Do I Need Long-Term Care Insurance?

Purchasing a long-term care insurance policy can be an effective way to protect against the often-devastating costs of long-term care. In the right circumstances, a good long-term care insurance policy can help you avoid exhausting your life savings to cover needed long-term care services and maintain access to the widest variety of quality service options. It may also provide you with greater choices and help you avoid depending upon the financial assistance of family, friends or the MassHealth ( Medicaid) program.

Not everyone is a candidate for long-term care insurance. Long-term care insurance is not offered on a guaranteed issue basis and companies may deny coverage or limit benefits during a pre-existing condition waiting period if you do not meet their "medical underwriting" standards. If you already have health problems (e.g., Alzheimer's disease, Parkinson's disease or other less serious conditions), insurers may consider you to be a high risk and decline to issue a long-term care insurance policy.


Is Long-Term Care Insurance Right For You?
 

You should NOT CONSIDER buying Long-Term Care Insurance if:

  • You can't afford the premiums.
  • You have limited assets.
  • Your only source of income is a Social Security benefit or Supplemental Security Income (SSI).
  • You often have trouble paying for utilities, food, medicine or other important needs.

You should CONSIDER buying Long-Term Care Insurance if:

  • You have significant assets and income.
  • You want to protect some of your assets and income.
  • You want to pay for your own care.
  • You want to stay independent of the support of others.

Even if you are medically eligible, long-term care insurance might not be affordable for you. If you are living on a limited or fixed income or if you must go without basic needs to afford the premiums, you certainly should not buy a policy. You must also consider whether you are going to be able to afford the premiums throughout your lifetime, since it is not unusual for a policyholder to pay premiums for more than twenty years before needing services.

You should also be clear about what assets you hope to protect by buying long-term care insurance. If you do not have significant assets, long-term care insurance may not be an appropriate purchase for you. Under the right circumstances, long-term care insurance could be the best way to protect your assets, including your home.

Since long-term care insurance is a major financial commitment, before you buy any coverage, understand your options and look closely at your needs and resources. Use the information in this guide as a starting point, consider contacting the Executive Office of Elder Affairs for a copy of its Self-Assessment Guide and consulting with a qualified advisor.


What Determines Long-Term Care Insurance Costs?

Although prices vary, it is not unusual for a long-term care insurance policy to cost several thousand dollars in premiums per year. Your actual cost for long-term care insurance depends upon two key factors: (1) your age at time of purchase and (2) the type and amount of benefits you choose.

Your premiums will be substantially higher if you buy a policy at age 75 than they would be if you had purchased the same policy at age 65. Also, the greater the benefits, the higher the cost. A nursing home only policy with a low daily dollar amount of coverage will probably cost less than a policy that includes benefits for home health care, and contains inflation protection and nonforfeiture benefits, but be aware that such a policy may not cover the services you may eventually need.

Remember the rule: "you get what you pay for." If you are comparing a high-cost policy against a low-cost policy, it is probable that the higher-priced policy may offer greater benefits. Examine the plans carefully, because there may be variation in the premiums charged for policies with similar benefits from one company to another.

Although the highest-priced policy might offer the most benefits, it is not necessarily the one you should buy. You must decide whether there is a policy within your budget that will meet your needs and be affordable until you need those benefits.

Note: Most policies have "level premiums." A level premium is what the insurer has projected it must charge its policyholders over the life of their policies to cover its costs. It does not mean that your premiums will never go up. An insurer with higher than anticipated losses may raise your premium if approved by the Division of Insurance and as long as it does so for all other policyholders.


Who Sells Long-Term Care Insurance and What Policies Can You Buy?

Private insurance companies and fraternal benefit societies sell long-term care insurance. There are two basic types of policies: individual policies and group policies.

Individual Policies

Individual policies (also called "nongroup" policies) are sold directly to individuals, usually by insurance agents but sometimes through direct mail or phone solicitations. Individual policies must meet certain minimum standards set by the Division of Insurance. They must:

  • Be guaranteed renewable or non-cancelable;
  • Provide at least 730 days (or a comparable dollar amount) of coverage;
  • Not include an elimination period (waiting period) of more than 365 days;
  • Provide benefits based upon no more than two Activities of Daily Living (ADLs);
  • Include alternate care provisionallowing coverage for unspecified services if agreed to by the insured, insurance company and health care practitioner;
  • Offer an applicant the opportunity to buy inflation protection and nonforfeiture benefits and at least one policy with home health care benefits and one that qualifies for certain MassHealth ( Medicaid) exemptions;
  • Not have a pre-existing condition limitation that lasts for more than six months after the policy's effective date; and
  • Not limit benefit payments because an individual develops Alzheimer's Disease, mental illness, alcoholism or other chemical dependency after the policy is issued.

