PERSONAL FINANCIAL PLANNING
THE VALUE OF LONG-TERM CARE INSURANCE
By Bruce L. Birnbaum
Vast improvements in medicine and science have enabled Americans to enjoy longer and longer lives; however, this increased longevity is a double-edged sword. Many older Americans already suffer from physical and mental impairments, or can expect to before their death. With increasing age comes an increasing likelihood that the older individual will require assistance with the activities of daily living, such as bathing, eating, dressing, transferring, toileting, and maintaining continence. The major task of long-term care (whether at home, in specialized housing, or in a nursing home or other medical facility) is to help the elderly and disabled with these vital tasks.
Because of the enormous costs of long-term care, many commentators consider this problem to be one of the greatest threats to the financial security of American seniors and to our nation. Although at present the Federal and state governments play important roles in paying for long-term care, they are looking for ways to reduce their expenditures. Right now, the major source of payment for long-term care is out-of-pocket: the personal resources of the elderly or disabled person and family.
Medicare is a Federal health insurance program for seniors and certain disabled Americans. A person becomes eligible for Medicare at age 65 when receiving Social Security retirement benefits, or younger if receiving Social Security disability benefits for at least 25 months. (The Clinton administration has proposed a "buy-in" program that would extend Medicare eligibility, on a fee-paid basis, to near-elderly persons aged 5764. Yet other proposals have been made to increase the age of initial Medicare eligibility to compensate for the phase-in of 67 rather than 65 as the basic Social Security retirement age.)
Many people believe Medicare will pay for long-term care, but its coverage of long-term care is very limited. Medicare nursing home care is limited to 100 days per spell of illness. The first 20 days are paid for in full, the next 80 days are covered with a $96 per day co-payment requirement (1999 figures). If long-term care means more than 100 days in a nursing home, it is apparent that Medicare does not pay for long-term care.
Furthermore, Medicare reimbursement is only available if the patient spent at least three days in the hospital not more than 30 days before entering the nursing home. Yet another limitation is that Medicare pays only for care in skilled nursing facilities (a definition many don't fit) for patients who are deemed to require daily skilled care from nurses, therapists, and other health professionals. A person who only needs assistance with activities of daily living does not fit this definition, and is thus ineligible. Other requirements exist as well. In reality, it may be difficult to obtain any significant Medicare nursing home benefits.
Medicare home care benefits are also limited. The patient must be homebound and must be receiving part-time or intermittent skilled nursing care or physical, occupational, or speech therapy. Even when these elements exist, it may be difficult to obtain proper Medicare coverage without aggressive advocacy or litigation. Recent legislation doesn't help much, either. The Balanced Budget Act of 1997 imposed additional limitations: Most Medicare home care cases can now receive only 100 home health care visits per spell of illness; previously, there was no limit, so long as they did not equate to full-time care.
Medigap or Medicare Supplemental Insurance
Federal guidelines limit the choices now available under Medigap (also called Medicare Supplemental Insurance) policies. There are 10 ordinary standardized plans available (Plans A through J), plus additional plans to coordinate with IRA-type medical savings accounts for Medicare beneficiaries. (Senior citizens who get their care from a Medicare HMO or sign up with one of the Medicare + Choice plans being phased into existence starting in November 1998, will probably not require Medigap coverage.)
Basically, Medigap policies cover services which would otherwise be covered under Medicare but for Medicare's deductibles and co-insurance requirements. While such policies are beneficial in reducing the out-of-pocket cost of acute care for senior citizens, they do not provide meaningful coverage for long-term custodial care because this care is excluded by Medicare and therefore by Medigap policies.
Accordingly, it has been said that Medicare is designed for post-hospital recuperation rather than for chronic long-term custodial care.
Medicaid is the joint Federal and state program that provides health care for the indigent. Federal law sets the basic guidelines but gives the states great latitude in administering the program; as a result, Medicaid varies widely from state to state. The specific rules and planning techniques under Medicaid are often diabolically complex. Irrevocable income-only trusts, transfers of assets, and deeds with retained life estates are some of the techniques employed.
