Long Term Care Insurance - Indiana & Michigan
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Long Term Care Insurance Information
Planning for long-term care should be an integral part of any financial plan. Long-term care consists of a continuum of services including nursing home care, assisted living, home health care, and adult day care. The need can arise from an accident, illness, or advanced age.
The Risk. Statistics make a very good case for long-term care planning when considering retirement. For example, a 65-year-old woman can expect to live another 19.2 years, and a 65-year-old man can expect to live another 15.5 years.[i] During these years it is estimated that the risk of entering a nursing home ranges anywhere from 20% to 49%.
The Cost. Long-term care is expensive and varies widely from one region of the country to another.
- Nursing Home Costs. In 2007 the average cost of a nursing home stay was $213 per day for a private room, or $77,745 per year ($189 per day for a semi-private room, or $75,190 per year).[ii] Assuming an average stay of 2.44 years, the average nursing home stay costs $189,698 for a private room ($183,464 for a semi-private room).[iii] These costs are different across the country.
- Assisted Living Costs. In 2007, the average base cost of an assisted living facility was $2,969 per month, or $35,628 per year.[iv] Of course, these costs vary in different parts of the country and can be higher for residents who need greater care.
- Home Care Costs. The costs for home care differs substantially according to both the care needed and the provider:
- Health aides. In 2007 the cost of a home health care aide averaged $19 per hour nationally.[v] Based upon this rate, two hours of personal care three times per week would cost $5,928 per year ($19 x 2 x 3 x 52 = $5,928).
- Homemakers/companions. In 2007 the cost of a homemaker or companion who provides services such as light housekeeping, meal preparation, transportation, and companionship, averaged $18 per hour nationally. Based upon this rate, four hours of homemaker services five times per week would cost $18,720 per year ($18 ´ 4 ? 5 ? 52 = $18,720).[vi]
Managing The Risk. In planning for long-term care there are essentially only three alternatives: self-insurance, government programs, or private insurance.
- Self-insurance may be a realistic option for an individual with substantial retirement income and assets. As can be seen from the How Money Goes table, assuming an after-tax rate of return of 5%, $103,187 of capital will produce $678 per month for 20 years or $430 per month forever; and $592,947 of capital will produce $3,897 per month for 20 years or $2,471 per month forever. In the right circumstances, an annuity might produce even larger returns for any given capital sum
- Government programs are available within strict limitations, but the coverage may not be satisfactory to many individuals.
- Medicare. In 2008, after a minimum three-day hospital stay Medicare will only pay for the first 20 days of skilled nursing care. From days 21 through 100, the patient must pay the first $128 per day, and must pay all costs after 100 days. Medicare will pay for medically necessary home health visits that are restorative in nature (i.e., the patient must be improving). However, Medicare will not pay for intermediate care or custodial care. It should also be noted that Medigap coverage coverage only pays Medicare deductibles or coinsurance, it does not extend the basic coverage.
- Medicaid. Although Medicaid will pay for custodial care, the patient must first "spend down" assets in order to qualify. Simply put, "spend down" means liquidating assets to pay for long-term care until a level of financial indigence is reached and it is possible to qualify for Medicaid. When does such a "financial meltdown" become significant? The answer depends upon marital status. In most states a single individual cannot have more than $2,000 in countable assets. However, the "indigent spouse rules" provide better treatment to a married couple with an at-home spouse. In 2008, most states allow them to retain up to $104,400, plus the home, automobile, household goods, and personal belongings (and a minimum monthly income of $1,911 for the at-home spouse).
If an individual needs 24-hour-a-day custodial care, under Medicaid there is little or no provision for "community based care" (i.e., home care, assisted living, or adult day care). It is understood that, on average, Medicaid pays about two-thirds as much as the private pay patient. Although a nursing home cannot, by law, treat patients differently depending on who is paying the bills, quality of care remains an issue. Medicaid patients do not get private rooms. If the quality of care deteriorates, the family of a private pay patient can move him to a different facility.
