A Risk Management Approach To Long-Term Care
The purpose of this paper is to help the reader become more aware of the growing issues and concerns over long-term health care cost and the ways to handle the risks involved. Long-term care will first be defined, and then the problem of long-term care will be examined. This will be followed by the answer to the question of who should buy long term care insurance, and will conclude with the evaluation of the long-term care insurance policy. The focus is on the individual and the ways he or she may be affected by a personal or close experience with the aging process and the health care costs associated with growing older.
What is Long Term Care (LTC) ?
Long–term care (LTC) is a general term that includes a wide range of services that address the health, medical, personal care and social needs of people with chronic or prolonged illnesses, disabilities and cognitive disorders (such as Alzheimer’s). It is the assistance individuals need when they are unable to care for themselves and need help with activities of daily living (ADL’s) such as dressing, bathing, toileting, transferring, and eating, or have severe cognitive impairments.
Activities of Daily Living (ADL’s) are often defined as:
- Dressing. This is the ability to put on or take off the garments one usually wears, as well as any medically necessary braces or artificial limbs, and to fasten and unfasten them by oneself
- Bathing. This is the ability to wash oneself in the bathtub or shower, or by sponge bath from a basin, with or without the aid of equipment.
- Toileting. Toileting is the ability to maintain a reasonable level of personal hygiene while performing this function, either by one’s ability to make normal use of a toilet (getting to and from the toilet and transferring on and off, with or without equipment) or by one’s ability to effectively use appliances or protective undergarments designed to collect body wastes.
- Transferring. This is the ability to move in and out of a chair or bed with or without the aid of equipment (including support and other mechanical devices).
- Eating. Eating means being able to get nourishment into one’s body by any means once it has been prepared and made available.
These definitions are general and for illustrative purposed only. Each insurance contract will have the contractual definitions in the contract and can differ from company to company.
These services are most typically required by the elderly but may also be used by disabled people of any age. The need for long term care can result from an accident, chronic illness or other disability, or from advancing age. Long-term care is no longer for older individuals, as many people believe. It’s true that more than half of the people needing long term care today are 65 or older, yet almost 40 percent are working age adults between 18 and 64.2
Long-term care differs from traditional medical care as it is designed to assist a person to maintain his or her level of functioning, as opposed to care or services that are designed to rehabilitate or correct certain medical problems.3
Long-term care may be provided by family, friends or a number of health care professionals and may require different types of care depending on individual conditions. This care is usually divided into two broad categories: skilled care and personal care. Skilled care is continuous around the clock care provided by licensed medical professionals under the direct supervision of a physician. Skilled care is generally provided in a nursing home, but may also be provided in other settings, such as the patient’s home with help from visiting nurses or therapists. Personal care is also sometimes called custodial care and is for people who do not need ongoing health or medical services, but rather only need help with ADL’s. Household chores are also considered personal care. It is less intensive or complicated than skilled care and can be provided in many settings, including nursing homes, adult day care centers, or at home.
Verbiage from insurance companies often describes three levels of care: 1) skilled care; 2) intermediate care, and; 3) custodial care. Intermediate care is very similar to skilled care but is usually only needed intermittently. Registered nurses, licensed practical nurses and nurse’s aides under the supervision of a physician provide it. These services can be provided by:
- Assisted Living Facilities. These facilities provide an independent living environment while offering personal care services, meals, shopping, housekeeping, social activities and transportation. They also provide twenty-four hour nursing supervision for such things as medication, ambulation or dressing.
- Home Health Care Agencies. These are state licensed or accredited organizations that provide home health care in a person’s home.
- Adult Family Homes. This type of facility is a single-family home located in a residential neighborhood, which provides housing, meals, and some assistance with ADL’s for a limited number of residences.
- Adult Day Care Centers. Institutions designated to provide custodial care to individuals who are unable to remain alone. Usually during working hours while the other spouse or caregiver is away.
- Continuing Care Retirement Communities. These facilities usually require an initial lump-sum payment followed by monthly maintenance charges to provide a combination of informal and formal care. Residents live in the facility independently but have skilled care available if needed.
The Problems with Long Term Care (LTC)
1. an aging society
Unfortunately, there are many problems associated with long-term care. The first is that America is really a rapidly aging society. Americans are living longer and many can expect to live a substantial portion of their lives in retirement. That’s the good news. The bad news is, although statistics regarding longevity for older Americans may be improving, many individuals over age 65 still have to deal with poor health during their retirement years.4
As people age, they consume a larger proportion of health care services because of chronic illnesses, such as Alzheimer’s disease, heart disease, arthritis, senile dementia and stroke. Poor health means increased medical bills for services, medicine and equipment that may be only partially covered by health insurance. And an extended nursing home stay or around the clock nursing care can quickly deplete a lifetime of savings.
Individuals often become more dependent on others for care as they age. In many cases they turn to loved ones who may not have the time, ability or desire to meet their needs. Frequently, the adult child is also a senior citizen who finds it difficult or impossible to care for a much older parent. Because of medical advancements, the chronically ill can be kept alive longer but often at tremendous financial and emotional costs.
2. Societal Changes
Today, even though most families would prefer to take care of their parents or other elderly relatives, they will have a difficult time providing that care due to the tremendous social changes that have affected the traditional family structure.
