LTC Insurance

As the transformation of the long term care insurance industry continues, we are committed to keeping our finger on the pulse of the newest and most innovative options.” Kirk Matenaer

Long Term Care Insurance

Long-term care insurance comes in many forms (see Types of Policies) and generally covers care that is not typically covered by ordinary health insurance and Medicare. A comprehensive long-term care insurance policy is designed to provide coverage for home care, assisted living, adult daycare, respite care, hospice care, nursing home and Alzheimer’s facilities.

According to the American Association of Long-Term Care Insurance, the 5 most important things to know about long-term care insurance are:

1. You must health-qualify for long-term care insurance

Not everyone can. Because health changes, especially as you grow older, it’s smart to look into this well before you reach retirement age (your 50s are generally the best time to start). Some of the newer Hybrid products are far more lenient and in some cases have little to no underwriting at all. Take a look at Types of Policies.

2. Long-term care insurance can be far more affordable than most people think.

Cost is an issue; so you need to know there are many ways to make this protection affordable.

3. Rates (Premiums) can vary significantly from one insurer to another.

Each insurer has pricing “sweet spots” based on your age when applying. Available discounts and options can vary too. It’s a reason to work with someone with access to policies from multiple insurers in order to get you the best coverage for the best rate. Our online quoting tool consists of 19 different companies.

4. Health qualifications can also vary from one insurer to another.

If you’re in great health, don’t use tobacco products, take no medications — then every insurer will most likely accept you. Each insurer sets their own health-qualifications and they change from time to time. Be prepared to share information with an insurance professional. You want them matching you with the company offering the best protection for the best price.

5. You’re only going to buy long-term care insurance once.

Deciding to buy long-term care insurance is a financial and emotional decision. But, it’s different than buying car or home insurance, which people switch from time to time. It’s almost never economically advantageous to switch (primarily because costs are based on your age at application). Many people sell long-term care insurance. Make sure you work with someone who really knows this business. It will save you money and yield benefits for many years to come.

Types of Policies

Long-term care insurance is now available to individuals in many forms. There are policies that function to only provide benefits for long-term care purposes and there are also policies that blend long-term care insurance with another form of insurance such as life insurance or annuities. Some policies require you to pay continuous premiums and others may require only limited payments or even a “one time” single payment. Each type of policy provides its own unique set of opportunities in the planning process.

Click on the chart below to learn about the specific features of each.

Long Term Care Insurance

Traditional long-term care insurance works similarly to homeowner’s, health, and auto insurance. Payment of premiums provides for access to a specified pool of money to pay for your care. If this type of policy is never used, premiums are typically not refunded. Traditional long-term care insurance is sold most often in daily or monthly increments, so you would purchase a policy that would pay anywhere from $100-$500 per day or $3,000-$15,000 per month for a stated number of years. For example: a $3,000 per month benefit for 5 years would equate to a $180,000 pool of money.

When it comes to traditional long-term care insurance, here are the most important features to understand:

  • Daily or monthly benefit is the cost per day or per month that the policy will cover. It is a good idea to ask for quotes based on a policy that would cover you for $100 per day or $3,000 per month, because then you can easily determine a higher or lower multiple of that policy rate based on the round number.
  • Total benefit period is the length of time over which the policy will pay out. The average stay in a long-term care facility is already low—around two years—but most people utilize care at home first. Unless there’s a family history of dementia or Alzheimer’s, a five-year benefit is usually adequate.
  • Inflation protectionhelps the value of your coverage keep up with the rising cost of care, providing for annual increases in your monthly or daily amount for as long as your coverage remains in force. It is very important to strongly consider compound inflation protection.
  • Elimination period is like a deductible, but it’s a deductible of time. It’s the initial time frame in which the policy will not pay. Because Medicare will typically pay for the first 100 days, consider an elimination period of 90 days or more.
  • Benefits for couples such as discounts and shared benefits are available with many companies.
  • State Partnership programs promote the purchase of private LTC insurance by offering consumers access to Medicaid under special eligibility rules should additional LTC coverage (beyond what the policies provide) be needed. Only properly structured traditional long-term care insurance policies can be partnership qualified.

Linked Benefit Life Insurance

Linked Benefit Life Insurance is a life insurance policy with a rider that allows the insured access to the death benefit while living, if the need for long-term care arises.