Group Policies

Group policies are sold through employers and associations who sponsor group plans as a benefit to their employees and members. Some insurers also sell group policies directly to individuals through out-of-state "group trust" arrangements. Employer, association and group trust policies are NOT subject to all the same state protections. Please be aware that although many of them may include protections required in individual policies, they are not required to meet the same standards under state law.

Insurers who sell long-term care insurance in Massachusetts (except through an employer or labor organization) are required to provide you with a policy illustration form (see Appendix D) for each long-term care insurance policy that they present to you, as well as an outline of coverage for any policy for which you apply. These forms must state whether the policy is an individual or group policy.


How Do Policies Work?

What types of services are covered and in what settings?

Long-term care policies can vary greatly from one insurer to the next. Policies may include benefits for care in a nursing home, care provided in an assisted living facility, home health care or personal care provided in your home, care in an adult day care center or an ever-expanding array of other services. Some may pay for family benefits, such as caregiver training, but most will not pay for services provided by family members.

You should determine what types of facilities are covered by any long-term care policy you are considering. If you buy a policy that limits its coverage to care provided in a nursing home, your insurer will probably not pay for services you receive at home.

The most flexible policies allow you to use your benefits to cover any necessary long-term care service in whatever setting you might eventually need. Although insurers may offer such policies, they usually are more expensive than policies that limit the types and settings of services that are covered under the policy.

New services and facilities are likely to develop between the time you buy a policy and the time you need long-term care. Your policy may or may not cover these. As noted above, all individual policies must contain an alternate care provision which cover unspecified alternate services if agreed to by you, your caregiver and your insurer. The alternate care provision does not entitle you to benefits for service not specified in your policy, but allows the flexibility for an insurer to pay for newly developed services that were not available when you first bought your plan. Group policies are not required to include this provision.

Most of the information you may need to answer your questions about the types of services a policy covers can be found in the policy illustration and outline of coverage.

How much coverage might a policy provide?

Most long-term care policies limit both the amount they will pay each day ( daily maximum benefit) and over the life of the policy to a maximum number of days or dollars ( lifetime maximum benefit). These limits depend on the choices you make when you first buy a policy.

Lifetime maximum benefits usually are stated in number of days of coverage and usually range between two years and unlimited coverage. Although individual policies are required to cover the equivalent of two years of care, group policies may offer less. As you consider how much coverage to purchase, keep in mind that while some people remain in a nursing home for less than a year, others stay for extended periods. If you are also interested in using community-based options to delay the need to enter a nursing home, you might want to factor that into your coverage analysis.

Daily maximum benefit amounts also vary and usually do not cover the entire cost of a day of long-term care services. Ignoring the effects of inflation, if you choose nursing home benefits covering $130 per day and a nursing home charges $180 per day, you will pay $50 per day (approximately $18,000 per year) from your own resources. When deciding on the amount of daily coverage you need, you should know (1) how much long-term care services actually cost in your area and (2) how much you can comfortably pay out-of-pocket beyond what your policy covers. Consider using Appendix C to learn about costs in your area.

Carefully read the policy's options to understand your coverage choices. Some policies provide different daily maximum benefits for different services. Some policies might pay twice as much for nursing home services as they do for home health care services.

Some insurers may offer policies without daily maximum benefits. These "coinsurance" policies pay a fixed percentage of the total cost of covered long-term care services. A typical arrangement is for the insurer to pay 80% of the costs while you cover the remaining 20%. Although benefits automatically increase as long-term care services become more expensive, so do your costs.

What are other common policy features?

Inflation protection

Inflation protection is a costly but important policy feature. It maintains your level of coverage even as the cost of long-term care rises. To determine whether or not you should buy inflation protection, consider your ability to pay out-of-pocket costs ten or twenty years from now. A qualified advisor should be able to help you project your income and growth of assets over time. Unless your policy includes inflation protection, you could find that you have coverage for a much smaller percentage of your actual costs by the time you need benefits.

Depending on your age and future health needs, you may hold a policy for 20 or more years before you need long-term care services. If nursing home inflation increases by 5% annually, nursing homes costing $180 per day would cost over $360 per day in 15 years.


Growth of Daily Benefit Over Time Under
No Inflation, Simple & Compound




*Assumes initial daily benefit is $100

 

There are two basic types of inflation protection: "automatic" and "special offer," each of which can take a variety of forms. If you are comparing policies, make sure that you understand the exact terms of any inflation protection benefit because it may be administered differently from policy to policy.

