pays for the kind of care needed by individuals who have chronic illnesses or disabilities. It often covers the cost of nursing home care and provides coverage for homebased care—visiting nurses, chore services, and respite care for daily caregivers who need time away from these difficult duties. Such coverage becomes important when one considers that the annual cost for nursing home confinement can reach $67,000 or more. Many people believe Medicare or Medicare supplement policies will pay for this care if they need it. Medicare will cover nursing home care if it is part of the treatment for a covered injury or illness, but care needed because of aging is not covered by Medicare or Medicare supplements. Medicare and supplementary insurance pay for skilled nursing care, but the coverage is extremely limited (the care must immediately follow a period of hospital confinement, and no benefits are provided after the 100th day). Medicaid does pay for nursing home care but provides coverage only for needy families. Sadly, many people must pay for their own nursing home care and eventually turn to Medicaid when their life savings are gone.
History of LTC Coverage
The earliest long-term care policies were relatively more restrictive than the current generation of plans, often requiring prior hospitalization and a level of service greater than mere custodial care. Many covered care in a nursing facility only, rather than also providing coverage for services in the home of the individual or in an adult day care center. Most excluded Alzheimer’s and dementia—two common illnesses of the elderly and the reason many older persons require such care. Some long-term care policies were so closely tied to Medicare’s restrictions that they paid little that Medicare did not already pay. During the early development period, policies often had so many restrictions that few insureds qualified for payment of benefits. LTC policies are still evolving. However, with attention to the problem of long-term care firmly focused, legislators and the insurance industry have begun to come to grips with the far-reaching ramifications of health services for an older population. With the federal government responding to consumer interests in long-term care coverages, the National Association of Insurance Commissioners (NAIC) developed a model to help state legislatures in an effort to keep regulation on a state level. The increased knowledge of insurance buyers has played a part in the development and refinement of LTC policies. In addition, law changes have clarified the tax status of long-term care policies, which now are treated like accident and health policies. Proceeds of qualified long-term care policies are generally received income tax free, and premiums may be deductible as a medical expense, within certain limitations. Federal law now determines what constitutes a qualified long-term care policy eligible for these tax advantages. The law spells out when benefits must be paid and what options must be offered to prospects for long-term care insurance. Note, however, that insurers are not required to offer and consumers are not required to purchase qualified long-term care policies. Nonqualified policies may offer benefits that are more attractive or easier to obtain than qualified policies and may be more desirable to certain consumers even if the nonqualified policies do not offer the tax advantages of qualified policies.
More than half of the states currently use the NAIC or a similar model. Key issues include the following:
A benefit period of at least one year; Strict restrictions on cancellation, specifically prohibiting cancellation because of the insured’s aging; most policies now guarantee renewability; Standards for covering preexisting conditions; A free-look period; Prohibition of exclusions for Alzheimer’s disease
Another factor in the evolution and increasing availability of LTC policies is that consumers, too, are more aware that:
Medicare does not cover long-term care (much to the surprise of most of the population, who at one time believed Medicare did cover most nursing home care); one in four people are likely to spend at least some time in a nursing home after age 65, increasing to about one in three if they live to age 85; and the average cost for nursing home confinement is currently about $3,300 per month and can be as high as $5,000 per month, depending on location and level of care. These costs are likely to continue growing.
Who Needs LTC Insurance?
LTC insurance enables qualified individuals to maintain their independence. With adequate coverage, the individual does not have to rely on friends or family to provide custodial needs or necessary funds to help defray the costs of a nursing home stay. Protection of personal assets may be the most important reason for purchasing LTC insurance. Possibly, the question isn’t, “Can I afford to buy LTC insurance?” but rather, “Can I afford not to purchase LTC insurance?” When an individual has substantial financial assets (and retirement income), the possibility that LTC expenses could mean a significant reduction in the person’s assets and standard of living is a real threat. Thus, the purchase of LTC insurance to protect one’s personal financial resources may be a wise financial decision.
Probability of Needing Care
It is estimated that by the year 2030, there will be more than 64 million Americans age 65 and over. In addition, life expectancy is increasing in the United States. People reaching 65 today can expect to live 10 or even 20 years in retirement. These retirees will face a greater potential need for long-term medical care simply because of longer life expectancy. The likelihood of a nursing home confinement increases as age increases. By 2050, it is expected that over 20 million Americans 65 or older will need long-term care.
