Long-Term Care Insurance
Kate Mewhinney, Certified Elder Law Attorney
Clinical Law Professor, The Elder Law Clinic
Thanks to Villy Stolper, 3rd year law student, for research assistance.
Topics
1.
How LTC is paid for & who’ll need it.
2.
LTC costs in NC.
3.
Sources of and paying for LTCI.
4.
Tax-qualified LTCI policies.
4.
The new Partnership Policies.
5.
Cost and affordability of LTCI.
6.
What to buy and when.
7.
Keeping Medicaid in mind.
8.
Assessing the companies.
9.
The new hybrids
10.
Tax deductibility issues for businesses
11.
Public policy issues
1. How LTC is Paid For & Who Needs It

In-home services

Adult day centers

Assisted living (a/k/a domiciliary care,
adult care home, rest home)

Nursing facility care – SNF and ICF
Government Programs

Need-based (income/resource rules)
◦ Medicaid (nursing home care) pays for
about ½ of all nursing home costs.
◦ Special Assistance (SA) for ALFs or
in-home.
◦ CAP/DA

Medicare (but only partial coverage
in nursing home under some
Medicare “Advantage” programs)

Veterans Benefits
Medicare

Covers most older adults.

Pays for limited post-hospital home
health care.

Pays for skilled nursing facility care for up
to 20 days in full and 80 days in part, if
following a minimum 3 day hospital stay.
 With
Medicare supplement policies,
Medicare pays only about 12 % of
all LTC costs.
Private Sources of Payment

Unpaid care from friends and family.

Out of pocket (“private pay”).

Medicare supplemental insurance
(for co-pay during days 20-100 in SNF).

Long term care insurance.
Who Will Need LTC?
2
of 5 Americans > 65 will enter a NH.
 70% of couples, one spouse will need
LTC.
 Half will stay less than 3 months.
 Other half will stay an av. of 2 ½ years.
 Less than 2% will stay over 7 years.
Odds of Nursing Home Usage
Source: Kemper and Murtaugh, New England Journal of Medicine (1991)
Odds Increasers
Odds Decreasers
LTCI history
 First
available in 1987
 400,000
 83%
policies issued in ’07
of buyers purchased before age 65*
*American Association for Long Term Care Insurance (AALTI), News Release, 6/17/08
 ’07
claims broken down:
• 43% for home care;
• 33% for assisted living;
• 24% for nursing home care.*
8
million have LTCI.* Most are affluent
 About
10% of those 50+ have LTCI.
*AALTI, News Release, 6/17/08
2. LTC Costs in NC.

Family care costs jobs/ creates caregiver stress

Home Care: $39K - 42K/yr (44 hrs/week)

Adult Day Care: $12k/yr

Assisted Living: $34K/year

Nursing Homes: Semi-Private: $67K/year and
Private Room: $73K/year
(8 hrs/day, 5 days/wk)
3. LTCI: Sources and Payment

Employer (yours or relative’s/partner’s),
such as:
◦ Federal LTCI program
◦ State Employees (apply by 6/30/13!)

Membership organizations

Partnership policies in most states

Policies through CCRCs

Hybrid life insurance policies
Involving the Adult Children

Adult children may be financially able to
“invest” in a parent’s LTCI policy.

Allows the parent to remain at home
longer and in more safety and comfort.

Also opens the doors to better
assisted living options, if necessary.

Buying a remainder interest in parents’
home.
Other Ways to Finance LTC

Reverse mortgages allow the cashpoor and house-rich homeowner to
tap the equity in his home.

Cashing in a life insurance policy,
borrowing against it, accessing a
“living need” (if available), and the
option of viatical settlements.
Advice from?

Board certified elder law attorneys

Financial advisor (especially CFP)

CLTC – Corp. for LTC Certification

Use different sources; read fine print.
Federal LTCI Program
About 20 million people are eligible to apply:
 employees (most federal/ postal service, active
armed services, and D.C. court employees);
 annuitants (including retired armed services);
 spouses and adult children of employees and
annuitants; and
 parents, parents-in-law, and stepparents of
employees.
www.ltcfeds.com
Federal LTCI Program

John Hancock handles these policies.

268,200 enrollees (as of 6/30/11)

Same-sex domestic partners of Federal
or U.S. Postal Service employees or
annuitants may apply.