Automatic inflation protection increases your benefits each year by a fixed percentage. Using simple interest rates, your benefit will increase by the same dollar amount each year (e.g., a $130 daily benefit with 5% simple inflation protection will increase by $6.50 per year to $260 per day in its twentieth year). Using compound interest inflation protection, your daily benefit increase will be higher each year (e.g., a $130 benefit with 5% compounded inflation protection will cover $344 per day in its twentieth year).

Special offer inflation protection gives you the option to purchase inflation protection at set intervals, such as every three years. Expect your premium to increase if you exercise the option based upon your age at that time. If you turn down the option to increase your benefits in one year, you might not have another opportunity or may need to satisfy new medical screening to exercise the option later.

Nonforfeiture benefits

Nonforfeiture benefits provide something back to you if, for whatever reason, you drop your coverage ("let it lapse") after years of paying premiums. If you do not purchase nonforfeiture benefits and allow your policy to lapse, you will "forfeit" the premiums you have paid over the years.

There are many different types of nonforfeiture benefits, not all of which are offered by all insurers. In the event that your policy lapses and you have purchased a shortened benefit period nonforfeiture benefit, the policy will pay the same daily benefit but only up to an amount that is some percent of the premiums you paid before your policy lapsed. Return of premium benefits, generally the most expensive nonforfeiture benefits, pay back all or part of the premiums that you paid since you bought the plan.

Nonforfeiture benefits are costly options, but provide certain benefits should you allow your policy to lapse. For many people, the most cost-effective protection against dropping coverage is to only buy a policy that is both affordable and contains benefits that suit their needs so that it will be less likely that they will ever need to drop their coverage.

Other features

In addition to the above, many policies contain benefits that pay for services provided by family members under certain circumstances, waive premiums when you are receiving covered services in a nursing home or "restore" the original lifetime benefit amount if you use up part of it, but then go for a period of time without needing long-term care. You should review each plan's policy illustration form and outline of coverage carefully to be sure that you understand what is and what is not included in any policy that you are considering.

When could you become eligible for benefits?

" Benefit triggers" refer to the conditions under which you are eligible to claim benefits under your policy. The way benefit triggers are defined in your policy can have an impact on how easily you qualify for benefits. Not only do benefit triggers vary between policies, but the same policy might use a different trigger for home or community-based care than it does for nursing home care.

Most policies use your inability to perform certain " activities of daily living" ( ADLs) to determine if you are eligible for policy benefits. The ADLs include (1) bathing; (2) continence; (3) dressing; (4) eating; (5) toileting and (6) transferring. Before paying benefits, insurers usually require certification by a physician or licensed health care practitioner that you cannot perform certain ADLs because of physical or cognitive impairments.


Activities of Daily Living (ADLs)

Bathing
Washing yourself by sponge bath; or in either a tub or shower, including the task of getting into or out of the tub or shower.

Continence
Ability to maintain control of bowel and bladder functions; and when unable to maintain control of bowel or bladder functions, the ability to perform associated personal hygiene (including caring for catheter or colostomy bag).

Dressing
Putting on and taking off all items of clothing and any necessary braces, fasteners or artificial limbs.

Eating
Feeding yourself by getting food into the body from a receptacle (such as a plate, cup or table) or by a feeding tube or intravenously. Eating does not include preparing a meal.

Toileting
Getting to and from the toilet, getting on and off the toilet and performing associated personal hygiene.

Transferring
Moving into or out of a bed, chair or wheelchair. Transferring does not include the task of getting into or out of the tub or shower.

Individual policies sold in Massachusetts must provide benefits if you are unable to perform two or more of the above six ADLs (unless they are federally tax-qualified in which case the federal rules apply). The benefit triggers for federally tax-qualified policies described in the next section can be based upon either five or six ADLs and the policies must require that you be unable to perform two or more of these. Although a federally tax-qualified policy can use a benefit trigger of two of six ADLs (the same as what is required of non-tax qualified, individual policies sold in Massachusetts), it could contain a benefit trigger that would make it much more difficult for you to become eligible for benefits (e.g. , three out of five ADLs.) Finally, group policies that are not federally tax-qualified can use any standard the insurer chooses.

Some policies will not count an ADL toward the benefit trigger unless you need hands-on assistance to do it. Other policies will count an ADL as long as you need stand-by assistance. It is harder to qualify for benefits if you have a policy that requires hands-on assistance. It also can be more difficult to claim benefits if you have a policy that recognizes only five ADLs. This is especially true if one of those five ADLs is not bathing, which is usually the first ADL that a person cannot do.

