Long Term Care Insurance

All about long-term care insurance

Experts say most individuals will require some form of long-term care at some point in their later years. This type of care, which is not covered by regular health insurance, is expensive and the cost is constantly rising. To pay for this type of care without depleting one’s savings, people can choose to buy long-term care insurance.

How it works

Many companies that offer other types of insurance also provide long-term care policies. You pay the insurance company a regular premium. If at some point you become unable to care for yourself, the insurance policy will pay the contracted benefit to help you pay for professional care.

Long-term care insurance is designed to pay for care when the insured is unable to care for themselves. Depending on the policy provisions, you could be covered for nursing home care, assisted living facilities, adult daycare, and at-home care. Policies usually require care be provided by licensed professionals.

Long-term care policies are similar to life insurance in that you will have to undergo an underwriting process to qualify for coverage. A person’s age and overall health will factor into how much coverage a person can receive and how much he or she will pay in premiums. Pre-existing conditions may disqualify a person from receiving coverage.

The policy will specify how much the insurance company will pay in long-term care benefits and for how long.

How benefits are paid

Most care policies are triggered by the insured’s inability to perform several of the activities of daily living (ADL), which include bathing, dressing, eating, walking and using the bathroom.

Long-term care insurance policies will pay benefits in one of two ways:

Expense-incurred policies reimburse policy holders for long-term care expenses they incur, up to the maximum benefit amount. The person receiving care will submit claims based on what they have spent.

Indemnity policies pay a set dollar amount regardless of the cost of the service you receive. You will begin receiving insurance payments once you receive long-term care, unless you have a waiting period. If that’s the case the insurance company will begin payments after that period has expired.

How are long-term care policies taxed

The tax treatment of a long-term care policy depends on whether you purchase a tax-qualified policy or a non-qualified one.

Tax-qualified plans are more common. The premium payments on this type of policy are treated as medical expenses that you can itemize on your income taxes, provided that your overall medical expenses reach a certain amount. The benefits of a tax-qualified policy are not taxable.

Non-qualified long-term care policies have no tax benefits, but they also have fewer restrictions. They typically have less restrictive rules for triggering benefits and they don’t usually include a waiting period to receive benefits.

LTC policy optional features

Insurance companies offer optional features to help consumers tailor the product to their anticipated needs. These features usually add to the cost of the policy. Examples include:

Joint policies. This type of policy covers two people — typically spouses — with one policy. The policy usually offers one maximum benefit that the two individuals must share. So if the maximum benefit is $150,000 and one of the insureds uses $100,000, the other insured will only have $50,000 in maximum benefits available.

Inflation feature. Many policies will increase the size of benefits each year the policy is in force based on the annual rate of inflation.

Non-forfeiture benefits. This is a guarantee that if you cancel your policy, you will still receive some benefits, if needed, based on how much premium you paid. This feature is usually automatically included and buyers may have to opt out if they don’t want to pay for it.

Waiver of premium. A policy with this feature will not require premium payments during the time that the insured is receiving benefits.

Return of premium. This provision states the insurance company will refund some of your premium if you cancel the policy, provided you did not receive benefits prior to cancellation.

Restoration of benefits. Some policies restore benefits to the original maximum amount if you received long-term care, but then went a certain period of time without needing care.

How are premium costs determined?

Buying long-term care insurance is similar to the decision to buy other types of insurance. Consumers have to find a balance between getting adequate coverage and fitting the cost of insurance premiums into their budgets.

Insurance companies determine the cost of long-term care insurance based on a number of factors, including:

Age. As with life insurance, younger individuals will typically pay less for long-term care insurance.

Health. Your overall health condition when you buy the policy will determine its cost. The better your health, the less you will pay.

Where you live. Since long-term care costs fluctuate based on geography, certain areas will require higher premiums.

Benefit amount and duration. Policies offer choices on how much in benefits you can receive and for how long. The larger both factors are, the more you will pay in premium for the policy.

The length of waiting period. Long-term care policies often have a waiting period, sometimes called an elimination period, before benefits will be paid. This is similar to a deductible on your health insurance or property insurance. For example, if the waiting period is 50 days, you will have to pay the first 50 days of care out of pocket before your insurance benefits kick in. Depending on the policy, the waiting period will begin the day you cannot perform daily living tasks that trigger benefits, or the day you being receiving care. The longer the waiting period, the lower the policy’s premium.

Partnership or non-partnership policies. Your premium rate will also depend on whether you purchase a partnership or non-partnership policy. In an effort to encourage more people to purchase long-term care insurance, the Deficit Reduction Act of 2005 (DRA) created the Qualified State Long Term Care Partnership program. Partnership policies allow policyholders to continue to qualify for Medicaid if they receive benefits from a policy. Premiums for Partnership policies are considerably more than non-partnership policies.

Additional features. As with most types of insurance, any additional features will increase the amount of premium.

Premium Increases

An aspect of long-term care insurance that consumers need to be aware of is that insurers can raise your premiums after you have purchased the policy. Insurance companies cannot single out just one or a few policies for increases, but must raise the rates of all policies within a specific rate class. Many states also require approval from the insurance department to raise premium rates. Companies are required to give a minimum amount of notice before they raise rates.