Offers a facility-only option.
Cost of Sample Plan for 55 y o

3 year benefit, 90 day elimination period, and
$150 daily benefit (and 5% compound inflation)

$159/month ($1,908/yr) for:




Home, nursing home, ALF, or hospice (home or not)
Bed hold days
Home care, adult day care, and respite services
Formal and informal caregiver services.
Aug. 2012, www.ltcfeds.com
4. Tax-qualified LTCI policies.

Most people should only shop for this type.

Meets certain requirements of HIPAA
(Health Insurance Portability and Accountability Act of 1996).

Pre-’97 policies are “grandfathered” in.

90% of policies sold in 2001 were TQ.
 “Qualified” LTCI premiums are
deductible
◦ But limited to excess over 7.5%
adjusted gross income (AGI)
◦ Deductibility is unlikely to benefit many

“Qualified” plan benefits are not
“income.”
 Unreimbursed
(uninsured) LTC
costs are deductible.
 For
deductibility issues and small
businesses, see last section.
5. The New Partnership Policies
They reward people who self-insure by
increasing their asset limits under
Medicaid.
- Ex.: Single person with $100K policy
could keep an additional $100K in
“countable” assets, and get Medicaid after
tapping the full policy.

Early ’90’s till 2006: only in 4 states –
Robert Wood Johnson Foundation
program of “partnership policies” to
encourage middle class to buy LTCI.
225,000 policies sold.

To save on Medicaid, the federal Deficit
Reduction Act (DRA) of 2005
authorizes all states to use partnership
policies.

Connecticut “Partnership Policies” in ’05:
$4,100 premium/year, at age 65 for 3
years, $200 daily benefit, and inflation
protection.

Majority of purchasers in CA, CT, and IN
have assets over $350,000 (excluding home)
and half have incomes of $60K or more.
Source: Kaiser Commission on Medicaid and the Uninsured. Feb. 2006.
www.kff.org/kcmu

In 2007, Connecticut estimated that
its Partnership program had saved
$5.5 million in Medicaid benefits.

California estimated over $16 million
as of Sept. 30, 2008.
NC Partnership Policy

Legislation to comport with DRA enacted in ‘10.

N.C. Gen. Stat. Chapters 108A and 58-55.

Change Notice 02-11 to Medicaid Manual.

Inflation protection must be offered for
the Partnership Policy to qualify.

Compound annual inflation protection
must be provided for those under age 61.

Purchasers between age 61 and 76, need
only be provided some level of inflation
protections.
NC Partnership Policy

Resource disregard at application for LTC
Medicaid or CAP and resource
protection at estate recovery. (but see
the details later…..)

Resource disregard and asset protection
are equal to benefits paid under the policy
P’ship Policy = Harsher Estate Recovery
With regards to estate recovery, the
definition of estate is much broader
for deceased Medicaid recipients who got
a resource disregard due to a partnership
policy.
For p’ship policy holders, “estate” includes:
• All real and personal property owned at
the time of death.
• Those assets conveyed to a survivor, heir
or assignee.
• Life estates and living trusts.
• Ownership interest in joint tenancy with
rights of survivorship, tenancy in common
and any other arrangement.
Drawbacks of Partnership Policies

Expanded estate recovery will be a
disadvantage for some policyholders’
estates.

Many policyholders won’t live long enough
or need nursing home care/CAP services
long enough to even apply for Medicaid.

Asset disregards are more likely to help
the insured person’s heirs than the
insured person. The heirs won’t be
better off, though, if they expect to get:
◦ Remainder interests,
◦ POD interests,
◦ JTWROS interest, or
◦ Inter vivos (living) trust assets.
6. Cost and Affordability of LTCI

Median elderly household income: $31K

Median income of LTCI buyers: $62,500
- Pension Rights Ctr., “Income of Today’s Older Adults” (‘08 figures)
- Am. Health Ins. Plans, “Who Buys Long Term Care Insurance,” 4/07.
Annual cost: $1,720*- healthy 55 y o.
$2,700 - healthy 55 y o couple
_____
$3,335 - healthy 60 y o couple
* (Up
from $1,480 in 2011, a 16% jump.)
Nat’l av. for $150 daily, 3 yrs coverage, 90 day elimination period, 5% inflation
protection. AALTI, “2012 LTCI Price Index.”
Affordability Standards

Some recommend LTCI only if have $75100K aside from home and car.

Consumer Reports says not to buy if
your net worth is less than $200K (or
over $1.5 million).

