Frequently Asked Questions - Long-Term Care Insurance

Long-term care (LTC) is the assistance required by an individual who has a chronic illness or disability that leaves him or her unable to care for him- or herself for an extended period of time. This illness or disability may be physical or mental in nature. Frequently, one receives LTC after recovering as much as possible from an accident or illness. LTC may be provided in a variety of settings, including, but not limited to the individual’s own home, an adult day care facility, or a residential care facility (e.g., an assisted living facility, a skilled nursing facility). Such care includes both skilled nursing care and custodial care, and may be required by individuals of any age.

A 2009 study by the National Alliance for Caregiving estimates that there are 36.5 million “caregiving households” in the United States – i.e., households in which at least one person has served as a caregiver withion the last twelve months. This represents 31.2% U.S. households, and an estimated 65.7 million people who have served as unpaid caregivers in the twelve months prior to the survey. 1

On average, these caregivers of adults spend approximately 18.9 hours per week providing care,2 and most (58%) assist their loved one with at least one ADL.3 However, 32% of the caregivers were classified as “high burden” caregivers (based on average hours of care and the IADLs/ADLs with which they provided assistance).4 Such individuals provide an average of 46.9 hours of care each week, including assisting with 3.2 of six ADLs and 5.5 of seven IADLs.5

While the NAC survey found that, on average, caregiving lasts 4.6 years, 34% of the caregivers surveyed indicated that they had been providing care for one to four years and 31% for more than five years, including 15% who have been caregivers for 10 or more years.6

All caregivers of adults who responded to the NAC survey said that they assist their care recipient with at least one Instrumental Activity of Daily Living (IADL), and, on average, they assist with 4.4 out of seven IADLs. The chart of Assistance with IADLs shows the percentages of caregivers who assist with each IADL.7

As noted above, more than half of all caregivers (58%) assist with at least one Activity of Daily Living (ADL), and on average, caregivers provide help with 1.6 of the six ADLs. The chart of Assistance with ADLs shows the overall percentage of caregivers who help with each of the ADLs.8

 

1 “Caregiving in the U.S. 2009,” (n.p.: National Alliance for Caregiving in collaboration with AARP, November 2009), 4. Internet, August 17, 2010. Available: http://assets.aarp.org/rgcenter/il/caregiving_09_fr.pdf.
2 Ibid, 5.
3 Ibid, 22, figure 17.
4 Ibid, 28.
5 Ibid, 28, figure 22.
6 Ibid, 20,figure 14.
7 Ibid, 24, figure 18.
8 Ibid, 22, figure 17.

A survey published in November 2009 by the National Alliance of Caregiving in collaboration with AARP, revealed the following:

  • 65% had been giving care for 1 or more years and 15% had been caregivers for 10 years or more. 1
  • 48% of caregivers of adults were employed full-time, while 10% were employed only part-time. 2
  • 69% of working caregivers of adults reported having to make changes in their work situation. Most typically, such changes related to cutting back on hours worked: 65% of such caregivers reported going in late, leaving early, and/or taking time off work. 3

The NAC study also found that caregiving results in physical strain, emotional stress, reduced time for friends and other family members, and financial hardship. The impact of caregiving on any given individual varies depending on the level of care being provided, with 14% reporting a high degree of physical strain,4 31% reporting that they were highly stressed,5 52% reporting reduced time for family and friends,6 and 13% reporting a high degree of financial hardship.7

 

1 “Caregiving in the U.S. 2009,” (n.p.: National Alliance for Caregiving in collaboration with AARP, November 2009), 20, figure 14. Internet, August 17, 2010. Available: http://assets.aarp.org/rgcenter/il/caregiving_09_fr.pdf.
2 Ibid, 53, figure 49.
3 Ibid, 54, figure 50.
4 Ibid, 49, figure 44.
5 Ibid, 50, figure 45.
6 Ibid, 51, figure 46.
7 Ibid, 51, figure 47.

“The MetLife Caregiving Cost Study: Productivity Losses to U. S. Business,” published in July 2006, considered the impact of lost productivity due to employees who are caregivers. This study estimated that 15,933,0001 Americans work full-time and care for someone over the age of 18; and that 44% of these caregivers (7.0 million)2 have intense, or “high burden” caregiving responsibilities.

The study went on to estimate that the likely cost of caregiving to US businesses ranges between $17.1 billion (the estimated cost only for “intense” caregivers) and $33.6 billion (for all working caregivers), due to the various adjustments working caregivers make to balance work and caregiving. These estimates are as follows:

 

  “Intense” Caregivers3 All Caregivers4
Replacing employees who quit $2,822,461,694 $6,585,310,888
Absenteeism 3,430,263,991 5,096,925,912
Arriving late or leaving early 824,512,465 1,923,730,754
Workday interruptions 2,832,971,162 6,282,281,750
Eldercare crises 1,628,347,501 3,799,217,477
Supervisor time 780,268,472 1,796,385,842
Unpaid leave 1,447,420,001 3,377,082,202
Reducing from full-time to part-time 3,349,727,407 4,758,135,522
Total $17,115,972,695 $33,619,070,346

 

1 “The MetLife Caregiving Cost Study: Productivity Losses to U.S. Business,” (Westport, CT and Bethesda, MD: The MetLife Mature Market Institute and National Alliance for Caregiving, July 2006), 12. Internet, August 23, 2010: Available: http://www.caregiving.org/data/Caregiver%20Cost%20Study.pdf
2 Ibid, 6.
3 Ibid, 11.
4 Ibid, 17.

