Long-Term Care Insurance

Jim Schuster

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Long-term care insurance is a contract between an insurance company and a policyholder to pay for certain types of coverage under certain conditions. In general, long-term care policies are sold by insurance agents to policyholders, although group policies are becoming increasingly available from large employers, membership organizations like AARP and health maintenance organizations.

Long-term care insurance premiums are affordable only if paid with money that you would otherwise set aside to add to savings. An alternative would be to purchase an annuity that pays sufficient benefits to cover the long-term care insurance premiums.

Despite the wide range of policy options, there are a few rules of thumb for purchasing a policy:

• Compare insurance companies and rates. Make certain that the insurer is rated A or A+ by A.M. Best or another service that rates insurance companies. Compare different companies' rates and offerings before making a decision.
• Buy enough coverage. It doesn't make much sense to pay insurance premiums and then be bankrupted by nursing home fees anyway because of insufficient coverage. As with other medical expenses, the inflation rate in nursing home fees is quite high. In addition, people should probably assume that they won't be entering a nursing home for at least 10 years. At that time, the cost of the nursing home will be about twice what it is today.
• Three years of coverage may be enough. After moving to a nursing home, you may want to transfer assets to your children or to whomever you would like to benefit, if you haven't done so already. Medicaid penalizes such transfers by imposing a period of ineligibility that can be as long as three years (or five years for transfers to certain trusts). After those three years have passed, you can qualify for Medicaid to pay your nursing home costs (provided the assets remaining in your name do not exceed Medicaid's limits). If this is your strategy, you'll need long-term care coverage only for the years before Medicaid coverage commences. So there's little need to purchase more than three years of long-term care coverage.
• Buy a home care option or rider. One of the problems with Medicaid is that although it pays for nursing home care, in most states it pays for only limited home care (New York is a notable exception). So people often feel financially compelled to move to a nursing home, where the state will pick up the cost. Until there is a change in the law, most home care will have to be paid for out-of-pocket or by insurance.
• Fill out the application completely. If you don't tell the insurer about an illness, the company may refuse you coverage at the time you need benefits. It's better to be denied a policy and to be able to plan knowing that coverage is not available than to believe that coverage will be forthcoming, only to have it denied when it's needed.
• Make sure the insurance company evaluates your application before issuing the policy. If not, the company could refuse you coverage when they evaluate the application at a later date.

Which spouse gets the coverage?

Often a married couple will be able to afford coverage for only one spouse. Looking at statistics alone, the wife should purchase the policy. In our society women tend to live longer than men and to provide more care than men. The result is that women are much more likely than men to end up in a nursing home for a long period of time. In addition, the Medicaid rules provide some protection for the spouse of a nursing home resident.

The tax deductibility of long-term care insurance premiums

Under the Health Insurance Portability and Accountability Act ("HIPAA"), "qualified" long-term care insurance policies receive special tax treatment. To be "qualified," policies must adhere to regulations established by the National Association of Insurance Commissioners:

• The policy must offer the consumer the options of "inflation" and "nonforfeiture" protection, although the consumer can choose not to purchase these features
• The policies must also offer both activities of daily living ("ADL") and cognitive impairment triggers, but may not offer a medical necessity trigger. "Triggers" are conditions that must be present for a policy to be activated.

Premiums for "qualified" long-term care policies will be treated as a medical expense and will be deductible to the extent that they, along with other unreimbursed medical expenses (including "Medigap" insurance premiums) exceed 7.5 percent of the insured's adjusted gross income. But the deductibility of premiums is limited by the age of the taxpayer at the end of the year.

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