- Private insurance provides asset protection from the Medicaid spend down requirements, and is often considered by those desiring independence and choice of care and benefits. Private insurance provides flexibility by allowing individuals to obtain care in various settings and at different levels (skilled nursing, intermediate, and custodial care). Contracts generally do not require prior hospitalization, are guaranteed renewable, and offer level premiums. (Long-term care insurance is also available on a group basis or as permanent life insurance that advances the death benefit.)
- Benefit amounts and periods. Daily benefits run from $50 to $300 or more. The benefit periods are typically from 2 to 5 years, or lifetime.
- Deductibles. A deductible, in the form of a waiting or elimination period, will generally last from 0 to 180 days or more. Accepting a longer waiting period can often substantially reduce premiums. Alternatively, there might be a favorable tradeoff between accepting an increased waiting period, in exchange for obtaining a longer benefit period.
- Benefit triggers. A benefit is paid when the insured has a cognitive impairment, or is unable to perform certain activities called "benefit triggers" (referred to as "gatekeeper provisions"). Typically, benefit payments are triggered by the loss of two or more activities of daily living (ADLs). These activities commonly include eating, toileting, transferring, bathing, dressing and continence. There has been considerable debate regarding tax-qualified versus nontax-qualified products (i.e., the use by nontax-qualified products of the more liberal "medical necessity" standard to determine payment of benefits). See pages 296-297.
- Guaranteed renewable. Most contracts are guaranteed renewable. This means that the contract cannot be cancelled, provided the premiums are paid. However, premiums may be increased on a class basis if the insurer's claims experience is poor. Those policies that are "optionally renewable" allow the policy to be non-renewed at the insurer's discretion.
- Covered services. Although the range of coverage can differ widely, most policies cover skilled nursing, intermediate, and custodial care. The range of coverages include:
- Skilled nursing care provided 24-hours per day by skilled medical personal under the supervision of a physician
- Intermediate nursing care includes similar skilled nursing care, but on a more periodic basis (i.e., intermittent care as opposed to 24-hour nursing care).
- Custodial care provides assistance with the activities of daily living (ADLs), such as bathing, eating, dressing, walking, and using the toilet.
- Home health care. Many policies allow the above covered services to be provided at the insured's home rather than in a nursing home. However, where home health care is provided, the benefits are often limited to a reduced percentage of the nursing home benefit. Most policies do not cover such homemaking duties as meal preparation and housecleaning.
- Adult day care. Provisions for home health care and adult day care allow the beneficiary to remain in the community.
- Waiver of premium. Various waiver benefits are offered. The best contracts waive premiums once benefits have commenced under the policy (i.e., after the elimination period). However, some policies may not waive premiums until some specific period has elapsed after the commencement of benefits (e.g., 30 days), and other waiver provisions may not apply if the insured is receiving home health care.
- Inflation protection. The General Accounting Office has projected that long-term care costs would increase at an annual compound rate of 5.8%.[vii] For younger insureds inflation protection is particularly important (e.g., a 50-year-old will not likely claim benefits as soon as a 70-year-old, thus the 50-year-old's care will cost more). Assuming only 5% inflation per year, care that costs $3,750 a month today will cost $6,108 in 10 years and $9,948 in 20 years. In order to ensure an adequate daily benefit in the future, optional protection against inflation is generally provided in a number of very different ways:
- Option to purchase specific amounts of additional coverage at given future dates without evidence of insurability (i.e., guaranteed insurability). When purchased, an additional premium is required.
- Automatic benefit increase of a specific percentage of the basic daily benefit for a given number of years (e.g., 5% increase per year for 20 years). The initial premium typically includes the cost of these increases, and it can be quite expensive. The increases are generally calculated in one of two ways:
- Simple interest calculation involves increasing the benefit by some fixed percentage of the initial benefit. For example, a $100 daily benefit increased at a simple rate of 5% would increase by a level $5.00 each year. By year 20 the daily benefit would equal $195.00 ($100 + ($5.00 ? 19) = $195).