Some of these changes include:
- Women in the work force
- Lower birth rate
- Increased mobility
- Increased longevity
These changes have had both social and political consequences as well as having limited the number of family members available to care for elderly relatives.
Women in the Work Force
Women traditionally married, raised their children and then cared for their elderly parents or in-laws. They very rarely worked outside the home. Now women are fully integrated into the work place and have replaced the duties at home with the duties of the work environment. It is now socially expectable for a woman to choose a career in addition to or instead of a family.
Lower Birth Rates
American families at one time required large families to operate the farm or other necessities of life. As they moved into the city’s the importance for large families lessened. Today birth rates are down and large families are rare. Smaller families, however, reduce the number of children available to care for their own aging parents.
Divorces have created many single parent families that have limited resources and do not allow them to take on the added financial and emotional responsibilities of caring for an aging parent.
Most individuals leave their childhood homes to marry, travel or pursue career opportunities. Once, children moved only a few blocks from home, but now they often live hundreds or thousands of miles from their parents.
Thanks to medical technology and better healthcare, people are living much longer after retirement. In fact many adults support both their children and their parents.
Eventually, almost everyone who lives long enough can expect to lose some ability to function that will require some ongoing assistance from another person. Whether the disability is sudden and major, such as a stroke, or gradual, such as a loss of vision or hearing, the elderly person will require some assistance in the home, at an adult day care center or in a nursing home. Increasingly, long-term care is becoming a predictable life event for a large part of our population.
In addition to the aging of Americans and the changing social and political perspectives, long-term care cost can quickly deplete someone’s savings. In 2000, the national average cost for private nursing home care was $55,845 ($153/day) a year and went as high as $107,675 a year.6 The cost of nursing home care is increasing by five to 10 percent per year. The average stay in a nursing home is around two and a half years, however, the overall care period averages closer to five years. These costs are only averages and can vary widely across the country. In-home personal care services average between $15.00 and $50.00 per hour. The average cost experienced in Washington is approximately $174.00 per day for nursing home expenses.
Independent Sources of Financing
Currently Long-Term Care Costs Are Paid in the Following Manner7
Many elderly people think that their health care needs will be met by their health insurance, Medicare, Medigap polices or government programs, however, that usually is not the case. Most group medical plans and HMO’s do not cover long-term care expenses. However, these policies will be of little use should the elderly person develop a chronic illness and need nursing home care.
Currently, Medicare pays only for short term, skilled nursing home care following hospitalization. It was designed to pay for hospital and doctor’s charges for people over the age of 65. The facility must be Medicare-approved and the person must enter the rehabilitative facility within 30 days after three consecutive days in the hospital. This is measured as 72 consecutive hours in the hospital. The care must be designed to make the patient well rather than to help with personal needs or custodial care on a long-term basis.
Even if the patient meets all the requirements, Medicare pays only the first 20 days of nursing home care in full. The patient pays a co-payment for the next 80 days and after that, Medicare pays nothing. This means that after 100 days, the patient and or family is on its own.
Unfortunately, Medicare leaves many “gaps” in its coverage. With its structure of limited benefit periods, deductibles, co-payments and exclusions, the coverage it provides is limited. To fill these gaps many people purchase a Medigap insurance policy. These are private insurance policies that are designed to fill in the deductibles and co-payments in Medicare coverage. Medigap insurance policies, though, pay only for Medicare approved expenses that do not include custodial care. So, unless you are already in a skilled nursing facility and meet all the qualifications, a Medicare supplement will be of little use for long-term care.
Medicaid is one of the largest payers of long-term care expenses and in fact is the only public program available that covers the cost of long-term care. It is a program of medical assistance for people with low income and limited assets and is jointly administered and funded between the federal and state governments.
To determine Medicaid eligibility, a person must fall within the income and assets rules for the state in which they live and it must be determined that skilled care in a nursing home is required. The income and assets allowable are usually at welfare levels and the rules differ for a single person and for married couples. Income includes such things as social security, veterans benefits, interest earned on investments and wages. Assets include such things as real estate, bank accounts, stocks, bonds and other investments. There are certain assets that are not counted against the allowable limits and include a personal residence, household goods and personal effects, some real estate sales contracts, a car, life insurance with a face value of not more than $1,500, the values of certain annuities, most burial plots and prepaid burial plans, and certain other property and items used for self-support.8 The allowable values of these exempt assets can change over time.
In order to qualify for Medicaid, it is not uncommon for people to give away their assets to family members. However, there are strict rules for uncompensated transfers that may cause a period of ineligibility and prevent or delay Medicaid qualification. Gifts among spouse are allowed and unlimited. Gifts to a non-spouse have a thirty six-month look back period and gifts to a trust have a sixty-month look back period. During a period of ineligibility, a Medicaid applicant is disqualified from long–term care services. However, if an applicant transfers assets and waits out the look-back periods before applying for benefits, there is no period of ineligibility regardless of the amount transferred.
This is only a summary of the very complicated Medicaid eligibility rules and is not intended to substitute legal advice.
Personal Assets and Savings
Personal assets and savings usually include cash or near cash items as well as any real or personal property that an individual owns and could be converted to cash with in a reasonable time frame. These items usually include savings accounts, certificates of deposit, mutual funds, stocks, bonds, and so on. The bottom line is that significant portions of long-term care costs are paid out of pocket by individuals and their families. The result can be catastrophic. After paying for one year of long-term care, 72% of elderly Americans are impoverished.9 In one survey, 31 percent of families reported that they depleted a large part or all of their savings to pay for long term care.10
Other Veterans’ Administration Benefits
Some people are entitled to limited nursing home coverage from the Veterans’ Administration (VA) if they are directly discharged from a VA hospital into a nursing home or if the patient’s need for a nursing home is a result of a service connected disability.