Most long-term care policies use " cognitive impairment" (mental incapacity) as another benefit trigger that allows you to qualify for benefits even if you are able to perform all of the ADLs on your own. This is an important benefit trigger if you are diagnosed with Alzheimer's disease or other dementia but are still able to perform most ADLs.


When do benefits begin?

Many policy benefits usually do not start the first day that you enter a nursing home or use other long-term care services. Instead, you must satisfy the policy's elimination period (waiting period) or a deductible. An elimination period or deductible requires you to pay for your own long-term care expenses for a specified number of days or a dollar amount before the insurer will pay benefits.

The longer the elimination period or higher the deductible, the lower the premium you will pay. If you choose a policy with a long elimination period, you should be prepared to cover the entire cost of the long-term care services you need during that period. Individual policies offered in Massachusetts cannot have an elimination period of greater than 365 days. Although a policy with a 365-day elimination period may cost less, it may mean that you should expect to pay tens of thousands of dollars before you are entitled to any benefits. Also, if you need care for only a short time, your policy may never pay benefits.

A longer elimination period might be right for you if (1) you can afford to cover your own long-term care costs during the elimination period and (2) you want protection against prolonged or "catastrophic" long-term care needs.


What is a Federally Tax-Qualified Policy?

You may be asked to choose between a "tax-qualified" long-term care insurance policy and one that is "non-tax-qualified." A federally tax-qualified long-term care insurance policy offers certain federal income tax advantages.

Under federal tax laws, the portion of your medical expenses that exceeds 7.5% of your adjusted gross income may be deductible. If you have a tax-qualified long-term care policy, you may be able to add the premiums you pay for the policy to your other deductible medical expenses when calculating your income taxes. Furthermore, benefits paid by a qualified long-term care insurance policy generally are not taxable as income. (The federal Internal Revenue Service has not yet determined whether benefits paid by a non-qualified plan might be taxable as income.)

Policies sold as tax-qualified must meet certain federal standards. They must be guaranteed renewable, must include a number of consumer protection provisions and must cover only "qualified long-term care services."

 Tax-Qualified Policies Non-Tax-Qualified Policies
1.Premiums can be included with other annual uncompensated medical expenses for deductions from your income in excess of 7.5% of adjusted gross income up to a maximum amount adjusted for inflation.1.You can't deduct any part of your annual premiums.
2.Benefits that you may receive will not be counted as income.2.Benefits that you may receive may or may not count as income. The U.S. Department of the Treasury has not yet ruled on this issue.
3.Benefit triggers may be more restrictive than those that may be allowed in non-tax-qualified policies. The federal law requires you be unable to perform at least 2 of 5 out of 6 possible ADLs without substantial assistance.3.Policies can offer a different combination of benefit triggers not to exceed requiring that the insured satisfy more than 2 ADLs. Benefit triggers may not be restricted to 2 of 6 ADLs.
4."Medical necessity" can't be used as a trigger for benefits.4."Medical necessity" and/or other measurements of disability can be offered as benefit triggers.
5.ADL disability must be expected to last for at least 90 days.5.Policies don't have to require that the ADL disability be expected to last for at least 90 days.
6.For cognitive impairment to be covered, a person must require "substantial supervision."6.Policies don't have to require "substantial supervision" to trigger benefits for cognitive impairments.

Qualified long-term care services are those required by a "chronically-ill" person and are given by a long-term care provider according to a plan of care prescribed by a licensed health care practitioner. Under federal law, a person is considered "chronically-ill" if (1) he or she is expected to be unable to perform at least two of five (or six) ADLs without substantial help from another person for at least 90 days or (2) he or she needs substantial supervision to protect his/her health and safety because of a cognitive impairment.

Please note that it is not always to your advantage to choose a federally tax-qualified policy over one that is not federally tax-qualified. You may need to be more incapacitated to qualify for benefits in a federally tax-qualified policy. However, any benefits received under a non tax-qualified policy COULD be taxable as income. Also, depending on your finances, you might not be able to take advantage of the federal tax breaks. You should consult your personal tax advisor on these issues.

Note: Most long-term care policies bought prior to January 1, 1997 are considered federally tax-qualified even if they do not meet all of the standards required of policies sold after that date. In most cases, you do not need to buy a new policy to qualify for the tax advantages.



Continue to: Part Two: Long-Term Care Insurance - Section B