When employees are faced with a long term care need – either for themselves or their family – it impacts their productivity. It is estimated that the cost to business of caregiving in terms of lost productivity is between $17.1 and $33.6 billion per year.1

Employees who provide care for a family member often experience increased absenteeism and may even stop working to provide such care. With long term care insurance in place, employees are better able to focus on their work responsibilities, without neglecting their family responsibilities.

Corporate-sponsored LTC insurance plans also offer employees the advantage of guaranteed issue coverage. This feature can make it possible for employees who would otherwise be uninsurable due to pre-existing conditions (e.g., multiple sclerosis, diabetes, or even loss of one or more activities of daily living) to obtain long term care insurance. Obviously, employees perceive great value in such a benefit!

 

1 “The MetLife Caregiving Cost Study: Productivity Losses to U.S. Business,” (Westport, CT and Bethesda, MD: The MetLife Mature Market Institute and National Alliance for Caregiving, July 2006), 11 and 17. Internet, August 23, 2010: Available: http://www.caregiving.org/data/Caregiver%20Cost%20Study.pdf

Nine basic features are key components of any LTC insurance plan:

While many LTC plans offer other benefit features, these are the most important features, which are essential elements of any plan design.

The daily benefit amount is the maximum amount you can expect to receive for any day on which you are eligible for benefits. In designing your LTC insurance plan, you want to choose a daily benefit that will cover most, if not all, of your likely cost of care when you become benefit eligible. With many types of insurance, one minimizes the cost of the insurance by accepting some level of risk in the form of copayments. However, with LTC insurance, we recommend that any such self-insurance be in the form of (1) an elimination period or (2) a limited benefit duration (i.e., lifetime maximum benefit). As a general rule, a “short and fat” LTC plan – i.e., one with a large daily benefit and a somewhat short benefit duration – is better than a “long and thin” one.

Most LTC plans pay benefits by reimbursing you for costs incurred for covered services. With such plans, it is important to determine (1) how costs are accumulated for reimbursement purposes and (2) which costs will be considered to be “covered services.” For example, a plan that accumulates costs throughout the month and compares them to the daily benefit times the number of days in the month will pay as much or more than a plan that reimburses only on a day by day basis. Likewise, if only covered services are paid for, it is important to understand the definition of covered services to ensure that benefits will be payable for all of your anticipated costs of care.

For instance, does the policy pay benefits for caregiver training? Emergency response systems? Home modifications?

By contrast, plans that pay a flat per diem amount – also called “indemnity based” or “cash benefit” plans – pay benefits without regard to the cost of services received. Such plans typically require less paperwork and are easier to understand at time of claim. Some cash benefit plans even pay benefits if all care is provided free of charge by friends and/or family members. Because such plans are much more user-friendly, they typically cost more than traditional reimbursement-based plans.

LTC insurance plans typically pay benefits until you use up the plan’s lifetime maximum benefit (also known as the “pool of benefit dollars.” Often, plans will also speak of a benefit duration in terms of calendar days or years. However, that stated benefit duration is simply a multiplier that is used to calculate the lifetime maximum amount. As long as the lifetime maximum has not been used up, benefit payments can continue. This means that benefit payments may continue well beyond the stated calendar duration.

Some LTC plans offer an unlimited lifetime maximum benefit or “lifetime” benefit duration. Under such plans, one can receive benefits indefinitely – as long as one is alive and benefit eligible.

In selecting your benefit duration, you should consider how long you are likely to need care. For example, an individual with a family history of longevity and Alzheimer’s disease will want a longer benefit duration than an individual whose family members have all died at a somewhat younger age.

Your age when you purchase your coverage will also affect your decision as to benefit duration: the younger you are when you apply, the longer the benefit duration you should consider. A young person (i.e., someone age 50 or less) needs to purchase coverage that will be adequate even if he or she requires care at a young age, perhaps due to an accident, but will still have enough benefits left to address LTC needs later in life.

To date, no comprehensive and integrated study has addressed the question, “How long does the need for long term care last?” However, statistics suggest that an elderly person will spend an average of 2¼ years in a nursing home1 and that family caregivers will care for loved ones in a home setting for 4½ years.2 Therefore, as a general rule, we recommend that a benefit duration of five to seven years is likely adequate for most individuals. However, a lifetime benefit duration will offer even greater peace of mind.

1 Jones AL, Dwyer LL, Bercovitz AR, Strahan GW. The National Nursing Home Survey: 2004 Overview. (National Center for Health Statistics. Vital Health Stat 13(167). 2009), 11. Internet, July 20, 2010. Available: http://www.cdc.gov/nchs/data/series/sr_13/sr13_167.pdf.
2 “Caregiving in the U.S. 2009,” (n.p.: National Alliance for Caregiving in collaboration with AARP, November 2009), 19. Internet, August 17, 2010. Available: http://assets.aarp.org/rgcenter/il/caregiving_09_fr.pdf.

Increases in the cost of long term care have historically exceeded the consumer price index. Accordingly, if an LTC benefit is to keep pace with the rising costs of care, it is important to include a strong inflation protection feature in the plan. The most common and generally most generous inflation protection option is automatic 5% compound inflation protection, with no limit on inflation increases. With this option, both the daily and lifetime maximum benefits increase by 5% of the prior year’s inflated benefit amount, while premiums do not increase due to benefit increases. Alternatively, many carriers also offer a 5% simple inflation protection option. This option increases benefits annually by 5% of the original benefit amount.