Federally required “suitability test.”
Weighing the Costs and Benefits
Consider current and future finances
◦ Ability to continue paying the
premiums as you age?
◦ What protections does the policy offer
if unable to pay the premiums?
◦ Other resources available to help pay
for long term care?
Tax Credit for LTCI Premiums
State law allows a credit of up to $350
for LTCI premium costs.
 It is restricted however, to the following
AGI limits:

 Married filing jointly…….. .. $ 100,000
 Head of Household ………
$80,000
 Single …………………..…
$60,000
 Married filing separately ….
$50,000

Those who take deductions on their fed tax
return cannot take the NC LTC tax credit.

Most people who purchase LTCI do not
receive federal tax subsidies. Why?
 No income tax liability
 Do not itemize deductions
 Medical expenses do not exceed 7.5% of AGI

Those who do benefit from federal tax
subsidies tend to be older and affluent.
Federal Tax Credit May Improve
A pending bill would improve the tax
deductibility of premiums. It would allow
individuals a deduction for qualified LTCI
premiums, use of such insurance under
cafeteria plans and flex spending
arrangements, and a credit for individuals
with LTC needs.
H.R. 6005: Long-Term Care and Retirement Security Act of 2012, 112th
Congress, 2011–2012.
Out of Reach?
Middle class is increasingly being priced out
of LTCI market due to premium increases.
◦ New policies prices are up 30-50%
compared with 5 years ago, for 55 to 65.
◦ A single 55 y o in standard health pays an
average of $2,000/year for middling benefits.
◦ A couple at 65 might pay $5,000.
[Source: Jane Bryant Quinn, AARP Bulletin, 6/12]

# of new individual buyers dropped by 43
percent from 2004 to 2009.

In past five years, at least 14 companies
quit selling new individual LTC policies.

7 companies dropped out of the
employee-group business. Still service
policies but can raise rates.
7. What to Buy and When?
What Affects the Policy Cost?

Age when policy starts.

Length of coverage: 3 yrs, 5 yrs, or lifetime.

Elimination period: 30, 90, 180 days

Amt of coverage: $100/day or more
Other Factors Affecting Cost
 Inflation
protection
 Home care coverage: none,
limited, or including family
members
Inflation protection

Nursing home care costs are increasing
at a rate of 5% annually, so today’s daily
benefit will not cover future costs

Two types of inflation protection
 Automatic Inflation Protection
 Special Offer or Non-Automatic Inflation
Protection
Automatic Inflation Protection

An automatic increase in benefits each year

Simple vs. Compound Interest
Automatic Inflation Protection, cont’d.

Compound interest – based on the original
principal and any interest earned the
previous year (earning interest on interest)
◦ Recommended by most consumer
advocates
◦ A $100 daily benefit that increases by a
compound 5% annual interest rate will be
worth $265 a day in twenty years
Automatic Inflation Protection, cont’d.
Simple interest – based only on the
original principal
◦ A $100 daily benefit that increases by a
simple 5% annual interest rate will go up
$5 per year and be worth $200 a day in
twenty years
 So, compare protection of $265/day vs.
$200/day in 20 years.

Special Offer (Non-Automatic) Infl. Protection
Allows you to choose to increase your
benefits every two or three years
 If you increase your benefits, your
premiums will also increase
 Two downsides of waiting:

◦ may be more expensive to increase benefits
◦ may have to prove good health in the future
“Gatekeeper” provisions

Must need substantial assistance with two
Activities of Daily Living (ADLs) - eating,
toileting, transferring, bathing, dressing,
continence, (policy may limit to 5 of those 6)
and/or

Need for substantial assistance due to
“severe cognitive impairment.”
Disability Rules for Qualified Policies

Must be expected to last > 90 days.

Simple “medical necessity” is not enough
to constitute disability.

For cognitive impairment, a person
must require “substantial supervision,”
and the impairment must be severe.
Desirable Features & Terms, Cont’d.
Assisted living & community programs.
 Respite care and hospice care.
 Monthly benefit meets person’s needs.
 Inflation protection: 5% compounded.
 Benefit period: 5 years would allow asset
transfers to get Medicaid eligible. In most
states, 1 yr is minimum policy.

Desirable Features & Terms, Cont’d.

Waiver of premium (to avoid lapse).

Waiting period – for as long as client can
self-pay.

Geriatric care manager services.