Many life insurance companies offer a long-term care rider. When purchasing life insurance, for an additional cost you can add this rider to your policy. Depending on the company, this rider is available with term insurance, whole life, universal life and variable universal life. This rider gives you the flexibility to use your one life insurance policy in two important ways:

  1. As a death benefit for your beneficiaries
  2. To pay for your qualified long-term care expenses

This rider is simply an acceleration of your life insurance death benefit. As such the LTC rider payout will reduce both the death benefit and cash surrender values.

Advantages of Linked Benefit Life Insurance:

  • Chances of using the policy are 100%
  • If you never need long-term care, your beneficiaries will still receive an income tax-free death benefit as long as your policy remains in force
  • If you do need long-term care, your beneficiaries will still receive any unused benefits.
  • Premiums for life insurance are often guaranteed for life and can be paid Annually, Semi-Annually, Quarterly, and Monthly.
  • Survivorship policies are available in which both spouses can be insured under one policy. Even when one spouse is otherwise uninsurable.
  • Some companies may offer a long-term care benefit greater than the actual death benefit.
  • Some companies also offer a guaranteed minimum death benefit. Which, if you use your entire death benefit for long-term care expenses, beneficiaries are still guaranteed to be paid a small percentage (usually 5-10%) of your original death benefit, less any policy indebtedness.
  • Conversion opportunities

Long-term care riders vary significantly between different carriers. It’s important to compare the cost of the rider, payout structure, benefit triggers, policy guarantees etc… Many carriers offer a “Chronic Illness” rider. This is NOT a long-term care rider! They can be very similar but typically chronic illness riders are much more restrictive. ALWAYS consult with a long-term care specialist before purchasing any form of long-term care coverage.

Hybrid Life Insurance

Hybrid life insurance is a combination of life insurance and long-term care insurance. Unlike linked benefit life insurance, hybrid policies typically provide a long-term care benefit amount that is greater than the actual death benefit of the policy. These policies are most often funded with a “one time” single “lump-sum” payment.

Advantages of Hybrid Life Insurance:

  • A “one time” single “lump-sum” payment creates a “paid up” policy guaranteed for life
  • Most companies offer a “Return of Premium” rider in which the initial lump-sum payment can be refunded without penalty at any time during the life of the contract
  • Chances of using the policy are 100%
  • If you never need long-term care, your beneficiaries will still receive an income tax-free death benefit as long as your policy remains in force
  • If you do need long-term care, your beneficiaries will still receive any unused benefits.
  • Survivorship policies are available in which both spouses can be insured under one policy. Even when one spouse is otherwise uninsurable.
  • Most companies also offer a guaranteed minimum death benefit. Which, if you use your entire death benefit for long-term care expenses, beneficiaries are still guaranteed to be paid a small percentage (usually 5-10%) of your original death benefit, less any policy indebtedness.

Hybrid Annuities

A “Hybrid” annuity product features an annuity combined with a qualified long-term care insurance rider. It provides financial protection for retirement assets by offering benefits for a potential long-term care event. The long-term care benefits are typically a multiple of your initial investment. In other words a $100K investment in to the annuity can almost immediately be worth up to $300K in long-term care benefits.

Under this combination design, the insured can simply reposition assets into an annuity and receive growth on principal as well as long-term care protection. In accordance with the Pension Protection Act, amounts including investment gains can be paid out as tax-free LTC benefits. The insured maintains the account value and death benefit within the annuity to the extent that these amounts are not used for LTC benefits. Any withdrawals taken for purposes other than for qualified long-term expenses will naturally reduce the account value and thus the total LTC guaranteed benefit as well.

Advantages of Hybrid Annuities:

  • If you need long-term care you can receive up to three times the annuity value to pay for your care
  • In many cases underwriting is limited
  • In some case there is no underwriting
  • If you don’t need long-term care, you still receive the benefits of the annuity
  • Can have a guaranteed interest rate
  • Tax-deferred growth
  • Access to your principal through penalty-free partial withdrawals (typically 10% of account value)
  • Ability to create a guaranteed lifetime income stream
  • Provides a death benefit to your beneficiaries that is designed to avoid probate
  • Usually paid with a one- time lump-sum premium payment
  • Conversion opportunities
  • Can be guaranteed benefits for life

Tax Information

In general, the benefits of tax-qualified long term care insurance policies are received tax-free by the policyholder.

