Long Term Care Insurance has come a long way since its inception. It is no longer a “use it or lose it” proposition, and the sources of funding for long term care coverage now include the cash value of existing life insurance and deferred annuities that may no longer be needed.
Let me start by way of example. I recently provided long term care coverage for a husband and wife, ages 74 and 71 respectively. The wife had two deferred annuities with a combined cash value of $153,317, which they both felt were not necessary to provide future income given their other resources. The couple’s greatest concern was that if either, or both, ever needed long term care coverage, they would have to tap into their investments, including the annuity, on a tax disadvantaged basis. The solution proposed was a totally tax-free exchange of the deferred annuities, which before the exchange had a deferred taxable gain, for a long term care policy that provided a maximum of $337,297 of long term care coverage -- all of which was tax-free. In addition, each of them had a maximum monthly benefit of $5,111 per month. If neither of them needed the long term care benefit, they would be entitled to a return of more than 80% of the annuity cash value over the next 20 years. The end result was that they exchanged the annuities (which had a built-in taxable gain) for a tax-free long term care benefit that gave them peace of mind.
Many people mistakenly believe that Long Term Care insurance is unnecessary because Medicare and Medicaid will provide adequate long term care coverage. Medicare does not provide coverage for people who need to go into nursing homes indefinitely because they are disabled or can no longer take care of themselves. Medicare does not adequately cover assisted living, adult daycare, daily custodial care, such as assistance with eating, bathing and dressing, or care in the home.
Here is a brief summary of what Medicare and Medicaid will cover:
Medicare Part A (“Hospital Insurance”), which generally does not require any premium payment, covers, for a limited period, only inpatient hospital care, hospice care, and medically necessary skilled nursing care, which, if ordered by a doctor, may include a limited amount of skilled nursing care and rehabilitative care in one’s home if the individual is chronically or terminally ill, or disabled.
Even when Medicare Part A coverage is available, it is quite limited in scope.
Medicare Part A primarily covers only inpatient hospital coverage for up to 150 days, with a deductible for each benefit period, with co-pays starting on day 61.[1] There is no coverage at all for inpatient care after 150 days.
Medicare Part A also provides limited coverage in a skilled nursing facility for up to 100 days after a prior hospital stay of at least three days.[2] Most nursing home care is custodial care, such as help with bathing or dressing. Medicare Part A does not cover custodial care if that's all that is needed. Medicare Part A does not cover at home custodial care, or traditional Long Term Care services such as non-skilled care services.
Medicare Part B, (“Medical Insurance”), which requires a monthly premium payment, pays a limited amount[3] for outpatient doctor’s services, certain medically necessary treatments or laboratory services, and equipment. Medicare Part B does not pay for skilled, non-skilled, custodial or traditional Long Term Care Services, or prescription drugs.
Medicaid pays for nursing home care if individuals lack enough savings to cover the cost of the nursing home. If the cost of a protracted stay exhausts the individual’s assets, the individual can become eligible for assistance from Medicaid. To qualify for Medicaid, applicants must have minimal assets (no more than $2,000 in cash and cash equivalents such as bonds and IRAs). For married couples, the spouse staying at home may have assets worth an additional $121,220 (the annually adjusted Social Security cap for 2016). While some individuals might be tempted to make large financial gifts to their children or grandchildren in order to hasten qualification for Medicaid, doing so within the five years prior to applying for the program could disqualify them from receiving its benefits. Transfers within 60 months of application are added to the asset base and must be reduced before coverage is available.
Long Term Care insurance typically covers things that Medicare won’t, such as extended home, custodial assisted living and nursing home care. It provides protection for retirement savings if a long term care need arises, especially in a down market. There are a number of ways to structure Long Term Care policies to minimize the cost, to utilize existing life insurance or deferred annuity cash values to pay the premium, or to provide for a return of all, or a portion of, premiums paid, either as a tax-free death benefit or a tax-free return of premium to the extent it may exceed the actual benefits paid.
Is a long-term care policy the answer? Conventional wisdom is that if you have limited income and resources (defined by some experts as having $50,000 or less in assets, including your home) or you are very wealthy, Long Term Care Insurance may not be the best answer. Medicaid will pay for those who have very few assets, and the very wealth may be able to self-insure. For those in between, Long Term Care Insurance may be the best option.
If you would like more information on this subject, or have a client who might benefit from a discussion about it, please contact Barry Koslow at bkoslow@mkaplanners.com or (781) 939-6050.
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[1] It covers up to 90 days for hospital inpatient stays, along with a 60‐day lifetime reserve (if the initial 90 days are exhausted). For 2016, there is a $1,288 deductible for each benefit period, and starting on day 61, the patient has a $322 daily co-payment, and each lifetime reserve day (days 91-150) requires a $544 co-payment.
[2] Care in a skilled nursing facility is covered for up to 100 days, of which 80 require a daily co-pay of $161 in 2016.
[3] Medicare Part B has a $166 deductible (in 2016) and, in most cases, requires that the patient pay 20 percent of all approved services in excess of this deductible.
