Medicaid and Long-Term Care Insurance
What is long-term care insurance?
Long-term care insurance (LTCI) pays a certain dollar amount
per day, for a set period, for skilled, intermediate, or
custodial care in nursing homes and, sometimes, in
alternative care settings, such as home health care. Because
Medicare and other forms of health insurance do not pay for
custodial care, many nursing home residents have only three
alternatives for paying their nursing home bill: cash,
Medicaid, and LTCI. In general, long-term care refers to a
broad range of medical and personal services designed to
assist individuals who have lost their ability to function
independently. The need for this care arises when physical
or mental impairments prevent one from performing certain
basic activities, such as feeding, bathing, dressing,
transferring, and toileting. These are normally called the
activities of daily living (ADLs). Long-term care may be
divided into three levels:
Skilled care is "around-the-clock" care designed to treat a
medical condition. This care is ordered by a physician and
performed by skilled medical personnel, such as registered
nurses or professional therapists. A treatment plan is drawn
up, and it is usually believed that the patient will recover
at some point.
Intermediate care refers to intermittent nursing and
rehabilitative care provided by registered nurses, licensed
practical nurses, and nurse's aides under the supervision of
Custodial care is designed to help one perform the
activities of daily living (such as bathing, eating,
dressing, etc.). It can be provided by someone without
professional medical skills but is supervised by a
How is LTCI useful as a Medicaid planning tool?
To qualify for Medicaid, both your income and the value of
your other assets must fall below certain limits (which vary
from state to state). For details, see
Eligibility for Medicaid. In determining your eligibility
for Medicaid, a state may count only the income and
resources that are legally available to you for paying your
medical costs. Consequently, a number of tools have been
developed to shelter assets, including irrevocable trusts,
life estates, and gifts. Each of these options, however,
involves relinquishing your control over the assets (to some
extent). For more information about these tools, see
Planning Goals and Strategies.
Purchasing an LTCI policy when you are healthy helps you
maintain control over your assets until such time as you
actually require care. Therefore, there is no need for you
to divest yourself of assets years ahead of time. Indeed,
even if you transfer away certain assets soon after you
enter a nursing home and apply for Medicaid, your LTCI
policy may cover your nursing home bills during the
ineligibility period caused by the transfer.
Assume Marge is a 75-year-old widow who purchased a 60-month
LTCI policy a few years ago. Marge enters a nursing home. At
the same time, she transfers all of her assets into an
irrevocable trust in order to qualify for Medicaid when the
insurance benefits run out. Transferring "countable" assets
into an irrevocable trust within 60 months of applying for
Medicaid creates a waiting period or period of ineligibility
for Medicaid, based on a formula set by the state. Without
the LTCI policy, Marge would have no way to pay her nursing
home bills for a period of time and would have to borrow the
money or perhaps live at home with her children. However,
Marge's LTCI policy covers her nursing home bills during the
ineligibility period. When her insurance benefits run out,
she will qualify for Medicaid.
Note that in some states, if you purchased an older
"qualified" long-term care insurance policy (i.e., one
purchased prior to OBRA '93) your house will be protected
from the imposition of a Medicaid lien upon eligibility for
Medicaid benefits. Some people were able to purchase the
minimum coverage necessary to obtain this protection against
a Medicaid lien. However, the benefits payable under these
policies typically represent only a small fraction of the
expected cost of nursing home care.
For more information about ineligibility periods, see
Look-Back Period for Medicaid.
The Deficit Reduction Act of 2005 gave all states the option
of enacting long-term care partnership programs that combine
private LTCI with Medicaid coverage. Partnership programs
enable individuals to pay for long-term care and preserve
some of their wealth. Although state programs vary,
individuals who purchase partnership-approved LTCI policies,
then exhaust policy benefits on long-term care services,
will generally qualify for Medicaid without having to first
spend down all or part of their assets (assuming they meet
income and other eligibility requirements). Although
partnership programs are currently available in just a few
states, it's likely that many more states will offer them in
When do benefits begin?