In addition to automatic inflation options, many carriers offer a “future purchase option” (FPO), under which insureds are offered the option to purchase additional benefits annually (or triennially), without providing evidence of insurability. However, with FPO coverage, whenever you accept an increase offer, your premiums increase based on your attained age when you purchase the increased coverage. Thus, a plan with FPO can look very inexpensive initially, but typically, by the time you reach your late 60s, the cumulative premiums for FPO will exceed premiums for automatic 5% compound inflation protection and the monthly premium may be as much as 10 times what the starting premium was.

Which inflation protection option to choose depends largely on your age when you purchase your coverage. The average age at time of claim is approximately 77, and the cost of care has been increasing faster than the consumer price index. Therefore, ideally one should plan to have benefit that is equal to the anticipated cost of care at age 77. With automatic 5% compound inflation protection, your initial benefit will double after approximately 15 years, whereas with simple inflation protection, it takes 20 years to double. Accordingly, we recommend compound inflation protection for applicants who are age 70 or younger and simple inflation protection for individuals above that age. We do not recommend the future purchase option other than in very limited circumstances.

How much does LTC insurance pay for care received in different care venues – e.g., in a Skilled Nursing Facility, in an Assisted Living Facility, or at home?

As a general rule, the stated daily benefit amount applies to care received in a skilled nursing facility (SNF). Accordingly, it is important to understand what benefit amount is paid if care is received either in some other kind of residential care facility (e.g., and assisted living facility). Many plans pay the same monthly benefit for ALF care as for SNF care, but some plans tie the ALF benefit to the home care amount.

LTC insurance coverage typically describes any home care benefit in terms of a percentage of the daily benefit for SNF care. This percentage is applied to the daily benefit amount – not the cost of covered services for the day. Thus, if you have a plan with a $300 daily benefit amount that pays 75% for home care, then the most you can receive for a day of care at home is $225. If your cost of home care for the day is $225 or more, you will receive that full $225.

Historically, many LTC plans paid a lesser benefit for home care than for SNF care, on the assumption that SNF care included housing costs, which are already covered if one receives care at home. However, because most people prefer to receive care at home, most modern LTC plans pay 100% for SNF, ALF, and home care. There is even one carrier that offers a 150% benefit for home care.

LTC insurance plans typically include a time-based deductible, known as an “elimination period.” The elimination period is a period of time after one has met the benefit eligibility criteria, during which benefits are not paid. The most common elimination period for group LTC insurance is 90 days. However, in designing your LTC plan, you should consider how long you could afford to self-fund your need for care and balance that against the incremental cost of shortening the elimination period.

In evaluating a proposed elimination period, also consider whether the policy requires that you satisfy an additional elimination period for each separate episode of care. Most quality LTC products only require you to satisfy the elimination period once in your lifetime.

Elimination periods can be fulfilled in a variety of ways. Some plans only count days on which covered LTC services are paid for to fulfill the elimination period. Under such a plan, if care is received only every other day, it will take twice as long to fulfill the eliminiation period. Other plans will count one full week for each calendar week during which care is received on at least one day. In still other plans, the elimination period is fulfilled based on days of benefit eligibility, without regard to whether care is paid for. These nuances can significantly affect the ease or difficulty of fulfilling the elimination period.

Several carriers now offer an option of waiving the requirement to fulfill an elimination period if care is received at home. Such “zero day home care elimination period” plans are very appealing, but may increase costs substantially. When considering such an option, it is important to remember that (1) not all LTC needs begin with care being received at home and (2) other sources (e.g., Medicare) may very well cover the cost of care during some portion of the elimination period.

Note that regardless what elimination period you choose, a tax-qualified LTC policy will only pay benefits if your need for care lasts at least 90 days. Thus, for example, if you have hip replacement surgery from which you fully recover in 60 days, that 60-day need for LTC will not result in any benefit payment – regardless of the elimination period you choose – nor will it count towards fulfilling your elimination period. Such surgery could only help to fulfill your elimination period if you needed assistance with activities of daily living for at least 90 days.

Unless otherwise indicated, most LTC plans require that you pay premiums any time you are not on claim, for the life of the policy. However, LTC plans also exist which limit the duration of premium payments. For example, plans may require a specified number of annual payments (typically 1, 5, or 10 years) or may require payments until a specified age (typically age 65).

As a general rule, limited premium durations may provide two benefits: (1) protection against possible future rate increases and (2) a higher tax deduction for premiums paid.

  • All LTC insurance in the market today is “guaranteed renewable,” which means that the carrier has the right to request a rate increase if its original pricing assumptions are proved inappropriate based on actual experience. Most current LTC plans are subject to rate stabilization and therefore are much less likely to experience increased rates than older policies were. However, with a limited premium plan, once the final premium has been paid, any rate subsequent increases will not affect the policyholder.
  • If premiums are tax deductible – for instance, if they are paid by a C-Corporation on behalf of an employee – it may be desirable to pay all of the premiums for the coverage while the insured is still working, so as to take maximum advantage of that tax deduction.

The answer to this question depends on the waiver of premium feature included in your policy. Most policies provide that when you are on claim and receiving benefits, your premiums are waived. If/when you recover and stop receiving benefits, premium payments begin again. Some coverage will waive premiums as of the first day of benefit eligibility, regardless of the elimination period. Although most policies waive premiums as of the first day for which benefits are paid.

Some LTC policies offer a feature that allows two spouses or partners to receive benefits from each other’s policy. The logic of such a provision is that if one spouse dies before using his or her lifetime maximum benefit, the other spouse has access to those dollars; or if one spouse has a much greater need for care, the benefits can be given to that spouse.