Adaptation of home for handicap
accessibility.
Desirable Features & Terms, Cont’d.
An ELIMINATION PERIOD is the
length of time the individual must pay for
services out of pocket before the insurance
company will begin to pay.
It’s a type of deductible or “waiting period”
until the insured begins to collect money from
the policy. Compare these options……
1. Daily - Insured must pay for qualified care from
a qualified caregiver for 90 days. Not a good
option. May take 6 mos. to satisfy 90-day
Elimination Period!
2. Weekly - Must pay for 1 day/wk of qualified
care for entire 7 days to count toward 90-day
Elimination Period.
3. Calendar Day or Immediately - Policy begins
from date the insured assessed as chronically ill by
a licensed health care prof’l. This is best option.
Some policies have once in a lifetime
elimination period - once the
elimination period is met, the company
begins to pay immediately after a
subsequent bout of illness.
More Features To Consider
Most policies do not pay benefits to
family members who give home care.
So, some advisors recommend an
“indemnity” policy which pays a set
amount regardless of who provides care.
“Reimbursement” policy is cheaper!
LTCI is not available or advisable for:

People who have costly illnesses, such
as dementia or Parkinson’s.

People who cannot afford the
premiums due to income and/or age.

People with enough income or assets
to pay for the costs of long term care.
Many issuers are getting picky.
A colleague reports that John
Hancock Insurance rejects
anyone with fibromyalgia (and
other chronic illnesses), no matter
the individual’s actual health.
Mass Mutual rated her as “preferred,"
despite her fibromyalgia, based on her
actual health.
Have a particular health problem?
Ask the agent to get the underwriting
standards for that illness from the
companies you are interested in.
More Difficult to Be Approved
as You Age

One out of four 65 year olds is rejected
based on physical exams or medical
history.

One out of three 75 year olds is rejected
for these reasons.
Who Should Buy LTCI?
 Age
55; Consumer Reports says 65.
 44%
of applicants in their 50s qualify for
preferred health discounts. 32% of
those in 60s do.
 Concerned about quality of care and/or
future of Medicaid; Prefer home care.
American Asso. for LTCI, “2009 National Long-Term Care Insurance Price Index.”
Who Should Buy LTCI, cont’d.
 No
family caregivers
 Family history of chronic illness
 The average age when people begin
using the policy is 82, with men
beginning to use at an earlier age.
What is the financial planning goal
for purchasing LTCI?
Protect assets, but not monthly income
OR
Protect assets and monthly income
Making this distinction will help to
determine how much daily coverage to buy.
 To protect assets, buy the difference
between average daily LTC cost and
projected monthly income.
 To protect income and assets, get a
daily benefit to cover full cost of care.
Premium Increases

Last two years have brought premium
increases to policyholders.

Insurance prices have increased as a result
of the historic low interest rates and
yields on fixed income investments.

40 to 60% of the dollars an insurer
accumulates to pay future claims comes
from investment returns.
Benefit Cuts
 In
addition to premium increases,
some companies have stopped
offering favorable options.
 Genworth will no longer offer:
◦ Lifetime coverage
◦ 10-pay policies
◦ 40 percent spousal/partner discounts
Disqualifying Health Conditions

Genworth also announced several
health conditions that will automatically
disqualify applicants, including certain
mental illnesses (such as schizophrenia)
and heart issues in combination with
tobacco use for 12 months.
Considerations for LGBT Couples
Discounts for same-sex partners who have lived
together in committed relationship for > 3 yrs.
 Option to share benefit dollars when one
partner’s benefit limits have been reached.
 Options of home and community-based care,
and use of company-provided care coordinator.
 Option of informal caregiver training benefit to
train person to provide informal care w/in
home. May include spouse or domestic partner.

Source: New York Life.
8. Keeping Medicaid in Mind.
Income must be lower than the
nursing home’s cost, which averages
$6,300/mo. in NC.
 Some assets “countable” and some
not.
 A single person is limited to $2,000 in
countable assets.

Medicaid Advice from LTCI agents

May misstate the rules, esp. for couples.

May not understand the transfer rules,
especially what transfers are allowed and
how long transfers affect eligibility.

May not know about non-countable
assets that could be purchased.
Protections for Married Couples
under NC Medicaid
 Institutionalized
spouse limited to
$2,000 of countable assets.
 Community
spouse (at home) can
keep ½ of countable assets (min.
$22,728; max. $113,640. )
2012 figures in NC: MA-2231.II.B.
Non-Countable Assets include:
a home of any
value
 a vehicle of any
value
 household goods
 a prepaid
irrevocable burial
contract

burial plots for
applicant/recipient
and immediate
family.
 certain types of
annuities and trusts.

Keep in Mind….

Community Spouse Resource Allowance
rules vary considerably state to state.