In conclusion, unless the individual is willing and able to pay long term care expense out of their own pocket, possibly down to the state required Medicaid limits, they don’t have a funding source for long-term care. This is where long-term care insurance may be a very viable option. Since the chances are that one way or another most people will personally pay for long term care expense, they should find the best way to limit their out-of-pocket expense. Often insurance products will accomplish this.
Who should buy Long Term Care Insurance?
Before examining who should buy long term care insurance, a review of the risk management process will help to show how insurance works as a risk management tool.
There are four basic steps in the risk management process. The first is to identify the problem and the potential losses. Second, the risk must be evaluated and measured. Third, alternative methods, techniques and combination of techniques for treating loss exposure are considered. And the fourth step is to administer and implement the risk management techniques chosen.11
It is relatively easy to identify both the financial and non-financial problems associated with long-term health care. These problems were previously identified.
Risk Evaluation and Measurement
After the potential losses are identified, the next step is to evaluate and measure the impact of losses. This involves looking at the severity and frequency of loss as determinants of risk treatment. Loss severity refers to the probable size of the losses that may occur and Loss frequency refers to the probable number of losses that may occur during some given time period.12 The risk associated with long-term health care are high in severity and low in frequency. Long-term care illnesses are usually very expensive (high severity) and usually occur only once (low frequency).
Alternative Risk Treatment Methods
The third step is to examine alternative methods, techniques and or combination of techniques to properly treat the severity and frequency of the potential loss due to a long-term health care condition. The five major risk management techniques for treating loss exposure are avoidance, retention, noninsurance transfers, loss control (reduction), and insurance.
Avoidance means that a certain loss exposure is never acquired, or an existing loss exposure is abandoned.13 The risks of needing long-term health care are just about impossible to avoid. Unfortunately, all people face the risk of someday requiring medical assistance and the risk management technique of avoidance is not an option.
Retention means that part or all of the losses that result from a given loss exposure are retained. Retention can be effectively used in a risk management program when certain conditions exist. First, no other method of treatment is available. Insurers may be unwilling to write coverage, or the coverage may be too expensive. Noninsurance transfers may not be available. Loss control can reduce the frequency of loss, but not all losses can be eliminated. In these cases, retention is a residual method. If the exposure cannot be insured or transferred, then it must be retained. Second, the worst possible loss is not serious. And finally, losses are highly predictable. The risks of long-term care can definitely be retained in part or in whole but the risks associated with it are serious and are not predictable.14 Since there are other treatments for long-term care risks and there are several insurance companies offering coverage, the risk should only be retained in whole when the person is able or willing to handle the financial consequences. Retaining part of the risk may make more sense than retaining the whole risk. Some would call this retention self-insuring. A better way to express it may be to call it self-funding.15
Noninsurance transfers refer to methods other than insurance by which a pure risk and its potential financial consequences can be transferred to another party.16 It would be impossible for one to transfer his or her risk of long term health care to another.
Loss control activities are designed to reduce both the frequency and severity of losses. The purpose of loss control activities is to change the characteristics of the exposure so that it is more acceptable.17 With long-term care, it is very difficult to reduce the frequency of the risk. The severity cannot be reduced but merely shifted or transferred elsewhere. Either way, the risk is not made more acceptable.
Insurance can be advantageously used for the treatment of loss exposures that have a low frequency and a high severity. The risks with long-term care meet this definition and insurance is quite often an excellent way to handle the risk.
Risk Implementation Administration
At this point, three of the four steps in the risk management process have been discussed. The fourth step is implementation and administration. In handling the risks of long-term health care, there are only two risk management techniques that are applicable: insurance and retention. So, the problem is really reduced to risk financing. How to pay for the risk. People will either retain the risk and chance having to pay the full cost of care out of their pockets or choose to pay a premium to an insurance company in which case the insurance company would pay for the covered charges. The other option is to use a combination of retention and insurance. This is usually done because people cannot or do not want to pay an insurance premium. The key point here is that when evaluating LTC insurance, it should not be an all or nothing decision.
The understanding of the risk management process can be a guide in helping focus on who should use the risk transfer technique and purchase long-term care insurance.
Not everyone should buy a long-term care insurance policy. For some, a long-term care policy is an affordable and attractive form of insurance. For others, the cost is too great, or the benefits they can afford are insufficient. You should not buy a long-term care policy if it will cause a financial hardship and make you forego other more pressing financial needs.
It is difficult to predict who will need long term care, but there are studies that help shed some light on the likelihood of needing such care. For example, one national study projects that 43 percent of those people who turned age 65 in 1990 will enter a nursing home at some time during their life. The same study reported that among all persons who live to age 65, only 1 in 3 will spend three months or more in a nursing home; about 1 in 4 will spend one year or more in a nursing home; and only about 1 in 11 will spend five years or more in a nursing home.18
Factors to Evaluate
After identifying the potential need for health care, age, ability, financial situation and marital status of the individual should be considered. In addition to these attributes, evaluate LTC for the community spouse with those people who have qualified for Medicaid.
