing her to be ineligible for Medi-Cal coverage for the subsequent five years. She would then purchase long-term care insurance and hold the policy for five years. If, for instance, the premiums on the policy are $5,000 a year and the house is worth $500,000, $25,000 is a very reasonable price to pay to protect $500,000.

For more on Medi-Cal planning, click here.

Partnership Policies

Many middle-income people have too many assets to qualify for Medi-Cal but can’t afford a pricey long-term care insurance policy. In an effort to encourage more people to purchase long-term care insurance, the Deficit Reduction Act of 2005 (DRA) created the Qualified State Long Term Care Partnership program. The program expands to all states the partnership programs currently available in four states – California, Connecticut, Indiana and New York.

The program offers special long-term care policies that allow buyers to protect assets and qualify for Medi-Cal when the long-term care policy runs out. Private companies sell long-term care insurance policies that have been approved by the state and meet certain standards, such as having inflation protection. The program is intended to provide incentives for people to purchase long-term care insurance policies that will cover at least some of their long-term care needs. As of April 2006, according to the AARP, 21 additional states had enacted legislation to authorize plans under the new law. Those states are: Arkansas, Colorado, Florida, Georgia, Hawaii, Idaho, Illinois, Iowa, Maryland, Massachusetts, Michigan, Missouri, Montana, Nebraska, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, Virginia, and Washington.

Under the new Qualified State Long Term Care Partnership program and California’s and Connecticut’s programs, the asset protection offered by partnership policies is dollar-for-dollar: for every dollar of coverage that your long-term care policy provides, you can keep a dollar in assets that normally would have to be spent down to qualify for Medi-Cal. So, for example, if you’re single, you would normally be allowed only $2,000 in assets in order to qualify for Medi-Cal coverage of long-term care. But if you buy a long-term care insurance policy that provides $150,000 in benefits, you would be allowed to retain $152,000 in assets and still qualify for Medi-Cal. (These states set limits on the assets that can be protected.)

In New York, the partnership policy benefits are even more significant. Once you have exhausted the benefits from your long-term care partnership policy, you can qualify for Medi-Cal coverage no matter your level of assets. In other words, an unlimited amount of assets can be protected.

Indiana offers either of the above models, depending on when the policy was purchased and the policy’s design.

Bear in mind that currently the Medi-Cal asset protection will only work if you receive your long-term care in the state where you bought the policy, or in another partnership state that has a reciprocal agreement with the first state.

The purpose of the partnership programs are to reduce Medi-Cal costs, however a study by the Government Accountability Office indicates that any cost savings will be limited. Click here to read the study.

For more information on the four original state partnership policies, visit the following Web sites:

• California: http://www.dhs.ca.gov/cpltc/default.htm
• Connecticut: www.Ctpartnership.org
• Indiana: www.in.gov/fssa/iltcp
• New York: www.nyspltc.org

The Tax Deductibility of Long-Term Care Insurance Premiums

Qualified long-term care insurance policies receive special tax treatment. To be “qualified,” policies must adhere to regulations established by the National Association of Insurance Commissioners. Among the requirements are that the policy must offer the consumer the options of “inflation” and “non forfeiture” protection, although the consumer can choose not to purchase these features.

The policies must also offer both activities of daily living (ADL) and cognitive impairment triggers, but may not offer a medical necessity trigger. “Triggers” are conditions that must be present for a policy to be activated. Under the ADL trigger, benefits may begin only when the beneficiary needs assistance with at least two of six ADLs. The ADLs are: eating, toileting, transferring, bathing, dressing or continence. In addition, a licensed health care practitioner must certify that the need for assistance with the ADLs is reasonably expected to continue for at least 90 days. Under a cognitive impairment trigger, coverage begins when the individual has been certified to require substantial supervision to protect him or her from threats to health and safety due to cognitive impairment.

Policies purchased before January 1, 1997, are grand fathered and treated as “qualified” as long as they have been approved by the insurance commissioner of the state in which they are sold. Most individual policies must receive approval from the insurance commission in the state in which they are sold, while most group policies do not require this approval. To determine whether a particular policy will be grand fathered, policyholders should check with their insurance broker or with their state’s insurance commission.