Medicaid planning is always difficult. Some older people reject the option of receiving "welfare" benefits. Some clients--and some political commentators--find the process ethically distasteful. Nevertheless, planned impoverishment is sometimes the only feasible option for someone with a relatively small estate or in failing health.
Using New York figures for 1999, an individual who qualifies for Medicaid can keep nonexempt assets of no more than $3,550 plus a $1,500 burial fund or any amount in an irrevocable preneed funeral agreement. A person receiving Medicaid while living in the community can retain an income of $592 per month. An individual receiving institutional care (such as nursing home care) under Medicaid is limited to a "personal needs allowance" of $50 per month.
Spousal protections are available which permit the community spouse (i.e., the well spouse) to keep up to, as a general rule, $81,960 in assets, plus a home and an income of $2,049 per month (1999 figures). These amounts are adjusted annually. However, the great majority of nursing home residents are not married, so comparatively few people can actually use these provisions.
Medicaid is supposed to be a poverty program, so limitations are imposed on the extent to which a person can qualify by giving away surplus assets. Transfers of assets can result in a period of ineligibility from Medicaid. Two related, and easy to confuse, concepts govern Medicaid transfer penalties. The first is the look-back period, which is 36 months for most transfers and 60 months for transfers to certain irrevocable trusts. Transactions occurring before the look-back period are considered so remote that they will not be applied to penalize the transferor.
The second concept is the penalty period: the number of months that a transferor will be denied access to Medicaid care because of the transfer. The actual penalty period is determined by the application of a formula involving an officially promulgated figure that is supposed to represent the average cost of private payment in nursing homes in the relevant geographic region. The current (1999) New York City rate is $7,077 per month, although, of course, the actual cost of private payment varies and can be much higher. For example, a person who made a transfer of $400,000 during the look-back period will be denied Medicaid benefits for more than four years, beginning on the date of the transfer ($400,000/$7,077=56.52 months). This simplified example involves just one lump-sum transfer; more sophisticated use of the formula can create substantial planning opportunities.
Quality of care, independence, and choice of provider are obviously major issues. A Medicaid beneficiary will often find there are serious limitations. For example, a hospitalized person who has to be placed in a nursing home must accept the first Medicaid bed that is available in a nursing home, even if the facility is not conveniently located or has a poor reputation. A home care patient may find it extremely difficult in today's climate to obtain more than four
hours per day of Medicaid home
Medicaid planning can be difficult to combine with conventional financial, tax, and estate planning. In particular, the Medicaid system often has a right to place a claim against the estate of a decedent who obtained Medicaid benefits. Medicaid-oriented transfers may have to be made at a time when good investment planning would counsel holding on to assets for future appreciation. Nor is the Medicaid system governed by tax rules: There is no charitable deduction or annual exclusion within the Medicaid system, for instance.
Because the current political climate does not favor social welfare programs, legislative proposals and recent case law have severely restricted Medicaid entitlements. The expansion of estate recoveries, liens, and the imposition of additional limitations continue to be proposed. Criminal sanctions for ostensibly lawful Medicaid
planning were even sought to
Counting on Medicaid alone when other options, such as long-term care insurance, are available does not appear to be prudent financial planning.
Long-term Care Insurance
While Medicare, Medigap policies, and catastrophic coverages will offer adequate protection for most hospital and physician services, they are simply not going to provide protection for long-term custodial care. Nursing home costs in the New York metropolitan area often exceed $80,000 per year. Home health care expenses can sometimes exceed nursing home costs. This would occur if "round-the-clock" skilled in-home care services were required. An Alzheimer's patient, for example, may require constant supervision and companionship, even if his or her physical health is good. Most people would prefer, and much planning revolves around, protection for adequate home health care. Provision for either nursing home care only, or home care only, is flawed planning in most situations.