Most policies provide that benefits will be "triggered" by
certain physical and/or mental impairments. The most common
method for determining when benefits are payable is based
upon your inability to perform ADLs. The most common ADLs
are eating, bathing, dressing, continence, toileting, and
transferring (getting from bed to chair, etc.). Typically,
benefits are payable when you're unable to perform a certain
number of the ADLs, such as two out of the six or three out
of the six.
Some policies, on the other hand, will commence benefits
only if your doctor certifies that the care is medically
necessary. Others will also offer benefits for "cognitive
incapacity" or mental incapacity, demonstrated by your
inability to pass certain mental tests.
Since many policies contain a waiting period or deductible
period, your benefits may not begin the first day you enter
a nursing home. These deductibles can range from a zero-day
deductible up to a 365-day deductible, and naturally, a
longer deductible means a lower premium. It also means
you'll have to pay nursing home bills out of your own pocket
for a longer period of time. So, if a nursing home in your
area charges $200 per day, a policy with a 30-day deductible
period will require you to pay $6,000 of your own money
before the insurance will kick in.
When you purchase an LTCI policy, however, you will be able
to select the plan design that you desire (within the
constraints of your budget). Thus, you'll be able to choose
the waiting period (if any), the benefit amount, and the
What do LTCI policies cost?
Your yearly premium for an LTCI policy depends on a number
of factors, including your age when you purchase the policy,
the length of the coverage period (for instance, three
years, five years, or lifetime benefits), the amount of the
daily benefit provided, the range of care provided, and
whether you purchase inflation protection or other optional
When buying an LTCI policy, you must consider not only
whether you can afford to pay the premium now, but also
whether you'll be able to continue paying premiums in the
future, when your income may be substantially decreased.
What should you look for in an LTCI policy?
Duration of benefits
When purchasing LTCI, you'll be asked to select a benefit
period. Benefit periods generally range from one to six
years, with some policies offering a lifetime benefit.
You'll want to choose the longest benefit period you can
afford. If you can't afford a lifetime benefit, consider
choosing a benefit period that coordinates with the
look-back period for Medicaid (five years). For more
information about ineligibility periods, see Look-Back
Period for Medicaid.
Nursing home daily benefit
Most policies let you choose the amount of coverage,
typically running anywhere from $40 to $150 or more per day.
Of course, the greater the daily benefit and the longer the
benefit period, the more the policy will cost. Because the
formula for determining the Medicaid ineligibility period
(if any) is based on the average cost of nursing homes in
your locale, you should ascertain this figure. Certainly, it
wouldn't make sense to purchase a policy with a daily
benefit of $50 if the average daily cost of nursing homes in
your area is $150 per day.
Additionally, you should consider whether you plan to remain
in your present state or whether you plan on moving to
another state at some point in the future in order, for
example, to be closer to your children.
Optional inflation rider
Although the average daily cost of nursing homes in your
locale may be $200 today, it could be significantly more
five years from now. Therefore, an inflation rider is very
important. The younger you are when you buy an LTCI policy,
the more important inflation protection will be.
Unfortunately, an inflation rider may significantly increase
the policy cost.
Range of care
Review the policy carefully to determine what expenses are
covered. A very comprehensive LTCI policy will cover skilled
care, intermediate care, custodial care, home care, adult
day care, and even alternative care (assisted living). Most
policies will cover skilled, intermediate, and custodial
Home health care can be an important consideration, because
most people prefer to live in their own homes for as long as
Home care makes sense when, for example, you're recovering
from a stroke, broken bone, or illness and don't need
lifetime care. It is also useful if you're living with your
children and require the services of a nurse or home health
aide a few times a week. It's generally a good idea to
insure for at least a one- or two-year home health care
A pre-existing condition may be defined as a medical
condition for which you sought medical advice or treatment
(or regarding which you experienced symptoms) within a
specified period of time, such as one year or five years,
before applying for the LTCI policy. Although some companies
may ignore pre-existing conditions, others may refuse to pay
for treatment related to those conditions. Often, however,
insurance companies will impose a waiting period on you
before your coverage will go into effect for treatment of
pre-existing conditions. Typically, you'll have to wait up
to six months before that condition is eligible for
Even though some companies will not require a medical
examination before issuing your policy, it is still
necessary that you truthfully disclose any pre-existing
conditions. Otherwise, your company can refuse coverage for
that condition or terminate your coverage altogether.