Naturally, adding shared care to a policy increases the premiums fairly significantly. The risk with shared care is that one partner will use up all the benefits, leaving the other spouse with no LTC insurance. While statistics suggest that only 60% of Americans will need LTC, one cannot assume that this means that only one partner in any couple will need care. Instead, one’s plan must be adequate if both partners need care. As a result, it is usually more cost effective to purchase somewhat longer benefit durations without shared care than to add shared care to a policy.

While the nine plan design features discussed above are essential components in any plan, many policies will offer or automatically include one or more of the following features. Most of these features are considered “nice to have,” but generally are not deciding factors in plan design:

  • Bed reservation: this plan provision ensures that you can return to the same nursing facility or assisted living facility after a hospital stay or other absence from your nursing facility, by paying necessary charges to reserve your space in that facility. Plans typically include 14 to 30 days per year.

  • Respite care: most policies will include some amount of benefit which is available to give a primary informal caregiver (e.g., a friend or family member) a break from his or her caregiving responsibilities. This benefit is typically limited to 14 to 30 days per calendar year.

  • Restoration of benefits: some policies offer a feature that restores your benefits to their original level if, after a period of receiving benefits, you fully recover and do not receive benefits for a specified period of time (usually 180 days). However, this feature increases the premium, typically by four to ten percent. Also, if you exhaust your benefit pool before recovering, this feature is generally invalidated. This feature is not relevant with a lifetime benefit period.

  • Return of premium at death: some policies include an automatic feature that returns all premiums you have paid, net of any benefit payments received, if you die before a specified age – usually age 65. These policies typically phase out the return of premium by reducing the percentage returned for each year you live beyond age 65, such that by age 75, no premiums are refunded. Given that current US mortality exceeds age 75, this feature is of limited value. Other policies offer a special feature that returns premiums paid net of any benefits received regardless of the age at time of death. This feature typically increases the premium for the policy. We generally do not consider it to offer a good value.

  • Contingent nonforfeiture: Most newer LTC policies include a feature that is designed to protect you if the policy is subject to a significant rate increase. If rates increase over the life of the policy by more than a specified percentage, then you have the option to exercise this contingent nonforfeiture option, by stopping paying premiums but retaining a reduced lifetime benefit equal to the total premiums you paid over the life of the policy. The specified percentage increase varies depending on your age when you purchased the policy. While this feature is nice to have, it is one that offers little value, because the nonforfeiture benefit is so small and because the specified increase percentages are relatively high.

  • Nonforfeiture option: While contingent nonforfeiture is built into most current policies, one also has the option of purchasing an enhanced nonforfeiture option that provides that if you lapse your coverage for any reason whatsoever, you can nonetheless retain the rights to a reduced lifetime benefit equal to the total premiums you paid over the life of the policy. Typically, your coverage must be in force for at least three years before you can exercise this nonforfeiture option. Typically such a “shortened benefit period” or “reduced paid up” feature increases premiums anywhere from 10% to 58%. This option only adds value if you lapse your coverage, which occurs to less than 2% of all policies. Also, because LTC insurance premiums are usually minimal in comparison to the cost of care, this benefit is likely to be negligible. Accordingly, we do not believe this feature offers good value.

  • International coverage: Most LTC plans limit payment of benefits if you receive care outside of the United States. If you are contemplating retiring outside the US, you should read these provisions carefully. In particular, note that some carriers that say they cover care received outside the US may place substantial limits on the benefits for such care – e.g., benefits may be limited to no more that 1 year over the life of the policy, or may be limited to as little as 25% of the US home care benefit.

Costs for long-term care can be significant, and statistics show that of 9.3 million Americans receiving assistance with activities of daily living or instrumental activities of daily living, 77% have been receiving care for more than one year and of that number, 29% have been receiving care for more than 5 years.1

By purchasing long-term care insurance, you accomplish four key objectives:

  1. You provide yourself with greater control over how and where you will receive care. You are not limited by the options available through Medicaid.
  2. You reduce your dependency on family members, and avoid becoming a burden to them.
  3. You preserve your assets – very important if you will recover from this disability, if you have a surviving spouse, or if you want to leave a legacy to your heirs.
  4. You increase the likelihood that all of your needs for assistance will be met. A government study found that “lacking the necessary assistance with ADLs, approximately one half of those in need experienced a serious negative consequence such as burns from bath water, weight loss, or being chair- or bed-bound.” 2

Therefore, unless you have a net worth in excess of $5 million, chances are you should buy long-term care insurance coverage. Even individuals with net worth in excess of $5 million may want to purchase LTC insurance, if any of the objectives listed above are important to them.

 

1 J. M. McNeil, “Americans with Disabilities: 1994-95,” P70-61, n.pag., detailed table 12. Internet, August 14, 2000. Available: http://www.census.gov/hhes/www/disable/sipp/disable9495.html.
2 Health, United States, 1999 with Health and Aging Chartbook, (Hyattsville, MD: National Center for Health Statistics, 1999), 60.