Although policies are available from age 18 to 99, the average client is between 60 and 75. People under 40 are usually still more concerned with retirement and college planning while people over the age of 84 are not likely to qualify for coverage because of their health history. There are companies that do impaired risk underwriting, but sometimes the policies they offer are not adequate or the premiums are unaffordable.
Underwriting for long-term care insurance is different from that of life insurance since the applicant’s ability to function is analyzed. The underwriting decisions are based more on morbidity (the chance of becoming disabled) than mortality (the chance of death). Underwriters look for diseases, injuries or illnesses that could lead to loss of function. For example, arthritis may not affect underwriting for life insurance, but it would be an important factor in long term care underwriting. In general, individuals with signs of a chronic condition that would likely lead to a loss of function will not qualify for coverage. Further, as individuals age, their likelihood of qualifying for LTC coverage decreases because chronic conditions begin to set in as we age.
When evaluating if one should purchase a long-term care insurance policy, the financial conditions of the situation need to be considered. Both assets and income need to be analyzed in order to accurately measure the need for insurance.
Assets. When it comes to assets, there are three groups of people. People with liquid assets below $42,000 (the 2004 Medicaid resource limit), people with liquid assets of $900,000 and up, and people between $42,000 and $900,000
Group IGroup IIGroup III$42,000 or Less$42,000 to $900,000$900,000 or More
For Group I, long-term care insurance is not a need, because they can easily qualify for Medicaid. For this group LTC insurance is still an option if they can afford it, and they would prefer not to go the Medicaid route, but it is not a need.
For Group III, long-term care insurance is not a need because they could self-insure. For this group LTC insurance is still a good option, because it makes good business sense to use professional insurance and minimize their out of pocket expenses, but it is not a need.
Client age 65 at time of LTC purchase
Client age 75 at time of claim (ten years from now)
Client requires 3 years in nursing home
Current cost of care $63,000 per year
Inflation rate 5%
Care cost at time of claim $102,620
The potential problem is that if the client requires a 3-year nursing home stay with an average annual cost of $102,620, the total expense incurred would be $307,860. (3 years x $102,620 = $307,860)
Here the client has two choices: A) they don’t transfer the risk and use 100% of their own money to pay for the expense. In this case it would be $307,860, or B) they transfer the risk and purchase a LTC policy with the following features.19
$170 per day benefit
Compound Inflation option at 5%
3-year minimum policy period
Annual premium $1,828
Total cost of policy for 10 years $18,280
In option “B”, the total cost of care is still $307,860 but instead of the client paying for the total cost, they only paid $18,280 of the $307,860. This represents only 6.0 percent of their own resource. Again, for this group, LTC insurance is not a need but a good business decision.
For Group II, long-term care insurance is a good option because they have worked too hard to want to qualify for Medicaid and they probably would find it hard to move into Group III. For this group LTC insurance is almost a necessity. It should be noted, that for this group, Medicaid qualification could be a very expensive option due to the taxes incurred and other liquidation expense.
Income. In addition to analyzing assets, the available income that could be allocated for long-term care expenses needs to be considered. People with incomes below the cost of long-term health care cost would have a difficult time paying for the care out of their income. People with incomes above the cost of long-term health care expenses need to determine if the amount of income in excess of the care would be adequate to support other current living expenses.
For example, a married couple with an annual income of $40,000 and an annual nursing home expense of $50,000 would not have adequate income to cover their cost. This also would be the case for a single person.
If the couple had income of $65,000 and $50,000 of long-term care expense, their excess income would be $15,000. ($65,000-$50,000=$15,000). The couple would need to determine if the excess income of $15,000 would be adequate for their other living expense. For a single person, if their excess income would cover the remaining expense, long-term care insurance would not be a necessary. But again, it may be a good business decision.
In either the case of a married couple or a single person, if the income were not sufficient to cover both the long-term care cost and the other living expense, liquid assets would need to be consumed.
To summarize the assessment of the financial status, take this test. First, add up all annual sources of income from pensions, social security and the like. If married, add both spouses' income. To that figure add all investment income from interest, dividends, rents, etc. From total income, subtract the annual cost of a year in a nursing home in the area. If the difference between the income and the cost of a nursing home is a negative number, there is a problem. The principal will have to be spent immediately. Principal will be required to pay both the nursing home and to pay the living expenses for the spouse still at home. If the number is positive, ask the question: "Can I live on that?" If the spouse at home could not survive on the difference between the income and the cost of a nursing home, principal will be consumed to meet expenses.
If principal must be spent, how long will the assets last? If principal is consumed this year to pay the nursing home, there will be less to invest to produce income next year. If there is less to invest, the investment income will probably go down. If investment income goes down, more principal will be consumed next year to meet nursing home costs. This is the start of an accelerating downward spiral.
As mentioned in the financial status assessment, marital status can be a determining factor in deciding whether or not to purchase long-term care insurance. For a married couple, there is a strong need to preserve assets and income for the non-disabled spouse. Here long-term care insurance is a good solution. For a single person with assets and or income sufficient to handle the cost of long-term health care, the insurance is not a strong need but a good solution if preserving assets for heirs is desired.
The Community Spouse
For people who have qualified one spouse for Medicaid, it is important to evaluate LTC insurance for the well spouse. If the community spouse was to need long-term care and they were to seek assistance from Medicaid, they would have to qualify as a single person. For this reason, LTC insurance is one of the best ways to handle a future long-term care need.
