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Long-Term Care
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Paying for Long-Term Care - Personal Resources
Much long-term care is paid for from personal resources:
- Out-of-Pocket: Expenses paid from personal savings and investments.
- Reverse Mortgage: Certain homeowners may qualify for a reverse mortgage, allowing them to tap the equity in the home while retaining ownership.
- Accelerated Death Benefits: Certain life insurance policies provide for "accelerated death benefits" (also known as a living benefit) if the insured becomes terminally ill.
- Private Health Insurance: Some private health insurance policies include coverage for limited period of at-home, or nursing home care, usually directly related to a covered illness or injury.
- Long-Term Care Insurance: Private insurance designed to pay for long-term care services, at home or in an institution, either skilled or unskilled. Benefits will vary from policy to policy.
Paying for Long-Term Care - Government Resources
Long-term care that is paid for by government comes from two primary sources:
Medicare: Medicare is a health insurance program operated by the federal government. Benefits are available to qualifying individuals age 65 and older, certain disabled individuals under age 65, and those suffering from end-stage renal disease. A limited amount of nursing home care is available under Medicare Part A, Hospital Insurance. An unlimited amount of home health care is also available, if made under a physician's treatment plan.
Medicaid: Medicaid is a welfare program funded by both federal and state governments, designed to provide health care services for the truly impoverished. The range of services covered varies from state to state. Eligibility for benefits under Medicaid is usually based on an individual's income and assets.
Some individuals will attempt to qualify themselves for Medicaid by either gifting or otherwise disposing of personal assets, sometimes known as "Medicaid spend-down." Federal legislation, however, has limited the usefulness of such tactics.
The Omnibus Budget Reconciliation Act of 1993 (OBRA '93) provided that gifts of assets within 36 months (60 months for gifts to certain trusts) prior to applying for Medicaid could delay eligibility for benefits. Other provisions of OBRA '93 allowed a state to recover from a person's estate (including trusts and jointly held assets) all of the payments made by Medicaid.
Gifts to one's souse do not help, since the combined assets of married couples must fall within specified eligibility levels. The levels range from approximately $18,000 to $90,000 and are set by each state. Some assets, such as a personal residence, may be exempt from the eligibility calculations.
Choosing a Long-Term Care Policy
The management of risk is a crucial part of financial planning. The potential need for long-term care (LTC) is a genuine risk. The prudent estate owner will examine long-term care insurance to see if it has a proper place in his or her overall financial plan. The decision to purchase LTC insurance generally must be made while one is still healthy; once a disabling condition appears it is too late to act.
Commons Elements in Long-Term Care Insurance Policies
- Amount of the benefit: Most policies pay a fixed dollar amount for each day you are eligible for the benefit; e.g., $160 per day. A survey of nursing homes in the local area can help determine the desired amount.
- Inflation protection: Since costs inevitably increase, a policy without a provision for inflation may be outdated in a few years. Of course, an additional charge is incurred for this protection.
- Guaranteed renewability: This important provision will prevent the insurance company from canceling your policy for as long as you continue to pay the premium when it is due. However, the insurer may be able to raise rates on a class basis. Currently, long-term care policies sold in most states are guaranteed renewable.
- Waiver of premium: Some policies will waive the future premiums after you have been in the nursing home for a specified number of days; e.g., 90 days.
- Prior hospitalization: This policy provision requires one to be hospitalized (for the same condition) prior to entering the nursing home, or no benefits will be paid under the policy. Although prior hospitalization clauses have been outlawed in all states, some older policies still in force may contain this provision. Policies currently sold do not contain prior hospitalization clauses.
- Place of care: Does the policy require that the nursing home be licensed or otherwise certified by the state to provide skilled or intermediate nursing care? Must the facility meet certain record keeping requirements?
- Plan of care: A plan of care is part of the health care claims process. It is the result of an assessment prepared by the insured's physician, and a multi-disciplinary team, including practical nurses, social workers, and other health care professions. The plan outlines the appropriate level of care needed to assist the insured in performing the activities of daily living.
Choosing a Long-Term Policy
- Level of Care: Three generally recognized levels of care, in an institutional setting:
- Skilled care: Daily nursing and rehabilitation care under the supervision of skilled medical personnel: e.g., registered nurses and based on a physician's orders.
- Intermediate care: The same as skilled care, except it requires only intermittent or occasional nursing and rehabilitative care.
- Custodial care: Help in one's daily activities including eating, getting up, bathing, dressing, use of toilet, etc. Persons performing the assistance do not need to be medically skilled, but the care is usually based on the physician's certification that the care is needed.