During the last decade, long-term care insurance (LTCI) has emerged as the preferred funding tool for persons that can afford current premiums and have assets to protect. The scope of policy improvements has been unprecedented. Yet, even with these enhancements, policy premiums have remained fairly consistent. The better insurers have offered upgraded policies to existing policyholders without the need to demonstrate continued insurability. Given the rate of policy improvements and changes to the law, an advisor well versed in the intricacies of long-term care planning and insurance
First and foremost, the policy should be from a financially sound insurance company, committed to this product and marketplace, with competitive rates and benefits. The policy should provide sufficient flexibility to adequately cover long-term care needs for each person's special circumstances. Coverage in a nursing home, at home, and in other settings (such as assisted living facilities) should be available.
The following paragraphs briefly describe the salient benefits and issues:
Levels of Care Covered. All levels of care should be covered. The three primary levels of care are skilled, intermediate, and custodial. Skilled care typically covers skilled nursing, restorative, or therapeutic services. It is provided on a daily basis by a trained professional under the supervision of a physician. Intermediate care generally consists of routine nursing services with intermittent availability of skilled nursing, restorative, or therapeutic services. Custodial care refers to personal care where the primary focus is assistance with activities of daily living. As mentioned previously, chronic long-term care is most often associated with custodial care. In nearly all states, an LTCI policy cannot gain licensure unless it covers all three of these levels. Furthermore, prior hospitalization requirements and "step-down" requirements (denials of benefits for lower
levels of care unless higher levels of care have already been accessed) are also
Amount of Daily Benefit. How much will be paid for each level of care? The local cost of the benefits, for example, $250 per day, is the main consideration. If, for instance, a person owns a policy that provides $100 per day in nursing home benefits and eventually enters a facility that costs $150 per day, $50 in co-payments must be paid out-of-pocket. Originally, LTCI policies typically limited home care benefits to only 50% of the daily nursing home limit. Today, some basic policies offer the same level of benefits for at-home and institutional care. Other policies pay more for institutional care, but riders are available to enhance the benefit level for home care.
Initially, the daily dollar amount was the only measure of LTCI benefits. An increasing trend is to adapt the "pool of money" concept from disability insurance. Although there are daily dollar limits on coverage, if that much is not used in a particular day, the rest remains in the pool for later use.
Benefit Duration. How long will the benefits be paid? Options can range from two to 10 years or more, and lifetime coverage is available as well. A person who wants to make a Medicaid plan can make LTCI an element of the plan: For instance, if the plan creates a risk of a 25-month penalty period, an LTCI policy that provides more than two years of benefits will satisfy the person's payment needs during the penalty period. The risk, however, is that Medicaid law will change in the interim.
Waiting Period. What is the waiting period before coverage begins? Examples range from zero days to 365 days. How long can the individual self pay? How long is it reasonable to self pay? Of course, the shorter the benefit period, the larger the premium, so the individual must trade a known higher premium against the potential savings if and when benefits are triggered.
Benefit Triggers. This relates to the event that causes the policy benefits to flow to the insured. The most restrictive benefit trigger is one that conditions care on medical necessity alone. It is desirous to have reasonably liberal benefit triggers. The better policies will pay in the event skilled care, intermediate care, or custodial care is needed as a result of physical or cognitive impairment. Cognitive impairment may be defined as a deterioration in intellectual capacity which requires regular supervision or assistance in daily living. It can be caused by memory loss, Alzheimer's disease, senile dementia, or other nervous or mental disorders of organic origin.
What restrictions exist for pre-existing conditions, prior hospital stays, or conditioning nursing home benefits on prior home care benefits? These limitations may appear in older, nonupdated policies.
The Internal Revenue Code contains tax incentives for the purchase of LTCI. These incentives apply only to qualified policies that satisfy various requirements (including consumer protection requirements). All qualified policies must be triggered either when the insured person is cognitively impaired or if the insured needs daily living assistance.
Although LTCI policies do not generally cover mental illness, Alzheimer's disease and related dementias are considered organic illnesses of the brain, and therefore coverage is mandatory.