In many cases, long term care insurance premiums may be tax-deductible. Click on the link below to learn state specific tax information regarding long-term care insurance and:

  • Individuals
  • Sole Proprietors
  • Partnerships
  • S Corporations
  • C Corporations
  • Health Savings Accounts

View 2015 Long-Term Care Tax Guide Pdf

View 2014 Long-Term Care Tax Guide Pdf

View 2013 Long-Term Care Tax Guide Pdf

Conversion Opportunities

Examples of sources used to fund a hybrid long-term care product:

  • Savings and money markets
  • Certificates of Deposit
  • Securities
  • IRA’s
  • Other qualified funds
  • Annuities
  • Life Insurance policies (with cash value)

1035 Exchanges

One of the unique advantages of the hybrid policies is the ability to convert existing life or annuity policies with cash value into a newer hybrid policy containing long-term care coverage. For example, in converting an existing life insurance policy with cash value into a new hybrid policy; the insured will retain life insurance coverage in the new policy, gain long-term care benefits and in most cases will owe no further premiums.

A Section 1035 exchange permits a policy-owner to transfer the cash value from one life insurance or annuity contract to another without income tax consequences, provided proper procedures are followed.

Policy Usage

Beginning January 1, 1997 as a result of the Health Insurance Portability and Accountability Act (HIPAA), the “benefit triggers” for tax-qualified long term care insurance policies were standardized and built around either “cognitive impairment” or “activities of daily living”. This action “leveled the playing field” among carriers and has made it much easier for policyholders and their professional advisors to determine when the benefits of a policy might be applicable.

State Partnership Programs

The Long-Term Care Partnership Program is a public-private partnership between states and private insurance companies, designed to reduce Medicaid expenditures by delaying or eliminating the need for some people to rely on Medicaid to pay for long-term care services. Individuals, who buy select private long-term care insurance policies that are designated by a state as partnership policies and eventually need long-term care services, first rely on benefits from their private long-term care insurance policy to cover long-term care costs before they access Medicaid. To qualify for Medicaid, applicants must meet certain eligibility requirements, including income and asset requirements. Traditionally, applicants cannot have assets that exceed certain thresholds and must “spend down” or deplete as much of their assets as is required to meet financial eligibility thresholds. To encourage the purchase of private partnership policies, long-term care insurance policyholders are allowed to protect some or all of their assets from Medicaid spend-down requirements during the eligibility determination process.

To find out specific information about your state and whether or not it offers partnership qualified policies, click here.
To learn more general information about State Partnership Programs, click here.

Pension Protection Act (PPA)

Public Law 109-280, is a wide-ranging piece of legislation signed into law August 17th, 2006. While the majority of it deals with changes and reforms to pension governance, Section 844 of the act deals specifically with annuities, life insurance, and long-term care and new tax advantages. The legislation provides tax clarification of long term care insurance (LTCI) combination policies and also the ability to pay LTCI premiums in a tax-advantaged way using life insurance or annuity cash values.

Before the PPA, the tax treatment of life/long term care combination policies could be cumbersome. The IRS viewed the life insurance policy and the LTCI component as one single contract, and combination policy owners could receive a 1099 tax notice for LTCI costs paid within the life contract. The PPA clarifies that properly structured combination policies will be considered as two separate contracts.  This allows the long-term care portion of the policy to comply with the HIPAA guidelines.  As a result effective Jan. 1, 2010, the LTCI cost can be paid on a tax-free basis for linked benefit life (or annuity) contracts purchased Jan. 1, 1997 or later.

In addition, the tax treatment of annuity/long term care combinations was unclear before the PPA. The PPA, however, makes it clear that LTCI benefits paid from an annuity combination policy purchased after Jan. 1, 1997 are tax-free, as long as the benefit doesn’t exceed the greater of the actual cost of long term care or that year’s daily benefit cap prescribed in HIPAA for taxation purposes. Also, as with combination life/LTCI policies, the internal transfer to pay the LTCI cost in an annuity/LTCI is tax-free.

The PPA, then, allows clients to use money currently held in annuities or life insurance contracts for LTCI premiums, and on a tax-free basis.

View the pdf to learn more about the Pension Protection Act