One of the most common misconceptions about long-term care insurance is that only the elderly need long-term care. In reality, many working age adults experience disabling injuries and illnesses that require ongoing care. Consider the following statistics:

  • In 1995, approximately 25.6 million Americans not living in long-term care facilities were severely disabled1 This represents 9.9% of the total population.
  • An estimated 12.8 million Americans need long-term care. Of these, 10.4 million (81%) live at home or in community settings and 2.4 million (19%) live in institutions;2
  • 5.1 million (40%) are working age adults between the ages of 18 and 64.3
  • 6.2 million (48%) have difficulty performing one or more of the activities of daily living (ADLs), including 3.8 million adults who live outside of institutions.4

 

1 J. M. McNeil, “Americans with Disabilities: 1994-95,” P70-61, (Washington, DC: U.S. Department of Commerce Economics and Statistics Administration, August 1997), 6, table 1. Internet, August 14, 2000. Available: http://www.sipp.census.gov/sipp/pubsmain.htm.
2 Jane L. Ross, “Long-Term Care: Diverse, Growing Population Includes Millions of Americans of All Ages,” GAO/HEHS-95-26, (Washington, DC: General Accounting Office), 5. Internet, August 15, 2000. Available: http://frwebgate.access.gpo.gov/cgi-bin/useftp.cgi?filename=he95026.pdf&directory=/diskb/wais/data/gao.
3 Jane L. Ross, “Long-Term Care: Diverse, Growing Population Includes Millions of Americans of All Ages,” GAO/HEHS-95-26, (Washington, DC: General Accounting Office), 5. Internet, August 15, 2000. Available: http://frwebgate.access.gpo.gov/cgi-bin/useftp.cgi?filename=he95026.pdf&directory=/diskb/wais/data/gao.
4 Jane L. Ross, “Long-Term Care: Diverse, Growing Population Includes Millions of Americans of All Ages,” GAO/HEHS-95-26, (Washington, DC: General Accounting Office), 6. Internet, August 15, 2000. Available: http://frwebgate.access.gpo.gov/cgi-bin/useftp.cgi?filename=he95026.pdf&directory=/diskb/wais/data/gao.

If you are over age 18 and can afford the premiums, it is never too soon to buy long-term care insurance. Remember that not only the elderly require long-term care: of the 12.8 million Americans who need long-term care, 5.1 million (40%) are working age adults between the ages of 18 and 64.1

If you delay your purchase, you may be unable to qualify for the insurance when you want to buy it. If you become ill or disabled, you may be turned down for long-term care insurance or your premiums may be rated (i.e., you may be charged a higher monthly amount).

In addition, because premiums are determined based on your age, the younger you are when you buy long-term care insurance, the lower your premiums will be. As shown in the chart,2 waiting to buy insurance ultimately costs significantly more, not to mention the risk that you will not qualify for the insurance at a later age.

 

1 Jane L. Ross, “Long-Term Care: Diverse, Growing Population Includes Millions of Americans of All Ages,” 5.
2 Chart is based on the cost for a 35-year old resident of Illinois to buy $6,000 monthly nursing home benefit with 75% Total Home Care, 6-year benefit period, and 5% compound no cap inflation protection. Premiums used for older ages are based on premiums to purchase the compounded monthly benefit amount the 35 year old will have at those older ages.

Disability insurance is intended to replace your income in the event of a disability. Long-term care insurance is intended to pay for expenses incurred when long-term care is needed. A good disability insurance policy will provide enough income to allow you to maintain your standard of living while recovering from a long-term disability. However, it will not necessarily provide enough money to cover the increased expenses of long-term care. Such expenses will need to be covered by health insurance (which only rarely covers any portion of LTC), out-of-pocket payments, or long-term care insurance.

Health insurance only pays for acute - as opposed to chronic - medical care; i.e., care that is intended to restore your health. When it is determined that you have recovered as much as possible from an injury or illness, and that further medical care will not further restore your health, health insurance benefits will cease. Most health insurance plans do not pay for LTC. Some provide a small benefit for skilled care services (restorative in nature), but not for custodial care.

Long-term care insurance benefits, on the other hand, cover chronic needs for care that do not necessarily require professional services. For example, a person who has been injured in an accident or a stroke victim may require assistance with activities of daily living such as dressing, bathing, and eating. Such individuals will likely require physical or supervisory assistance for an extended period of time. However, because this type of care is not considered skilled medical care, and because it is not restorative in nature, it generally is not covered by health insurance.

Doesn’t Medicare or Medicaid pay for long-term care?

One of the most common misconceptions about long-term care is that government programs will cover such expenses. Medicare, which is a health insurance program for people over the age of 65, fully covers only 20 days in a Medicare-approved skilled nursing facility, and only if the nursing facility stay is immediately preceded by a three-day hospital stay. From the 21st day through the 100th day, a co-payment of $97 is required. Considering that the average daily cost for care in a skilled nursing facility was $1361 in 1997, Medicare coverage doesn’t go very far!

In addition, Medicare only covers restorative care – not chronic or maintenance care. Thus, as soon as doctors determine that your condition will not improve, Medicare coverage is terminated – potentially before even the end of the 20 days that are theoretically “fully covered.”

After 100 days, Medicare does not cover skilled nursing care – regardless of your health status. As shown in the chart2, Medicare pays only 9% of the long-term care facility expenses for its beneficiaries.

Medicaid is a federal and state funded welfare program. Historically, Medicaid programs have paid approximately 44% of long-term care facility expenses. However, to become eligible for Medicaid benefits, recipients must first spend their assets down to the poverty level. Furthermore, once qualified for Medicaid, recipients have little or no choice in determining where care will be provided. While a healthy spouse will be allowed to keep a personal residence and a limited amount of assets for his or her lifetime, upon the death of the surviving spouse, Medicaid is required by law to attempt to recover from the estate any Medicaid benefits that were paid to the Medicaid-qualified spouse.