Other questions to ask when evaluating the need for LTC insurance include the following:
- Do you have assets that you would like to protect or leave to others, that have sentimental value, or that will involve large capital gains consequences if given away?
- Can you afford the premiums?
- Are you unable or unwilling to pay out of pocket for a long duration of long term care if the need arose?
- Are you not currently disabled or seriously ill, but has a health history and lifestyle strongly suggesting risk for disabling disease or injury?
- Do you want to maintain independence and control over your money?
- Do you want to protect your family members and their lifestyle from the burdens of providing long-term care to a family member?
- Do you have an income level too high to qualify for Medicaid?
Evaluating The Long-Term Care Insurance Policy
The long-term care insurance market place has evolved greatly over the last several years and there is no shortage of quality policies to choose from. There are several companies selling policies with multiple combinations of benefits and coverage. Unlike Medicare supplement policies, non-qualified LTC policies are not standardized. In several states, however, all policies must cover all levels of care in a nursing home, whether custodial (personal) or skilled. They also must cover care for mental and emotional illness, including Alzheimer’s disease and senility, as well as for physical conditions.
A comprehensive policy may be purchased that covers the individual in a nursing home, adult day care center, assisted living facility, his or her own home, or just about any other setting. Or they can purchase a nursing home only or home care only policy.
Most policies will pay 100 percent of the daily benefit for skill care but many policies will reduce the percentage they pay if care is received for custodial care. Some policies will also reduce the benefits depending on where the care is received. For example, it will pay 100 percent for care received in a nursing home but only 80 percent for assisted living. Further, many polices allow the client to choose a lower coverage rate in order to keep the cost of the policy down. In this situation the policy may pay 100 percent of the daily benefit for nursing home coverage and the client could choose a 50 percent or 80 percent rate for home health care.
As long as the coverage is affordable, it is wise to have a policy that pays 100 percent at any level of care and 100 percent regardless of the care facility. This way the client can choose where he/she will receive care at the time of claim as opposed to at time of application.
Benefits are paid usually in one of two ways. A policy can be designed to pay for expense actually incurred (reimbursement) or by indemnity (in cash). In the reimbursement policy the insurance company either pays the client or the provider up to the limit contained in the policy. Here the policy will pay benefits only when eligible services are received. The indemnity method will pay benefits to the client directly in the amount specified in the policy without regard to the specific services received. Most of the policies offered today are reimbursement policies. They will use a pool of money concept or some will pay actual expense up to the daily maximum with any remaining benefit forfeited.
Daily benefit amount $100.00
3-year benefit period (365 days per year)
Actual expense for the day $75.00
Pool of MoneyActual Expense$100 x 365 days = $36,500
$36,500 x 3 years = $109,500
Pool of Money equals $109,500
If only $75.00 was used per day, the actual cost for the year would be $27,375.
This is the amount that would be subtracted from the pool of money. In this fashion, the benefits would last longer than 3 years. The policy would terminate once all the $109,500 had been used.Daily maximum Benefit $100.00
Actual Expense $75.00
Here the $25.00 is wasted and cannot be used at a later point in time.
The policy will terminate once 1095 days of care has been needed.
Under this example, if this were an indemnity policy, the client would have been paid the $100.00 directly (in cash) regardless of the actual charges. He/she could save or invest the difference between the actual charge and the policy’s daily benefit for use another day or simply spend the money.
Common Provisions in Long-Term Care Policies
Maximum Daily/Monthly Benefit
Most policies pay a fixed dollar amount for each day of care. Benefits can range from $40.00-$300.00 per day.
Lifetime Maximum Benefits
Most plans have a maximum benefit they will pay. It is usually expressed in years, such as 1,2,3,4,5,6 years or for lifetime.
Waiting Period (Deductible)
Most LTC policies require the client to pay their own way for a specified number of days before the insurance company will begin to pay benefits. They range from 0 to 180. Of course, the shorter the waiting period the higher the premium. Be careful of the policies that require the days to be consecutive.
Waiver of Premium
Some policies will waive the future premiums after you have been in the nursing home for a specified number of days. The most common is 90 days, but some companies waive the premium as soon as they make the first benefit payment. One thing to look for in the insurance contract is the requirement for the days to be continuous; this can delay the waiver. Language that does not require the days to be continuous is preferred. Some companies do not waive the premium for care received at home.
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.
There are a few typical inflation options offered by insurance companies, but not all-insurance companies offer the same options.
- Simple 5%; the original daily benefit increases each year by 5 percent.
- Compound 5%; the original daily benefit increases by 5 percent compounded.
- Consumer Price Index (CPI); the daily benefit increases by the percentage increase in the CPI.
Inflation must be considered when purchasing LTC but it is an option that another risk management technique may be used to handle. The reason is that these options are very expensive, and with proper money management, the savings in premium can be invested as an inflation hedge. Example: Premium with a compound inflation option $3500.00. Premium without compound inflation option $2000.00. The $1,500.00 savings can be invested each year for future costs. Not purchasing an inflation option is a more aggressive approach, so you need to be comfortable with this strategy.
If you are more comfortable purchasing an inflation option, here are some rules of thumb. For people below the ages of 60 use the compound option. For people 60 to 75 use the simple inflation option and for people over the age of 75 use the CPI or no purchased option.