In CA and NY, for example, the
community spouse can keep a
minimum of $113,640 (and often
more, with expert legal assistance).
9. Assessing the Companies
Financial stability of insurer
◦ See A.M. Best or Standard and Poor’s
ratings.
◦ Look for A+ or A++.
Ask about history of rate increases.
 Cheaper policy isn’t necessarily best!

Complaints About Companies
A Conseco subsidiary, Bankers Life & Casualty,
has more than one complaint regarding long-term
care insurance for every 383 such policyholders.
Penn Treaty has one for every 1,207.
The largest insurer, Genworth Financial, has one
for every 12,434 policies.
“Aged, Frail and Denied Care by Their Insurers,” by Charles Duhigg,
The New York Times, 3/26/07.
10. The New Hybrids (the insurance kind!)
Hybrid Life Policies

These let a buyer get a cash-value life
insurance policy, use part of it for LTC
benefits and keep the rest as a death
benefit to go to a beneficiary.

If LTC benefits are used, the death
benefit may be reduced.
Hybrid Annuity Policies

These let a buyer purchase a fixed deferred
annuity with a LTC rider attached.

The annuity may pay out for a specific
number of years or for life.

It functions like a fixed annuity but has a
LTC multiplier built into the policy.
Example:

Purchaser puts $150K into an annuity.

It would provide LTC benefits of
about $4,700/month for 36 months.

There is no return of premium
rider attached to this medically
underwritten annuity policy.

Instead, a portion of the internal
return in the contract pays for the
LTC benefit.

LTC coverage is calculated based on
the amount of coverage selected
when the policy is purchased.

The company offers a payout of 200%
or 300% of the aggregate policy value
over two or three years after the
annuity account value is depleted.

If LTC is never needed, the annuity value
would then be paid out in a lump sum
to any named beneficiary.

Tip: A hybrid is typically less expensive
than purchasing two separate products,
but it is typically more expensive than
purchasing a stand-alone LTCI policy.

The cash surrender value of the
annuity can be used to fund the LTCI
portion of the contract without a tax
consequence to the contract owner.

Charges that normally would be
assessed against the annuity’s cash
value for such distributions are
excluded from gross income.
The charges will reduce the basis in
the contract and will not be taxdeductible.
 They may create an incentive for the
annuity owner to use those assets
when he needs them, rather than
spending out of pocket for LTCI
coverage he may never use.


The contract owner can use the
annuity’s cash to fund retirement or
long-term care needs, whichever is
preferred.
◦ Pension Protection Act (PPA) of 2006,
Section 844
Tax-free exchange of certain
insurance contracts
No gain or loss is recognized on the
exchange of a life insurance contract, an
endowment contract, an annuity contract
for a qualified LTCI contract or the
exchange of one qualified LTCI contract
for another. PPA Section 1035
11. Tax Deductibility & Businesses

A sole practitioner, partner or member of
professional LLC can deduct all or part of
premiums (for both the practitioner and
spouse) from pre-tax dollars, whether or
not the practitioner or the business pays
premium.

C-Corp’s can deduct 100% of premiums.
12. Public Policy Issues
Leadership Council of Aging
Organizations, made up of 66 national
non-profit organizations, encourages
broader social coverage of LTC.
Members include:
 American Public Health Association
 AARP
www.lcao.org, accessed July 2012.
LCOA members include:
Alzheimer’s Association
 American Association of Homes and
Services for the Aging (AAHSA)
 American Geriatrics Society
 American Public Health Association

American Society on Aging (ASA)
 Families USA
 The Gerontological Society of America
(GSA)
 Military Officers Asso. of America
(MOAA)
 National Academy of Elder Law Attorneys
(NAELA)

Another approach to LTC?

Other nations use a social insurance or risk
sharing approach
◦ For example, in Germany the risk of LTC costs
is spread out by including payments for LTC
within its Social Security System
Source: James H. Schulz and Robert H. Binstock, Aging Nation: The Economics
and Politics of Growing Older in America.
Consumer Information

Seniors Health Insurance Information
Program (SHIIP) www.ncshiip.com/
800-443-9354 - in NC only

National Association of Insurance
Commissioners (NAIC) www.naic.org
◦ “Shoppers Guide to LTCI” given out with all policy
information.
◦ Free copy from NC Dept. of Insurance
 1-800-546-5664 - in North Carolina only
Thank you!
Kate Mewhinney
http://elder-clinic.law.wfu.edu/