1 Celia S. Gabrel, “An overview of nursing home facilities: Data from the 1997 Nursing Home Survey. Advance data from vital and health statistics; no. 311,” (Hyattsville, Maryland: National Center for Health Statistics, 2000), 10, table 8. Internet, June 9, 2000. Available: http://www.cdc.gov/nchs/products/pubs/pubd/ad/ad.htm.
2 Health and Health Care of the Medicare Population (1996),” (n.p.:Health Care Financing Administration, 2000), Table 4.7. Internet, August 8, 2000. Available: http://www.hcfa.gov/mcbs/PublDT.asp.

If needed, the costs of long-term care will easily exceed the amount that could be accumulated by saving and investing the premium dollars. For example, consider the following average annual cost statistics1:

  • Skilled nursing facility care in the United States costs approximately $49,600

  • Residential care facility (i.e., a facility providing only low level care) costs more than $35,300

  • Skilled nursing facility care in the Northeast costs approximately $64,300

A survey conducted by the MetLife Mature Market Institute found that the average cost of a nursing facility ranges from a low of $90 per day in Louisiana ($32,850 per year) to a high of $413 per day ($150,745 per year) in Alaska.

By comparison, even for a 59-year old, premiums to purchase long-term care insurance with a $6,000 monthly nursing home benefit are only $3,308 per year. On this basis, one year of care in a residential (low level) care facility will cost more than 10 years of premiums.

1 Celia S. Gabrel, “An overview of nursing home facilities: Data from the 1997 Nursing Home Survey. Advance data from vital and health statistics; no. 311,” 10, table 8.

One of the most common misconceptions about long term care (LTC) is a belief that health insurance or a government program will pay for LTC.

Health insurance is designed to reimburse expenses associated with medical costs, including tests, medicines, doctor visits, and other specific services. In the case of accident or illness, it only covers the costs to help you get well. Once you have recovered as much as possible, it will not pay the ongoing cost of any chroninc, custodial care which is the most common type of LTC.

As shown in the chart below,1 government programs that help pay for LTC are both restrictive and very limited:

  • Medicare fully covers only 20 days in a skilled nursing facility, and only if the nursing facility stay is immediately preceded by a three-day hospital stay. From the 21st day through the 100th day, a daily co-payment of $137 is required. Considering that the average daily cost for care in a skilled nursing facility was $2192 in 2009, Medicare coverage doesn’t go very far!

    After 100 days, Medicare does not cover skilled nursing care – regardless of your health status.

    In addition, Medicare only covers skilled nursing care – not chronic or maintenance care. Thus, as soon as your doctor decides that you no longer need skilled nursing care, Medicare payments for the skilled nursing facility are terminated – potentially before even the end of the 20 days that are theoretically “fully covered.” This is true regardless of whether you are able to return to your own home and live independently at that time.

  • Medicaid programs pay 41% of long term care skilled nursing facility expenses. However, to become eligible for Medicaid benefits, recipients must first spend their assets down to the poverty level. Furthermore, once qualified for Medicaid, recipients have little or no choice in determining where care will be provided.

  • The new Community Living Assistance Services and Supports provisions of the Health Care Reform bill of 2010 create a government plan intended to help individuals pay for LTC. However, this plan is expected to cost substantially more than private LTC insurance and to provide lesser quality benefits when it is implemented in 2012.

Accordingly, the best means of planning for and affording your likely costs of LTC is by purchasing private LTC insurance, either through your employer or in the individual LTC market.

 

1 National Health Expenditures by type of service and source of funds, Calendar Years 1960-2007. Internet, December 22, 2009. Available: http://www.cms.hhs.gov/NationalHealthExpendData/downloads/nhe2007.zip.
2 “The MetLife Market Survey of Nursing Home and Assisted Living Costs,” October, 2009, (Westport, CT: MetLife MatureMarket Institute). Internet, January 4, 2010. Available: http://www.metlife.com/assets/cao/mmi/publications/studies/mmi-market-survey-nursing-home-assisted-living.pdf?SCOPE=Metlife#Page=3

Average annual costs for long term care vary widely, depending on geography and the type of care received. The monthly base rate for Assisted Living Facilities (ALFs) averaged $3,100 in 2009.1 However, only a limited number of services are included in that based rate. For example, the average annual cost of ALF care for Alzheimer’s or dementia was $53,200.2 Skilled nursing care ranged from $48,900 (in Louisiana) to $213,200 (in Alaska) annually, with a nationwide average of $79,900.3 The map below shows average costs of care in 2009.4

Home- and community-based care costs also vary depending on the type and frequency of care required. The MetLife Mature Market Institute found that the average hourly cost of home health care aides ranges from a low of $13 per hour in Shreveport, LA ($14 per hour in Jackson, MS and Birmingham, AL) to a high of $25 per hour in Phoenix, AZ, Rochester, MN, and Madison WI.5 At this rate, as little as 20 hours of assistance each week could cost from $13,500 to $26,000. (A study by the National Alliance for Caregiving found that on average, family caregivers provide 19 hours of care per week.6)

 


1 “The MetLife Market Survey of Nursing Home and Assisted Living Costs,” October, 2009, (Westport, CT: MetLife MatureMarket Institute),25. Internet, January 4, 2010. Available:  http://www.metlife.com/assets/cao/mmi/publications/studies/mmi-market-survey-nursing-home-assisted-living.pdf?SCOPE=Metlife#Page=3
2 Ibid, 9.
3 Ibid, 14-19. Cost is statewide average cost of a private room in a skilled nursing facility.
4 Ibid, 14-19.
5 Ibid, 26-31.
6 “Caregiving in the U.S. 2009,” (n.p.: National Alliance for Caregiving in collaboration with AARP, November 2009), 5. Internet, August 17, 2010. Available: http://assets.aarp.org/rgcenter/il/caregiving_09_fr.pdf.