This important provision will prevent the insurance company from canceling the policy for as long as the client continues to pay the premium when it is due. However, the insurer can raise rates on a class basis.
This 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. This is an undesirable provision.
Pre Existing Conditions
Some policies limit coverage of pre-existing conditions to discourage persons who have a diagnosed injury or sickness for which medical advice or treatment was sought prior to the effective date of the long-term care insurance contract. Further, some companies will sell a policy without underwriting the person and only investigate pre-existing conditions if a claim is filed within the first two years after purchase of a policy.
Restoration of Benefits
This benefit provides for the maximum amount of the original benefit to be restored, even if you have previously received benefits through your policy. Generally there is a stated period of time in which the person must go without requiring care before their benefits will be restored. This option is not necessary with a lifetime benefit period.
This benefit returns a portion of the premiums paid in the event that the policy is dropped or premiums are no longer paid. It may also provide the option to have a reduced paid up policy. With most companies, this is an expensive option.
Premium Refund Upon Death
This benefit refunds to your estate any premium you paid minus any benefits the company paid. Not all companies offer this option.
Alternative Plan of Care
Alternative care is care or services that are not specified in a policy, but that may be provided if it is appropriate and is agreed upon by the insurance company, the insured person and his or her physician. The alternative care benefits are provided in lieu of normal contract benefits.
This benefit pays to reserve the nursing home bed space left temporarily by the policyholder if he needs to go into the hospital, usually up to a designated maximum number of days.
Many policies offer a discount if both spouses apply and purchase coverage. Some will offer the discount if both apply but only one purchases a policy, and some will give the discount just for being married.
There are policies that will eliminate the premium for the living spouse if the other spouse dies, if both had a policy for a certain number of years.
Third Party Notice of Lapse
This benefit allows you to name a third party who would be notified by the insurance company if the policy were about to lapse because of non-payment of the premium. This third party, after they have been notified, would then have a period of time to pay the overdue premium. Individuals with cognitive impairments who have forgotten to pay the premium have had their policy lapse when they have needed it the most.
Benefit triggers are the terms and conditions that must be met before the policyholder can receive policy benefits. They are sometimes called gatekeepers.
The benefit triggers in non-tax qualified plans are different than those for tax-qualified plans. A comparison of these triggers and other differences between tax-qualified and non-tax-qualified plans will be summarized after the discussion on tax-qualified long-term care contracts. In most states, non-qualified plans only have three triggers that are currently allowed. These triggers are: the inability to perform three of six ADL’s, physician’s certification, and cognitive impairment. The most common method for determining when benefits are payable is the use of ADL's. The number of ADL’s and sometimes the types required to trigger benefits depends on the policy. In Washington, policies can have no more than a three of six requirements. Physician certification requires that the client’s doctor orders or certifies that the care is medically necessary and appropriate. Cognitive impairment is commonly described as deterioration for loss of intellectual capacity as shown by measurable deficits in the areas of memory, orientation, and reasoning, Alzheimer’s disease and similar forms of senility or dementia are conditions that can produce these deficits.
Tax Qualified Long-Term Care Contracts
Most of the information for non-qualified contracts will still be true for qualified contracts. Effective 1-1-97 both qualified long-term care insurance and out of pocket expenses are treated the same as that for accident and health. (IRC § 7702b). This was made possible by the Health Insurance Portability and Accountability Act (HIPAA).
The tax-exempt status of certain elements of long term care expenses made possible by this legislation often called the Kassebaum-Kennedy bill, stipulates the following.20
- Premiums for qualified insurance will be deductible as medical expenses
- LTC benefits received from qualified insurance will be received by the insured on a tax-free basis.
- LTC expenses not covered by insurance will be deductible as medical expenses by the insured.
- Employer paid premiums of LTC insurance will not be treated as income to the insured.
- Tax qualified policies must coordinate with Medicare.
- A nonforfeiture benefits option must be available in all policies. This means it must be offered but not that it must be standard in all policies.
- Policies sold from August 1996-January 1997 that meet state standards are grandfathered.
Generally, a long-term care insurance policy meets the definition of a “qualified long-term care insurance contract,” under Code section 7702B(b), if:
- the only insurance protection provided under the contract is coverage of qualified long-term care services;
- the contract does not pay or reimburse expenses incurred for services that are reimbursable under Title XVIII of the Social Security Act (or would be reimbursable but for the application of a deductible or coinsurance amount);
- the contract is guaranteed renewable;
- the contract does not provide for a cash surrender value or other money that can be paid, assigned or pledged as collateral for a loan or borrowed;
- all premium refunds and dividends under the contract are to be applied as a reduction in future premiums or to increase future benefits; (An exception to this rule is for a refund made on the death of the insured or upon a complete surrender or cancellation of the contract which cannot exceed the aggregate premiums paid. Any refund given upon cancellation or complete surrender of the policy will be includable in income to the extent that any deduction or exclusion was allowable with respect to the premiums. IRC Sec. 7702B(b)(2)(C);
- the contract satisfies certain consumer protection provisions concerning model regulation and model act provisions, disclosure, and nonforfeitability. Under Condo Section 7702B(g), in order to be considered a qualified long-term care insurance contract, a contract must also:
- meet certain provisions of the National Association of Insurance Commissioners’ (NAIC) long-term care insurance model regulation dealing with such issues as guaranteed renewal or noncancellability, prohibitions on limitations and exclusions, extension of benefits, continuation or conversion of coverage, replacement of policies, unintentional lapse, disclosure, post-claims underwriting, minimum standards, the requirement to offer inflation protection, and the prohibition against preexisting conditions and probationary periods in replacement policies;
- meet certain provisions of the NAIC long-term care insurance model act relating to preexisting conditions and prior hospitalization;
- meet certain nonforfeiture provisions (discussed below);and
- comply with the disclosure requirements of Section 498880C(d) (discussed below).
