Specialized Long-Term Care Insurance for Middle-Income Americans

Good to Know

Long-term care costs can consume hundreds of thousands of dollars regardless of an individual’s wealth but the risk is often managed differently by wealth demographic. The uber-wealthy may self-insure, the desperately poor may rely on Medicaid, and middle-income Americans may buy LTC insurance. This blog will illustrate a powerful long-term care insurance strategy that is well-suited for many middle-income Americans – The Partnership Qualified LTC insurance strategy. We will unpack this strategy in three steps:

  • How private long-term care insurance works,
  • How state-sponsored (public) Medicaid insurance works, and
  • How a Partnership Qualified LTC insurance policy can provide the best of both private and public insurance.

How Basic Private LTC Insurance Works

Long-term care policies can be described by underwriting requirements, benefits trigger, coverage, and tax treatment.

  • Underwriting Requirements – A person’s age, health, medical history, and lifestyle are analyzed by the insurance company’s underwriting department to determine whether or not the individual qualifies for coverage.
  • Coverage – The elimination period, lifetime benefit maximum, reimbursement structure, and inflation protection form the core coverage provisions.
    • Elimination Period - This is the length of time an insured must wait to receive benefits after a long-term care event occurs. Waiting periods can vary from 0 days to 180 days. The longer the elimination period, the lower the premium.
    • Lifetime Benefit Maximum – Benefits may be paid for a specific period, not to exceed a maximum dollar benefit specified in the policy. The average long-term care need is three years but can vary dramatically.
    • Reimbursement Structure – The insured may be reimbursed on a per diem or actual cost basis. A per diem policy pays a fixed daily amount without regard to the actual cost. The cost of care may be higher than or less than the per diem amount. An actual cost policy pays 100% of actual covered costs, not to exceed the limit specified in the policy. The actual cost may be higher than the limit specified in the policy.
    • Inflation Protection – This protection may or may not be included in a standard LTC insurance policy. Keep in mind that a client may purchase an LTC policy in her late 50’s and not need it until her 70’s. The daily cost of a long-term care facility could double during that length of time. Inflation protection is highly recommended.
  • Benefits Trigger – Two common ways that LTC benefits become payable are cognitive impairment and inability to perform a specific number of activities of daily living (ADLs).
    • Cognitive impairment is a deterioration or loss of intellectual capacities such as memory, orientation, or judgment.
    • ADLs include eating, dressing, bathing, toileting, continence, and physical movement.
  • Tax Treatment
    • Long-term care premiums are generally deductible as an itemized deduction within limits. Self-employed taxpayers may generally deduct premiums as a business expense within limits.
    • Benefits are excluded from income based upon the reimbursement structure of the policy. Per diem benefit payments are excluded from income up to an indexed annual amount even if the per diem payments exceed the cost of care. Actual cost benefits are fully excluded from income as long as the reimbursement does not exceed the cost of care.

How Medicaid Works

Medicaid is a state-federal program in which the state administers the program within federal guidelines. Medicaid offers many benefits including LTC but covers long-term care costs only for the poorest of the poor. For example, an individual with more than $2,000 in non-exempt assets (e.g., bank and retirement accounts) or more than $2,400 in monthly income is not generally eligible for coverage.

Other noteworthy aspects of Medicaid include:

  • Expenses paid by Medicaid during an insured’s lifetime can frequently be “recovered” (taken) from the insured’s estate at his or her death.
  • Individuals with significant income and net worth may not qualify even if they try to circumvent the non-exempt asset limit by giving their assets away. Gifts to individuals (other than a spouse) and transfers to a trust made within 5 years of the Medicaid application date are considered assets of the applicant.

Partnership-Qualified LTC Insurance

A partnership-qualified LTC insurance policy combines the best of private insurance with public Medicaid programs. These policies are purchased from a private insurance company and have specific policy terms and provisions that must coordinate with a state’s Medicaid program.

Three key advantages include an “asset disregard,” protection against Medicaid’s recovery rights, and mandatory inflation protection.

  • Asset Disregard - The insured can keep more, potentially much more, than $2,000 in savings and retirement assets and still qualify for Medicaid. For example, assume a partnership-qualified LTC policy paid $200,000 in long-term care benefits. When the insured applies for Medicaid coverage, Medicaid disregards up to $200,000 of the insured’s non-exempt assets. Here’s what that means - the insured can generally keep $200,000 in savings, retirement, and other non-exempt assets plus the basic $2,000 exemption and still qualify financially for Medicaid coverage.
  • Protection against Medicaid Recovery – Generally, Medicaid cannot collect long-term care costs paid by Medicaid from the insured’s estate when the insured dies. The recovery protection may be limited to the amount of the asset disregard.
  • Inflation Protection – Benefit coverage must be adjusted for inflation.

Key Takeaways

Partnership-qualified LTC policies can resonate powerfully with middle-income clients with the cash flow to pay premiums. If and when the benefits from the policy are exhausted, the insured can apply for Medicaid coverage and use the asset disregard to leave wealth to his or her heirs. The assets protected by the asset disregard are generally safe from Medicaid recovery when the insured dies.

Disclaimer

The information presented herein is provided purely for educational purposes and to raise awareness of these issues; it is not meant to provide and should not be used to provide insurance, tax, legal, compliance or financial advice. There are variations, alternatives, and exceptions to this material that could not be covered within the scope of this blog.