Yes. However, LTC insurance premiums are based on your age and medical history when you apply for insurance. These rates can only be increased if the appropriate state insurance commissioner approves an increase and if rates for all similar policyholders are also raised. Furthermore, if rates are raised, your new premium will continue to be based on your original age (i.e., your age at the time of purchase – not your age at the time of the rate increase).

While many carriers have requested and received approval for rate increases on existing policyholders, most such increases have been on older products that were priced before the carrier had any real basis for pricing this type of insurance. Such products were often priced very low, due to erroneous assumptions about lapse rates on LTC insurance as well as other factors. Because some of the early products were subject to extremely high rate increases, the National Association of Insurance Commissioners created Rate Stabilization regulations, designed to reduce the likelihood of rate increases on LTC insurance. Most LTC insurance products in the market today are subject to rate stabilization, and are therefore less likely to be subject to rate increases in the future. However, currently, all LTC insurance is “guaranteed renewable,” which means that rates could increase in the future. The only way to limit the possibility of future rate increases is by electing a plan design that includes a limited premium duration – e.g., one which only requires premium payments for 10 years or one that requires you to pay premiums to a specified birthday.

Most insurance carriers allow policyholders to reduce their coverage, and thereby lower their premiums. For example, if you originally purchased a $6,000 monthly nursing facility benefit with lifetime benefits, you might reduce the monthly benefit amount to $5,000 or shorten the benefit period to 6 years.

Most newer LTC policies include “contingent nonforfeiture,” a feature that is designed to protect you if the policy is subject to a significant rate increase. If rates increase over the life of the policy by more than a specified percentage, then you have the option to exercise this contingent nonforfeiture option, by stopping paying premiums but retaining a reduced lifetime benefit equal to the total premiums you paid over the life of the policy. The specified percentage increase varies depending on your age when you purchased the policy. While this feature is nice to have, it is one that offers little value, because the nonforfeiture benefit is so small and because the specified increase percentages are relatively high.

All policies also offer a “nonforfeiture option,” which guarantees you a certain level of coverage, even if you stop paying premiums entirely. However, such options typically raise premiums significantly and typically are not cost-justified. For an additional price, if, after at least three years, the insured stops paying premiums, he or she will receive a nonforfeiture benefit equal to the monthly benefit under the long term care insurance policy, but limited to the amount of premiums paid to the insurance company over the life of the policy. Because LTC insurance premiums are usually minimal in comparison to the cost of care, this benefit is likely to be negligible.

Historically, LTC costs have increased in excess of the consumer price index. For example, according to a MetLife study which has been performed annually, the nationwide average annual cost of skilled nursing care increased from $61,000 in 20021 to $79,900 in 20092 – an increase of 31% in just 8 years. During the same period, the consumer price index rose only 19%.3

Furthermore, with a “silver tsunami” of baby boomers about to reach the age when they are likely to need LTC, we anticipate that a high demand for caregivers will make the cost of long term care rise even more rapidly over the coming years.

 

1 Corporate Press Release dated April 26, 2002, Metropolitan Life Insurance Company. Internet, February 4, 2003. Available: http://www.metlife.com/Applications/Corporate/WPS/CDA/PageGenerator/0,1674,P2572%257ES349,00.html.
2 The MetLife Market Survey of Nursing Home and Assisted Living Costs,” October, 2009, (Westport, CT: MetLife MatureMarket Institute), 19. Internet, January 4, 2010. Available:  http://www.metlife.com/assets/cao/mmi/publications/studies/mmi-market-survey-nursing-home-assisted-living.pdf?SCOPE=Metlife#Page=3
3 Based on comparison of the “all items” category in the Annual Average Indexes reports for 2009 and 2002, as published by United States Department of Labor at http://www.bls.gov/cpi/cpi_dr.htm.

As soon as you become benefit eligible – by losing the ability to perform two of the six Activities of Daily Living or by becoming severely cognitively impaired – you should file a claim, assuming that you benefit eligibility is expected to last at least 90 days. Once you file your claim, the carrier will need to review your claim and obtain medical records supporting your benefit eligibility as well as doctor certification that your need for care will last 90 days. Also, you will need to obtain a written plan of care. These processes typically require at least one month, and often longer to complete. Therefore, by filing your claim as early as possible, you can expedite your initial benefit payment.

The answer to this question depends on the coverage that you elect:

  • If you elect a lifetime benefit duration (i.e., an unlimited lifetime maximum amount), then your benefits will continue as long as you are eligible to receive them (i.e., as long as you have lost two or more activities of daily living or have a severe cognitive impairment)

  • If you elect a shorter benefit duration (e.g., 3 or 6 years), your benefits will continue until you are no longer eligible to receive benefits or you have received your maximum lifetime benefit amount, whichever comes first.

Note that this may mean that you will receive benefits for longer than your chosen benefit period. For example, assume that you purchased $6,000 monthly benefit with 75% home care and a 6-year benefit period; this gives you a maximum lifetime benefit amount of $432,000. Under this plan, you could receive the following:

  • Nursing facility benefits of $6,000 per month for 6 years; or

  • Home care benefits of $4,500 per month (75% of $6,000) for 8 years ($432,000 divided by $4,500); or

  • Any combination of nursing facility and home care benefits that total up to $432,000, regardless of the time period over which they are paid out.