The nonforfeiture requirement is met for any level premium contract if the issuer of the contract offers to the policy holder (including any group policyholder) a nonforfeiture provision which:
- is appropriately captioned;
- provides for a benefit available in the event of a default in the payment of any premiums and the amount of the benefit may be adjusted only as necessary to reflect changes in claims, persistency and interest as reflected in changes in rates for premium paying contracts approved for the same contract form; and
- provides for at least one of the following: (a) reduced paid-up insurance; (b) extended term insurance; (c) shortened benefit period; or (d) other similar approved offerings. IRC Sec. 7702B(g)(4).
A policy will be considered to meet the disclosure requirements if the issuer of the long-term care insurance policy discloses in the policy and in the required outline of coverage that the policy is intended to be a qualified long-term care insurance contract under Code section 7702(b). IRC Sec.4980C(d).
Only premiums for qualified LTC insurance policies can be tax favored under the federal medical expense deduction. The benefit triggers that qualify a LTC plan for this tax treatment are:
- Certification by a licensed health care practitioner that the patient is unable to perform without substantial assistance from another individual at least two activities of daily living, for a period of at least 90 days due to a loss of functional capacity. This does not mean that a 90-day elimination period is required in the contract. It means that an anticipated 90-day period of loss of function must be certified. To be considered a qualified LTC contract, a policy must take into account at least five of these ADL’s in determining whether a person is a chronically ill individual under the ADL benefit trigger as defined above.
- Certification by a licensed health care practitioner that the patient requires substantial supervision for protection from threats to health and safety, due to severe cognitive impairment.
Tax IncentivesThe Act limits the annual amount of LTC premiums that can be deducted, based on the age of the insured.
Age Before Close of Tax Year
Individuals buying policies on their own will be able to deduct part of the premiums from federal taxes annually, if the total costs of medical and long-term care exceed 7.5 percent of income. Further, benefits from qualified long-term care insurance can be excluded as taxable income. Proceeds from a qualifying long term care insurance contract will not be taxed as income, subject to a cap of $240 per day or $87,600 per year on indemnity contracts. However, if per diem amounts exceed the limitations, benefits are only taxable to the extent they exceed actual expenses. 2005 = $240
Johnny is certified chronically ill on February 1, 2004. On March 1, 2004, his insurance policy begins per diem payments of $300.00 a day that continue through June 20, 2004, when he regains his health. Johnny’s limitation amount is $32,200 (140 days x $230). He received $33,600 from his insurance company (112 days x $300.00). Assume actual expenses totaled $32,200. Results: $32,200 is tax-free and $1,400 is includable in income.
Tax-Qualified vs. Non-Qualified Policies
There are important differences between tax-qualified policies and non-qualified policies. The differences were created due to the Health Insurance Portability and Accountability Act and should be examined before choosing one policy over the other.
Tax-Qualified LTC Policies
To qualify for favorable tax treatment, a LTC policy may provide insurance protection only for “qualified long term care services”. In general, the term “qualified long term care services” means necessary diagnostic, preventive, therapeutic, curing, treating, mitigating and rehabilitative services, and maintenance or personal care services, which:
- are required by a chronically ill individual; and
- are provided pursuant to a plan of care prescribed by a Licensed Health Care Practitioner
“Chronically ill” means the individual has been certified by a Licensed Health Care Practitioner as:
- being unable to perform, without substantial assistance
from another individual, at least two of the following Activities of Daily Living (ADLs): bathing, dressing, eating, toileting, transferring and continence; or
- requiring substantial supervision to protect the individual
from threats to health and safety due to seer cognitive impairment.
The ADL loss must be expected to last for at least 90 days, as certified by a Licensed Health Care Practitioner, and recertification is required every 12 months.
The Final Regulation issued December 1998 by the IRS describes “severe cognitive impairment” as a loss or deterioration in intellectual capacity comparable to (and including) Alzheimer’s disease and similar forms of irreversible dementia. Severe Cognitive Impairment means a severe deterioration or loss in:
- short-term or long-term memory
- orientation as to people, place or time, or
- deductive or abstract reasoning as reliably measured by clinical evidence and standardized tests.
Key and Provisional Differences, Non-Tax Qualified vs. Tax Qualified Policies 21,22
Non-Tax Qualified PolicyTax Qualified Policy Premiums
Premiums may be higher due to the contract being more liberal.Premiums can be included with other annual uncompensated medical expenses for deductions from income in excess of 7.5% of adjusted gross income up to a maximum amount adjusted for inflation.
Premium expense may be lower due to the contract being more restrictive.
