Long Term Care Insurance (LTCI) is a plan of insurance where the owner of the contract receives money if the person insured by the contract cannot perform certain basic self-care activities and is receiving professional services to assist them with their personal care. These self-care activities are referred to as activities of daily living (ADL). Depending on the contract purchased there are up to seven ADLs referenced. They are:
Most contracts require that the insured require at least stand-by assistance with at least two of the seven ADLs. Most all contracts also waive that requirement in the event of dementia or Alzheimer’s disease.
Once the insured satisfies the qualification for benefits there is a waiting period before benefits are paid. This waiting period is chosen by the owner when the contract is purchased. The waiting period most chosen is 90 or 100 days.
This typically does not create an undue hardship because in many cases the insured is receiving some sort of medical benefits during that time. If the individual is not receiving medical benefits they would need to pay for the services received.
When choosing a LTCI contract you need to know where the insured can receive the services that can be paid for by the insurance contract.
A comprehensive contract will pay when services are received in any of the following locations:
Note that some contracts contain provisions that will allow for earlier payment of benefits when the insured is receiving services at home.
LTCI can be obtained in at least three different ways.
Interest rates have been unusually low since 2009. Because of this insurance companies have found it necessary to make changes to their new and existing LTCI contracts so that they would be able to keep the promises that they have made and will make to their existing and new policy holders.
The three ways that insurers have changed new contracts is to increase the premiums, restrict the benefits available and to tighten underwriting standards.
Remember that although the insurers cannot make the provisions of their previously issued contracts more restrictive they can raise the premiums on blocks of in force contracts if the individual State insurance commissioners permit them to do so.
If you look at the premium of LTCI all by itself you will likely suffer from “sticker shock”. On a strictly dollars and cents basis this insurance is expensive.
Rather than cost, you need to consider value. You also need to look at this coverage as you would auto insurance or property and casualty insurance. You are spending money to protect an asset.
Consider that you are buying a LTCI contract with no inflation protection (normally I do not recommend this but my example is easier explain this way).
The contract you are considering will pay $300 a day for a period of five years. You are paying for $547,500 of protection. Or put another way you a sheltering $547,500 from having to be spent for long term care services.
What is a fair and reasonable amount of that asset ($547,500) that you would spend to protect it? The answer in my mind depends on how those assets are currently being invested. If for example they are invested in equities you might expect a long-term annual return of 8% – 9%. If however they are invested in CDs historically you might expect a long-term annual return of 4%- 5%.
Now let’s say for our example that the premium for this contract is $5,475 (1% of the amount being protected). If your asset is invested in equities giving up 1% of the 8%-9% expected return might not be a bad thing to do. If your asset is invested in CDs giving up 1% of the 4%-5% expected return would be twice as expensive.
The bottom line is you must see the value in the purchase you are making. It has been my experience that someone who has experienced firsthand the financial devastation that receiving long-term care services can cause are much more likely to see and appreciate the value of LTCI.
There are two other aspects of LTCI that you need to be aware of.
The first is whether or not a contract is tax-qualified. With a tax-qualified contract a portion of the premiums paid each year can be considered deductible medical expenses. Furthermore the benefits received from these contracts are clearly received tax-free.
Most contracts sold today are tax qualified. You really have to search to find the non-tax qualified contracts.
The second aspect is whether or not the contract satisfies the requirements of the “Partnership Plan”. Forty States currently have the Partnership Plan effective or pending.
Click here for a chart showing which states have this program.
Under the partnership plan if you receive benefits from a LTCI contract that contains the required Partnership Plan provisions then you can shelter dollar for dollar assets equal to the benefits received from Medicaid spend down requirements.
Some contracts pay their benefits regardless of the cost of services received. The majority of contracts pay their benefits as a reimbursement of costs incurred.
Should you have LTCI? That depends on many factors. Here are a few:
Should you have a Long Term Care Plan? Yes, without a doubt. You should have a strategy ready to be used if and when you become incapacitated.
A Certified Financial Planner ™ licensee can help you to review your options and develop a plan.