Premiums for “qualified” long-term care policies will be treated as a medical expense and will be deductible to the extent that they, along with other un reimbursed medical expenses (including “Medigap” insurance premiums), exceed 7.5 percent of the insured’s adjusted gross income. If you are self-employed, the rules are a little different. You can take the amount of the premium as a deduction as long as you made a net profit–your medical expenses do not have to exceed 7.5 percent of your income.

The deductibility of premiums is limited by the age of the taxpayer at the end of the year, as follows (the limits will be adjusted annually with inflation):

The Taxation of Benefits

Benefits from reimbursement policies, which pay for the actual services a beneficiary receives, are not included in income. Benefits from per diem or indemnity policies, which pay a predetermined amount each day, are not included in income except amounts that exceed the beneficiary’s total qualified long-term care expenses or $270 per day (in 2008), whichever is greater.

Consult With a Qualified Agent

If you are considering long-term care insurance, you need to consult with a qualified professional to determine whether you can afford this type of coverage and whether the policy you are considering meets necessary standards.

Long-term care insurance has attracted much media attention, and many insurance agents are now selling it. However, long-term care insurance is a complex product that should be approached with caution. ElderLawAnswers believes that insurance agents and brokers selling long-term care insurance should be highly trained and know how to recommend the right coverage based on a client’s finances and objectives.

One factor to consider is whether the agent has a professional designation in providing advice about long-term care. However, recommendations from friends and other advisors are also very important because they will have personal knowledge of the experience and integrity of the people they recommend.

If you would like a recommendation to a qualified insurance agent knowledgeable in this field, please contact us and we will be happy to make a recommendation. Our firm does not sell such insurance, but we can refer you to qualified persons who do. For more information contact The Law Office of Osofsky & Osofsky.

Long Term Care Planning For An Incapacitated Spouse

CASE STUDY:

Harry and Joan have been married almost 50 years. They have accumulated a comfortable “nest egg” of savings. However, Joan has been diagnosed with early Alzheimer’s, while Harry is in good health and provides care for Joan. Harry worries about the progression of Joan’s dementia. What if Harry develops a chronic illness or, worse, what if he dies before Joan? Harry wonders if there is any way that he can create a plan for the special needs of Joan if he dies before her, or if he suddently becomes incapacitated.

Harry had heard about something called a Special Needs Trust that would allow Joan to receive government benefits supplemented by their accumulated savings. But, he also heard that a “Living Trust” may not be the way to go. If correct, is there some other way to protect Joan?

GOOD NEWS! Yes, there is a way that couples can provide for the survivor in this situation. It requries some special planning. Instead of relying upon a “Living Trust” as the primary estate planning device, Harry should consider creating a Will which contains Special Needs Trust provisions for Joan. His plan should be entirely coordinated with the Will. If Harry dies before Joan, the Will — not the trust — will help protect Joan and provide for her needs. If necessary, Harry can apply to the Superior Court under the special “Substituted Judgment” procedure to adopt a comprehensive plan for both of them. This kind of planning takes special skill and knowledge about government benefits. Our firm may be able to help.

Knowing that there is a solution may give both of them greater peace of mind as they approach the challenges of aging and Joan’s progressing disability. NOTE: Where both spouses have capacity and are able to fully participate in planning decisions, we offer the Spousal Protection Plan to secure their future.

Books on Long-Term Care Insurance

“Taking Care Of  Tomorrow”.  The State of California publishes this excellent resource, which is free and can be downloaded from the internet. It includes discussion on the California Partnership Policy.

Choosing the Right Long-Term Care Insurance. A consumer advocate and insurance industry veteran delivers the straight stuff on whether you need long-term care insurance and how to make an intelligent purchasing decision.

Long-Term Care Insurance: The Essentials. This free booklet provides information on long-term care insurance.

Long-Term Care: Your Financial Planning Guide. If you have ever wondered whether you need long-term care insurance, this book is a must-read. The author argues that if you have assets of between $50,000 and $2 million (excluding home and car), you should seriously consider purchasing such coverage.

For more information contact The Law Offices of Osofsky & Osofsky