Activities of Daily Living :
2 out of 6 ADL’s: Bathing, Dressing, Toileting, Transferring, Continence, Eating2 out of 6 ADLs Bathing, Dressing, Toileting, Transferring, Continence, Eating
Minor changes to comply with the NAIC model regulation which do not change the intent
Disability & Disabled Means that, due to sickness, injury or advanced age:
You are Cognitively Impaired; or You cannot perform 2 or more ADLs without Standby Assistance.Means you are unable to perform, without Substantial Assistance from another individual, at least two ADLs; or you require Substantial Supervision by another individual to protect you or others from threats to health or safety due to severe cognitive impairment
Licensed Health Care Practitioner
Not ApplicableMeans any Physician and any registered professional nurse, licensed social worker, or other individual who meets such requirements as may be prescribed by the Secretary of the Treasury
Means that you have suffered a deterioration or loss in your intellectual capacity which requires another person’s assistance or verbal cueing to protect yourself or others as measured by clinical evidence and standardized tests which reliably measure your impairment in: short or long term memory; orientation as to person, place and time; deductive or abstract reasoning. Such loss in intellectual capacity can result from Alzheimer’s disease or similar forms of senility, irreversible dementia, or Advanced Age.Means a severe deterioration or loss in Short or long term memory; orientation as to person, place and time; or deductive or abstract reasoning; as reliably measured by clinical evidence and standardized tests. Such a loss can result from a Disability, Alzheimer’s disease, or similar form of dementia.
Stand-by Assistance Means you require the presence of another human being to ensure that all or part of an ADL may be completed or to ensure that all or part of an ADL may be completed or to ensure your safety. Stand-by assistance may also mean that in order to accomplish an ADL, you need verbal cueing.Substantial Assistance Means stand-by assistance without which you would not be able to safely and completely perform the ADL
Cognitive Impairment Assistance
Covered under Stand-by Assistance Substantial Supervision Means the presence of another individual for the purpose of protecting you from harming yourself or others.
Benefit Eligibility and Taxation Loss of 2 or more ADLs or Cognitive Impairment; Receiving services in a Long Term Care Facility, Assisted Living Facility or Home Care (if applicable); Satisfy the Elimination Period
Medical necessity and or other measures of disability can be offered as benefit triggers
Policies can offer different combinations of benefit triggers and may not be as restrictive.
Benefits may or may not count as income. The U.S. Department of the Treasury has not yet ruled on this issue.You become disabled;
Receiving services in a Long Term Care Facility, Assisted Living Facility or Home Care (if applicable);
Satisfy the Elimination Period;
A Physician certifies that you are unable to perform two or more ADLs for a period of at least 90 days, or that you have Severe Cognitive Impairment. Treatment and Services must be provided pursuant to a plan of care developed by a Licensed Health Care Practitioner
Medical necessity cannot be used as a trigger for benefits.
Benefit Triggers are limited to federal law.
Benefits received are not counted as income.
Certification of Loss NoneA 90-day pre-certification by a Physician is required. The pre-cert must state the loss of ADLs will last for a period of at least 90 days
Alternative Benefits Rehabilitation and Alternative Care PlansRehabilitation and Alternate Care Plans with requirement that services/equipment must be medically necessary and appropriate for the Disability and provided pursuant to a plan of care.
Proof of Claim Claimant must provide:
What the disability is; the cause of the disability; The address and place of residence used; and the name and address of the attending physician.Claimant must provide:
Date of disability; Cause of disability; Extent of disability; Physician certification; Copy of the plan of care and other proof we may deem necessary
When asked the question “What is long-term care?” the typical answer would be that it is care provided in a nursing home for old people. In today’s society, the perception of what long-term care is has drastically changed. Today’s definition has broadened to include a wide range of services that address the health, medical, personal care, and social needs of people with chronic or prolonged illnesses, disabilities and cognitive disorder. Most often it is referred to as needing help with activities of daily living. And it is not just for old people. People of all ages are at risk.
The problem with the new definition of long-term care is that it can be emotionally, mentally, physically and financially devastating to not only the individual requiring care, but for the entire family. Some of these challenges have been caused by the social changes in our country and others have been caused by the rapidly increasing economic aspects of providing long-term care services.
With the increasing problems surrounding long-term care issues, the way we handle the risks involved should be examined from a risk management point of view in order to better evaluate who should buy long term care insurance. The conclusion here is that for many individuals, long-term care insurance is an excellent technique for handling the risk associated with long-term health care issues. However, it is not appropriate for everyone and these people may use other risk management techniques more suited to their situation.
For the people who choose to use insurance to handle their long-term care risks, there are several decisions to be made in selecting a contract that will meet their needs. Today’s policies offer both comprehensive coverage and limited coverage in tax-qualified and non-qualified contracts. The contracts contain benefit flexibility so that each individual’s specific needs can be addressed in designing their coverage. In the end, there are several well-respected companies who offer this type of insurance and with careful analysis; proper coverage should be able to be obtained.
1.Washing state Long-Term Care Training Manual. 19982.Employee Benefit Research Institute, Issue Brief No. 163, July 1995, p.6.3.Washing state Long-Term Care Training Manual. 19984-5.Goetze, Jason, Long-term Care. 1993 by Dearborn Financial Publishing, p. 2-7.6.Metropolitan Life Insurance Company, Mature Market Institue, (2000) study.7.U.S Department of Health and Human Services.8.Bleck, Sean, “Medicaid Coverage for Nursing Home Care,” Isenhour Bleck, P.L.L.C. 1999.9.