Read the policy carefully to ascertain what isn't covered.
For instance, since Alzheimer's disease, senility, and
Parkinson's disease are common reasons for long-term care,
make sure that your policy doesn't exclude these conditions.
Also, most policies will not pay benefits for a person who
has an alcohol or drug addiction, an injury caused by an act
of war, or injuries that were self-inflicted or resulted
from attempted suicide.
Most policies provide that your premiums will not increase
unless the rates for everyone in a given class are
increased. Your own premiums cannot be increased simply
because of your age, health status, or claims experience.
However, rates for the entire class you're in (e.g., the
class of 70-year-old retired autoworkers) may be adjusted,
based on claims experience.
When LTCI was introduced, it was a conditionally renewable
contract. This gave the insurance companies discretion to
cancel policies and/or raise rates. Most policies now are
"guaranteed renewable" as long as you pay your premiums, so
do not purchase a policy that is renewable at the option of
the insurer. The insurance company should guarantee that it
will offer you the opportunity to renew the policy and
maintain the coverage. The company cannot condition the
renewal on evidence of your insurability (i.e., good
health). All LTCI plans which qualify for deductibility for
federal income tax purposes are guaranteed renewable.
Waiver of premiums
An important feature of your policy may be the waiver of
premium provision. This provision allows you to stop paying
premiums once you are in a nursing home and the insurance
company has started to pay benefits. Although some companies
will waive your premium as soon as they make the first
benefit payment, others may wait up to 90 days. A good
contract will waive premiums based on the use of home health
care as well, but read your contract to be sure.
This provision can be especially important to a potential
Medicaid applicant since it is likely that you will be
unable to afford extended nursing home premiums if you've
transferred your assets away as part of an asset protection
Grace period for late payment
A good policy should provide a one-month grace period during
which the policy will remain in effect if you are late
paying the premium. Absent such a grace period, your policy
could be canceled immediately.
Return of premium
Some companies offer return of premium or nonforfeiture
benefits for individuals who cancel their policies after
paying premiums for a number of years. For instance, a
policy might return nothing if canceled within the first
five years, 15 percent of the premium after five years, and
perhaps all of the premium after 35 years. However, adding a
return of premium rider to your policy may significantly
increase the policy cost.
Beware of policies that require you to have a hospital stay
of at least three days before qualifying for LTCI benefits.
This requirement is very restrictive and can greatly limit
your ability to receive any benefits under your policy if
you require only custodial care.
How should you compare providers?
It's important to check out the financial strength of the
companies in which you're interested. You can determine a
sound investment by reviewing your company's A. M. Best and
Company's rating, along with the opinions of other rating
services such as Moody's or Standard and Poor's, at your
local library. You should select a company that has received
a rating of A or A+ from A. M. Best. Of course, you can also
request a copy of the firm's annual report. For more
Comparing and Replacing Long-Term Care Insurance Policies.
What are the tax ramifications?
Federal law generally allows you to treat all or part of the
premium for a tax-qualified long-term care insurance
contract as a medical expense. As a consequence, the portion
of your LTCI premium treated as a medical expense should be
deductible for federal income tax purposes. To claim a tax
deduction, you must itemize your deductions and the total of
your medical expenses (including the applicable portion of
any LTCI premiums) must exceed 7.5 percent of your adjusted
Not all long-term care contracts are tax qualified--your
policy must meet certain federal standards. For more
information, see IRS Publication 502,
Medical and Dental Expenses.
Benefits you receive from a tax-qualified LTCI policy
generally are not subject to income tax; they are treated as
excludable benefits received for personal injury and
sickness. However, benefits received from a policy that is
not tax qualified might be subject to income tax. For more
Taxation and Long-Term Care Insurance.
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