- Compound interest calculation involves increasing the benefit by some fixed percentage of the increased benefit. For example, a $100 daily benefit increased at a compound rate of 5% would increase by $5.00 at the end of the first year, $5.25 at the end of the second year, $5.51 at the end of the third year, etc. By year 20 the daily benefit would equal $252.70 (almost 30% more than with a simple rate of increase).
- Other benefits. In addition to these basic components, other benefits are often available. These features include spousal discounts, respite care, hospice care, caregiver training, bed reservation, medical equipment, cognitive reinstatement, non-forfeiture benefits, case management, and referral services. Choosing from such a range of contract options requires a balancing of benefits and flexibility against premium costs.
- When To Purchase. The "cost of waiting" to buy long-term care insurance can be considerable. Not only are premiums substantially more at older ages but additional coverage must be purchased to cover inflation. See paragraph (i) on page 295.
Nonqualified Long-Term Care Insurance. The Internal Revenue Code does not directly address the income taxation of premiums paid for or benefits received from nonqualified policies and there is uncertainty regarding the tax treatment of nonqualified long-term care contracts issued after January 1, 1997. It is maintained by many commentators that some nonqualified contracts actually provide better protection to the insured than qualified contracts. The following table contrasts the triggers under a typical "triple-trigger" nonqualified contract with the triggers required of a qualified contract under Code section 213. Note that under Code section 213: (1) the ADL triggers were expanded from 5 to 6 (good for the insured), but then a 90-day requirement was added (bad for the insured); (2) the word "severe" was added to the cognitive impairment trigger (bad for the insured); and (3) there is no medical necessity trigger, and no to-be-defined trigger has been established (bad for the insured). Clearly, a case can be made that qualified contracts are not as favorable to the insured as the nonqualified "triple-trigger" contracts. Nevertheless, the tax consequences of a qualified contact are known and are very favorable to the insured.[viii]
Qualified Long-Term Care Insurance.[ix] A "qualified" long-term care insurance contract is any contract that:
- Was issued before January 1, 1997, which met the long-term care insurance requirements of the state in which the contract was sitused at the time it was issued (the grandfather provision in HIPAA).
- Meets all of the following requirements:
- Must provide only coverage for "qualified long-term care services;"
- Cannot pay or reimburse for services covered under Medicare;
- Must be guaranteed renewable;
- Cannot provide a cash surrender value;
- Must apply premium refunds or dividends to either reduce future premiums or increase future benefits;
- Must satisfy consumer protection provisions, disclosure, and nonforfeitability requirements as set forth by the National Association of Insurance Commissioners (NAIC).
Qualified long-term care services are defined as 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 which are provided under a plan of care set forth by a licensed health care practitioner. A person is considered "chronically ill" if certified by a health care professional as unable to perform, for a period of at least 90 days, without substantial assistance, at least two activities of daily living (i.e., eating, toileting, transferring, bathing, dressing, and continence), or as requiring substantial supervision to protect himself from threats to health and safety due to a "severe cognitive impairment" (i.e., a deterioration or loss of intellectual capacity that places the individual in jeopardy of harming self or others).
Tax Treatment. Beneficial tax treatment is afforded to qualified long-term care insurance contracts.
- Employers who pay premiums for nonowner employees can fully deduct the premium payments. The premiums are not includable in the employee's income, and are subject only to "reasonable compensation" limits.
- Individuals can deduct premiums as medical expenses, but the deduction is limited to expenses in excess of 7.5% of adjusted gross income. This deduction for premiums paid is further subject in 2008 to the following age-based limits: $310 if age 40 or less; $580 if age 41 through 50; $1,150 if age 51 through 60; $3,080 if age 61 through 70; and $3,850 if age 71 and over (these limits are indexed for inflation).
- Self-employed individuals can deduct 100% of premiums, subject to the same age-based limits.
- Benefits Received. Amounts received from a qualified long-term care contract in 2008 are generally not included in income up to the greater of $270 per day or the actual costs incurred. It is not necessary to prove a need for medical care in order to deduct unreimbursed long-term care expenses for nursing homes, assisted-living facilities, adult homes, and home care. This is very much to the taxpayer's advantage.