Long-term care: Choosing the right product for your needs
Long-term care insurance pays for nursing home care and other expenses not covered by health insurance, Medicare or Medicaid when the policyholder can no longer perform certain activities of daily living or suffers from a cognitive impairment. Many individuals may feel uncomfortable relying on their children or family members for support and find that long-term care insurance could help cover out-of-pocket expenses. Without longterm care insurance, the cost of providing these services may quickly deplete the savings of the individual and/or their family.
When shopping for longterm care insurance, there are multiple coverage options: (i) a traditional long-term care product, (ii) a permanent insurance policy with a long-term care insurance rider, and (iii) a linked benefit plan.
Traditional long-term care products
Traditional long-term care insurance may provide the most comprehensive coverage for the cost.
Depending upon the type of policy purchased, long-term care insurance can cover home care, assisted living, adult daycare, respite care, hospice care, nursing home care and Alzheimer’s facilities. If home care coverage is purchased, long-term care insurance can pay for home care, often from the first day it is needed. It may pay for a visiting or live-in caregiver, companion, housekeeper, therapist or private duty nurse up to seven days a week, 24 hours a day (up to the policy benefit maximum).
Policies may provide substantial premium discounts for couples, allow them to pool benefits (commonly known as “shared care”) and have multiple inflation protection options for protection against rising costs. However, depending upon the option selected, the annual premiums could increase.
Many traditional long-term care policies use the person’s inability to perform certain “activities of daily living’’ (“ADLs”) as one trigger to determine if the policyholder is eligible for the long-term care benefit. ADLs are (i) bathing, (ii) continence, (iii) dressing, (iv) eating, (v) toileting and (vi) transferring (i.e., moving from one place to another). Most long-term care policies will pay benefits when one cannot do two of the six activities of daily living, but this may vary depending upon the individual’s policy. Another trigger that can be used is when the policyholder needs substantial assistance for a designated period of time due to “cognitive impairment.” Before paying benefits, the insurance company will usually require certification of the elements of these triggers by a physician or licensed healthcare practitioner.
Premiums paid on traditional long-term care insurance policies may also be eligible for an income tax deduction. The amount of the deduction depends on (i) whether the insured’s total unreimbursed medical expenditures exceed a certain percentage of the insured’s adjusted gross income, (ii) the age of the covered person, and (iii) whether the policy is tax-qualified. If paid for by the individual, benefits paid from a long-term care insurance policy are generally excluded from income.
In addition to traditional long-term care products, the combination policies described below may be attractive for some people whose health prevents them from qualifying for traditional long-term care insurance as the underwriting standards on the rider may be more lenient.
Permanent life insurance policies with long-term care insurance riders
Permanent life insurance has both a death benefit and a savings or investment component (commonly referred to as the policy’s “cash value”). Clients interested in purchasing either a whole life, universal life or variable universal life insurance policy may also have an option to purchase a rider that will provide long-term care insurance coverage. A life insurance policy with a long-term care insurance rider provides access up to a specified percentage of the policy’s death benefit to pay for care. At the client’s death, the client’s beneficiaries receive the remaining death benefit.
The living benefits in these types of policies are typically limited to the amount of the death benefit. The cost of the living benefits can be much less than those of a typical traditional long-term care insurance policy, which generally covers all qualified expenses for a period of two to 10 years.
Linked benefit plans: Combination of life insurance and long-term care insurance policy
These are typically universal life insurance policies with an optional long-term care benefit rider. Policy premiums can be paid up front with a single premium amount or in installments during a specific period of time, and the premium amounts are locked in at the time of purchase.
There is also available for purchase a Refund of Premium (“ROP”) feature available to policyholders who may change their mind after the policy is purchased. The biggest attraction of a combination policy is the combination of the long-term care benefit and the death benefit, so if the policyholder does not use the long-term care benefit during their lifetime, the policy will pay a death benefit to their beneficiaries.