Your interest in your pool of benefit dollars is not vested. Therefore, your right to those funds terminates at your death. This factor is built into the cost of the insurance, resulting in lower premiums.

The respite care benefit is intended to pay for care in order to allow a primary caregiver to take a much-needed break. For example, to go on vacation, a family caregiver might have to hire a caregiver to stay with their loved one, or might arrange for their loved one to check into an assisted living facility for that time. The respite care benefit covers such costs.

Note that this benefit is less relevant if your long-term care insurance policy pays for informal home care (i.e., care provided by family members or other unpaid caregivers) based on an indemnity or cash benefit model. In such cases, the full monthly home care benefit is payable regardless of who provides the care, and the respite care benefit typically only covers respite care required during the elimination period.

The Eldercare Locator is a public service of the Administration on Aging, U.S. Department of Health and Human Services It is a nationwide service that connects older Americans and their caregivers with information on senior services in their area. On-line information can be found at http://www.eldercare.gov/ or you can call 1-800-677-1116. In addition, a number of web sites can assist in your search for information:

  • The National Association for Home Care and Hospice web site offers a Home Care/Hospice Agency locator, containing a database of more than 20,000 home care and hospice agencies across the country. See http://www.nahcagencylocator.com/index.asp. The web site also offers publications entitled, “How to Choose a Home Care Provider” and “All About Hospice: A Consumer’s Guide,” available to download.

  • The web site of the American Association of Homes and Services for the Aging (AAHSA) states that AAHSA “is an association of 5,500 not-for-profit organizations dedicated to expanding the world of possibilities for aging. We advance policies, promote practices, and conduct research that supports, enables and empowers people to live fully as they age.” At http://www.aahsa.org/choice.aspx you can find information designed to help you find the right kind of aging services, or, at http://www.aahsa.org/section.aspx?id=280 you can search AAHSA’s member database for homes and services for the aging in your area.

Finally, many religious organizations own and/or operate residential care facilities. Your local clergy may be able to refer you to residential care facilities and other resources in your area.

Yes. Self-employed individuals – including sole proprietors, partners, and individuals who hold more than 2% of the shares of a subchapter S corporation – can deduct “eligible premiums” paid for qualified long term care (LTC) insurance plans as a business expense. As shown in the table below, LTC insurance premiums eligible for deduction are subject to certain age-based limits that are adjusted annually based on increases in the medical care component of the Consumer Price Index.

Age Before Close of Tax Year Premium Deduction limit for
2009 Tax Year 2010 Tax Year
40 or younger $320 $330
41 to 50 $600 $620
51 to 60 $1,190 $1,230
61 to 70 $3,180 $3,290
71 or older $3,980 $4,110

No. The tax code stipulates that the value of employer-provided health coverage (including long term care insurance) is excludable from an employee’s gross income.

Yes. LTC insurance premiums paid for any non-owner employees are fully deductible.

Benefits paid to an individual under a federally tax-qualified LTC insurance plan are excluded from taxable income as long as they don’t exceed the greater of either the IRS’s tax-free cap on benefits ($280 per day in 2009) or actual long term care expenses. Benefits up to the tax-free cap will always be tax-free, regardless of expenses incurred. Benefits in excess of the tax-free cap will be tax-free to the extent that they do not exceed actual long term care expenses.

For benefits exceeding the cap to be tax-free, they must be applied to long term care expenses. If the insured cannot demonstrate that the benefits were spent on such expenses, a portion of the benefits may be taxable. For example, if an insured receives an annual benefit of $110,000 but only spends $90,000 on long term care, up to $20,000 could be taxable. If the daily tax-free cap for the year in question is $290 per day ($105,850 annually), then $4,150 of the benefits will be taxable (the difference between the $110,000 received and the tax free cap of $105,850). On the other hand, if the daily tax-free cap in the year is $310 per day ($113,150 annually), then none of the benefits will be taxable.

Benefit payments under an indemnity contract are tax free up to a daily cap or the cost of actual services, whichever is greater. The tax-free cap may be reduced by other reimbursements, such as another LTC insurance policy or Medicare. For the tax year 2009, the tax-free cap is $280/day. Benefit payments from a reimbursement contract have no tax-free cap, because such benefits will never exceed actual expenses. Reimbursement contract benefits are also required to coordinate with Medicare.

Long term care insurance plans that meet certain legal requirements qualify for certain federal tax benefits. These benefits relate both to the deductibility of premiums paid (either by an employer or an individual) and to taxability of any benefits received.

For most individuals, a TQ plan will offer the best option and most plans available in the LTC market today are tax qualified. Therefore, before purchasing an NTQ plan, you should carefully review its features to ensure that it meets your needs. Ordinarily, you will be able to find the most important benefit features in a TQ plan, and such a plan is likely to meet your needs best.

I have a long term care insurance policy that was issued prior to the Health Insurance Portability and Accountability Act (HIPAA). What is the tax treatment and can I make changes to the policy.

Under HIPAA, all long term care insurance policies issued before January 1, 1997 were grandfathered, and automatically receive favorable tax treatment. However, under IRS regulations, a change to a grandfathered LTC insurance policy may jeopardize its tax-qualified status. Before making a change to any grandfathered LTC insurance policy, you should consult your tax advisor and assess the impact of the change on the tax-qualified status of the policy.