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July 1991

Using insurance to plan for long-term health care.

by Bell, Evan R.

    Abstract- A key element of personal financial planning is the consideration of long-term health care, and individuals can use insurance to cover the costs of such care. Potential buyers of long-term health care insurance must carefully evaluate coverage and policies before making a purchase. The factors to consider when evaluating policies include coverage for pre-existing conditions, Alzheimer's disease coverage, and guaranteed renewable coverage. The factors for accountants to consider when dealing with a client who decides to purchase long-term health care insurance include determining the method of asset distribution, and executing a power of attorney.

Long-term health care is an important area of personal financial planning, particularly for retirement age clients. With the astronomical costs of today's long-term health care, a plan is not complete if it covers only estate taxes and probate. With the cost of nursing homes averaging $55,000 or more annually, long-term health care can devour the client's assets very quickly and leave the healthy spouse virtually destitute. The potentially devastating financial effects of long-term health care must be part of any plan. For a more complete discussion of the issues in protecting the assets of the elderly, see The CPA Journal, May 1991.

What Term of Insurance is


According to the law, if a transfer of an individual's assets is made by gift or at below market value, there is a 30-month waiting period, subsequent to the transfer, before Medicaid coverage begins. Because of the 30-month below fair market value transfer law, insurance coverage for the first 36 months is usually recommended. This gives the client adequate time before acting to determine if asset transfers are appropriate. If the care is expected to last fewer than three years, the client has purchased insurance coverage and need not go through the process of asset transfer. Transfer of assets means loss of control, and loss of stepped up tax basis benefits available at death. It should be avoided, if possible.

When transfer is indicated, a "Medicaid Trust" should be considered. The Trust must be irrevocable and unchangeable, and the client must give up control and any interest in the principal transferred into the trust. Neither grantor nor spouse can serve as a Trustee. They can, however be the income beneficiaries of the Trust and may leave the assets to a named beneficiary of their choice. The New York State Supreme Court, for example, in January 1990 held in Tittino, that EPTL Sec. 7-1.6(b) allows a court in its sole discretion to make an allowance from the principal to an income beneficiary whose support or education is not sufficiently provided for, regardless of beneficiary consent.

A Medicaid Trust would be more desirable than outright transfer of assets in the case of a grantor who is reasonably assured of ultimately leaving the nursing home or no longer needing continuous care. The income generated from the trust will first be applied to medical treatment before going to the grantor. Any shortage in expenses will then be paid by Medicaid. A qualified transfer might save income spent for medical expenses that would be covered by Medicare, but the transferor could not recover control of income upon recovery.

A Medicaid recipient/or the "at home" spouse, must use almost all joint assets to pay for care before Medicaid coverage begins.

Rules for eligibility for Medicaid are established by each state. For example, in one state, married senior citizens can protect the greater of $ 12,000 or 1/2 of their combined life savings (not to exceed $60,000). If there is an "at home" spouse, there are exempt assets. In addition to the cash balance mentioned above, exempt assets include the family residence if the spouse or dependent relative lives there, household goods, personal effects and up to $3,000 to $5,000 for funeral expenses. Single Medicaid applicants may protect only $3,000 of their life savings. The eligibility rules are complex. There are now consultants who specialize in this area.

The Insurance Solution

Insurance is now available to cover costs of long-term care whether at home or in an institution. There are currently 118 companies that write such coverage (up from 75 in 1987), and sales of this product rose 36% in 1989. Programs vary in scope and in cost. There is even a policy offered by a life insurance company that offers a rider that will return 80% of your total premiums if you stay healthy long enough. It is structured as follows: You receive no refund during the first five years. From years six through 10, you receive 30% rising to 80% of the total premium paid to date. This return of premium rider boosts the cost of the policy substantially, ranging from an additional 25% to 50% based on the insured's age; but it is worth considering. The premium return policy is a specialty, but there are several other policies that are surprisingly affordable, especially when the asset base being protected is considered.

Coverage and Options to


All coverage is not the same and policies must be examined carefully before purchasing Exhibit 1 is a checklist that will help you evaluate a policy. A few of the most important criteria in evaluating coverage are:

* Preexisting conditions;

* Alzheimer's disease; and

* Guaranteed renewable coverage.


Policy A Policy B 1. What services are covered?

* Skilled care

* Intermediate care.

* Custodial care.

* Home health care.

* Other care.

2. How much does the policy pay per

day for:

* Skilled care?

* Intermediate care?

* Custodial care?

* Home health care?

* Other care?

3. Does the policy offer a means for

increasing benefits to account for

expected future costs? If so, how?

Is there an additioanl premium?

4. Doest the policy have a maximum

lifetime benefit? What is it? of

* Nursing home.

* Home health.

5. Does the policy have a maximum

length of coverage per "spell of

illness" of maximum benefit period?

If so, what is it?

* Nursing home.

* Home health.

6. How long do I have to wait before

pre-existing conditions are covered?

7. Is Alzheimer's disease covered?

8. How many days is the elimination or

deductible period before benefit begins?

9. Does this policy requirre:

* Physician certification of need?

* A functional assessment?

* A prior hospital stay for nursing

home care?

* A prior hospital stay for nursing

health care?

* Other?

10. Can the policy be canceled?

11. Will the policy cover you if you

move to another area?

12. What is the age for enrollment?

13. What does the policy cost?

Generally, all policies are rewable, cover Alzheimer's disease, and cover pre-existing conditions with limitation periods, usually six months. If the long-term benefits are needed within six months of the effective date of coverage due to a preexisting condition, coverage may be denied.

Cost of Three-Year Protection

The cost of this protection is surprisingly low for the available benefit. The sample monthly rates in Exhibit 2 are for 36 months of coverage, 100% of cost, up to $200 per day. The policy is offered by a prominent national life insurance company.








The savings in premiums going from a 20-day to 100-day waiting period is not worth the increase in potential medical cost.

The Procedure

If a client decides to implement a plan of long-term health care protection, certain procudures must be followed. First, he or she must determine how assets are to be distributed in the event that asset transfer becomes necessary. If a Medicaid Trust is established, trustees must be chosen. The tax implications must be explored. the plan to be followed should be discussed carefully and completely and written clearly, so there is no misunderstanding as to intentions. Second, the client msut execute a durable power of attorney in favor someone who is familiar with the situation and has the trust of the client to fulfill his or her wishes. This is an essential portion of the plan because the individual entering the nursing home or requiring home care may become incompetent. The only way to be sure that medical wishes (at the time of competence) are carried out is through the durable power of attorney. A living will or proxy should also be considered. The potential economic effect of medical expense without insurance coverage can be disastrous. It is certainly an important topic to be discussed thoroughly and included in a client's financial plan.

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