- Pre-existing conditions: Depending on the state, a policy may limit coverage of pre-existing conditions to discourage persons who are already ill from purchasing the policy.
Many policies will provide benefits if the pre-existing condition was overcome six months or more prior to applying for the policy. Also, some policies will not pay benefits if the pre-existing condition re-occurs within six months after the effective date of coverage.
- Deductible or waiting period: Most LTC policies require you to "pay your own way" for a specified number of days (generally ranging between zero and 120 days) before the insurance company will begin to pay benefits. Of course, the shorter the waiting period, the higher the cost will be. This is usually referred to as an elimination period.
- Alzheimer's disease: Most policies now include coverage for organic brain disorders like Alzheimer's disease.
- Home health care (home care): Many long-term care policies can provide coverage in the insured's home. It is most often offered as a rider (requiring an additional premium) to nursing facility coverage, and reimburses the cost of long-term care received at home.
- Rating the company: Companies should be financially sound and have a reputation of treating policyholders fairly.
Seek Professional Guidance
A perfect LTC policy does not exist. Many policy features must be compared and weighed. As a general rule, the more benefits included in a policy, the higher the premium will be. Professional guidance is extremely important in this complicated area.
Long-Term Care Tax Issues
Federal law provides generally favorable tax treatment of the expenses connected with long-term care (LTC). However, a number of rules must be carefully followed in order to maximize these benefits.[3]
Key Definitions
- Qualified LTC Services - the necessary services required by a "chronically ill" individual, provided under a treatment plan prescribed by a licensed health care practitioner.
- Chronically Ill Individual - An individual unable to perform at least two of the activities of daily living (ADL's)[4] for at least 90 days, or who requires protective supervision because of severe cognitive impairment. Certification by a licensed health care practitioner within the previous 12 months is required.
- Qualified LTC Policy - a LTC policy that meets certain tax-related requirements set by the federal government.
Long-Term Care Expenses
Long-term care expenses are medical expenses: Unreimbursed amounts an individual pays for qualified LTC services, as well as premiums paid for qualified LTC policies, are included in the term "medical care". IRC Sec. 213(d)(1), as amended. For individual taxpayers, such expenses thus qualify for the medical expense itemized deduction. Qualifying medical expenses are deductible as an itemized deduction to the extent they exceed 7.5% of adjusted gross income (AGI).
Current law limits the annual amount of LTC premiums that can be deducted, based on the age of the insured.
Age Before Close
of Tax Year |
2002
Limitation |
2003
Limitation |
| 40 or less |
$240 |
$250 |
| 41 to 50 |
$450 |
$470 |
| 51 to 60 |
$900 |
$940 |
| 61 to 70 |
$2,390 |
$2,510 |
| Over 70 |
$2,990 |
$3,120 |
These annual limitation amounts are adjusted for inflation each year.
Long-Term Care Policy Benefits
Benefits excluded from income: Beginning with policies issued in 1997[5], benefits received under an LTC contract are generally excluded from income as an amount "received from personal injury and sickness". (See IRC Sec. 7702B). In order for benefits paid under a policy to be excluded from income, the policy must meet strict federal tax requirements to be a qualified contract. Further, benefits must be for services provided to a chronically ill individual. A limited grandfather clause applies to contracts in existence before 1997.
The exclusion from income is limited to $220 per day (calendar year 2003)[6] for contracts that pay benefits on a daily basis, without regard to actual expenses. This limitation is adjusted for inflation annually.
Other Tax Issues
- Employees: Generally if an employer chooses to purchase tax-qualified long-term care insurance for an employee, neither the coverage provided nor the benefits paid (subject to the limitations described earlier) will be taxable to the employee. If certain requirements are met, the owner/employee of a C corporation may also include himself or herself for such coverage.
- Self-employed individuals: Self-employed individuals are permitted to deduct qualifying health insurance premiums, including tax-qualified long-term care premiums, as an adjustment to gross income, rather than as an itemized deduction, subject to the 7.5% of AGI limitation. This same deductibility rule is applicable to owners of subchapter S corporations, as well as principals of limited liability partnerships.
Seek Professional Guidance
Federal, state, and local income tax law can be complex and confusing. The guidance and counsel of a qualified tax or other financial professional is highly recommended.
[3] The discussion here concerns federal income tax law, state or local law may vary.
[4] Such as bathing, dressing, eating, toileting, transferring and continence.
[5] The Health Insurance Portability and Accountability Act of 1996, which became a law on April 21, 1996, significantly changed the federal income tax treatment of LTC policy premiums and benefits.
[6] This amount was $210 in 2002.
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