Inflation Protection. Over time, the policy benefits can be eroded by inflation absent suitable inflation adjustment. Examples of permitted options include the following:
* Automatic annual simple or compound benefit increases;
* Periodic options to increase benefits without providing proof of insurability; or
* Coverages for specific percentages of actual or reasonable charges.
Premiums. Typically, the premiums are level for life, locked in at the age the client purchases the coverage. The insurer cannot increase premiums on an individual basis; classwide premium increases require approval from the State Insurance Department after showing a financial need.
Waiver of Premium. Most LTCI policies are written to waive the premium while the policy is on claim status, although some waive the premium only if the insured person is confined to a covered institution, such as a nursing home.
As noted above, LTCI and Medicaid planning can be coordinated. Congress instituted, then terminated, a pilot project to combine the two, so that persons that maintained adequate LTCI coverage would be able to qualify for Medicaid benefits after the exhaustion of that coverage. In New York State, unique LTCI policies are available, often called partnership policies or the Robert Wood Johnson policies.
These policies are offered through most of the same insurers and agents or brokers as are the traditional policies. They require a minimum three-year nursing home benefit or six-year home care benefit, a minimum $134 per day nursing home benefit and a minimum $67 per day home care benefit (1999 figures), as well as various other provisions which the state believes offer more consumer protection.
The partnership policies are unique in that once the policy benefits are exhausted, the insured can qualify for Medicaid while retaining all assets. The downside is that all income over the Medicaid income levels mentioned in the Medicaid section above must be contributed towards the cost of care. In addition, only New York State Medicaid applies. While the insurance component will pay for three (or six) years of care regardless of the state in which the insured resides, after that time period, New York State Medicaid will only be provided for care given in New York State.
Connecticut, California, and Indiana also have partnership policies. However, each of these plans contains differences from the New York version.
New Tax Incentives
Federal Legislation. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) was signed into law on August 21, 1996. HIPAA generally treats tax-qualified LTCI (TQ-LTCI) as accident and health insurance. Proceeds from TQ-LTCI are fully excludable from income. On disability type policies, up to $190 per day or $69,350 annually (indexed for inflation) may be excludable from income, if the excess is not applied to actual qualified costs. Certain pre-1997 policies are grandfathered, and considered TQ-LTCI.
Employer-provided coverage would be treated as accident and health insurance and, therefore, generally deductible by the employer. However, an option to fund LTCI through a cafeteria plan, or flexible spending account, where employees are paying with pretax dollars is not available.
Self-employed individuals may use the same standards for deducting LTCI as other health insurance coverage. The Taxpayer Relief Act of 1997 changed the phase-in schedule under which self-employed individuals may deduct health insurance costs, including LTCI costs, as trade or business expenses. Deductible percentages under the new schedule are as follows:
2007 and thereafter 100%
These changes are likely to encourage greater emphasis on LTCI as an employee benefit. However, LTCI is not yet a common employee benefit, and most people that want this coverage will have to pay for it themselves. HIPAA allows taxpayers that itemize their deductions to add either their full LTCI premium or an amount based on their age (whichever is lower) to their other unreimbursed medical expenses. The total is deductible to the extent that it exceeds 7.5% of AGI. The limitation on premium for the 1999 taxable year varies by age as follows:
40 and under $210
71 and over $2,660
New York State Legislation. On April 27, 1997, New York Senate Bill 3880 (1997) was enacted, permitting New York State residents to deduct LTCI premium payments on their state (and, if applicable, New York City) tax returns. As of January 1, 1997, tax-qualified or grandfathered premiums can be deducted, with the same age-based dollar limitations as under the Federal law. However, the full premium can be deducted; it is not subject to the 7.5% of AGI limitation. *
Bruce L. Birnbaum, JD, LLM, is the senior financial advisor for Signator Financial Networks, East Meadow, N.Y., and can be reached at (516) 794-9696.
Milton Miller, CPA
William Bregman, CPA/PFS
Alan J. Straus, CPA
David Kahn, CPA
American Express Tax and Business Services, New York
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