What are the available options for the senior citizen facing a stay in a nursing home? Following are some of the alternatives:
Using personal assets; Depending on relatives; Depending on government programs
Options Other Than Insurance
Depending on friends and relatives for custodial care may not be practical because of changing socioeconomic trends. Today’s family is no longer a cohesive unit but a fragmented group; family members live great distances from each other. The Medicare program is not designed to provide custodial care. It will cover a limited amount of rehabilitative care in a skilled nursing facility approved by Medicare. Because Medicare will pay only for rehabilitative services, it requires prior hospitalization before admission to the skilled nursing facility. Another avenue is Medicaid, which requires the individual to prove financial need. This normally requires that the individual get rid of financial resources and spend down to a poverty level to obtain Medicaid eligibility. The Health Care Financing Administration reports that about one-half of all Medicaid spending goes to people who had financial resources when they entered a nursing home but reached the poverty level while in the nursing home.
One way in which LTC policies differ from other health plans concerns how risks are rated. Although people afflicted with heart disease or diabetes, for example, would be rated as substandard risks under most health insurance plans, LTC policies, because of their focus on aging people, use a different means of classification. The key for LTC policies is whether an individual can perform the activities of daily living (ADLs) and, if so, with what degree of proficiency. ADLs include such things as dressing, bathing, eating, walking, and similar activities to care for oneself. Thus, an individual who has a heart disease but is still able to perform ADLs is a standard risk under LTC policies.
LTC Rating Factors example
Corey, age 60, has had several strokes during the past five years but is completely capable of performing the activities of daily living. Under a major medical policy, it is likely that Corey would be classified as a substandard risk. Under an LTC policy, Corey would be classified as a standard risk.
Types of Benefits
Three terms regarding the type of long-term care an individual requires are important to understand in order to determine what an LTC policy covers. Of these, custodial, or residential, care is the type most elderly people will require at some time in their later years, and it is also the type that is not covered by Medicare.
Skilled nursing care
nursing and rehabilitative care that is required daily and can be performed only by skilled medical practitioners on a doctor’s orders.
nursing and rehabilitative care that is required occasionally and can be performed only by skilled medical practitioners on a doctor’s orders.
Custodial or residential care
is help in performing ADLs and can be performed by someone without medical skills or training, but still must be based on a doctor’s orders.
Home health care
refers to services performed from time to time in the individual’s home. It may include skilled nursing, various types of therapy, help with ADLs, and help with housework.
Adult day care
provides company, supervision, and social and recreational support during the day for people who live at home and need assistance. This service is especially useful for those who are cared for by relatives who work during the day.
let’s look at provisions that are commonly included in these coverages. You might also want to glance back at the NAIC model requirements for comparison purposes.
Common Provisions – Eligibility
What are the youngest and oldest ages at which LTC policies may be purchased? Most minimum ages range between 50 and 60 years, but more recent policies may include a much lower minimum age, including some as low as age 18. Upper age limits at which policies may be purchased range from age 69 to 89.
Common Provisions – Renewability
Virtually all of the current generation of LTC policies are guaranteed renewable and cannot be canceled except for nonpayment of premium. The insurer cannot cancel the policy but does reserve the right to increase premiums in accordance with the policy provisions. If the premiums are to be increased, they will be changed on the policy anniversary, and the increased premium will be for an entire class of insureds, not just a single individual. Some LTC policies are noncancelable, which means the insured has the right to continue the coverage by timely payment of premiums, and the insurer has no right to make any change in policy provisions, cannot decline to renew, and cannot change the premium rate at renewal for any reason.
Common Provisions – Premiums
Similar to life insurance, premiums are generally based on when an individual purchases this insurance. The younger the individual is at the time of purchase, the lower the premium. In addition, premiums will fluctuate according to the elimination and benefit periods selected—the longer the elimination period, the lower the premium; the longer the benefit period, the higher the premium. Finally, premium variations may result from underwriting considerations. Underwriters consider risk factors, including an applicant’s current ability to perform activities of daily living. The premium will be higher if an applicant needs assistance with an ADL at the time of application than it would be if the applicant did not need such assistance.
Common Provisions – Waiver of Premium
Nearly all LTC policies include a waiver of premium provision that takes effect after the insured has been confined for a specified period of time. The usual period is 90 days, but it is as long as 180 days in some policies. A few policies have no such provision, which means the insured will be required to continue premium payments no matter how long care continues. When waiver of premium applies, premium payment generally resumes when the care ceases.
Common Provisions – Prior Hospitalization
Formerly, most nursing home policies required a hospital stay before confinement to a nursing home in order for benefits to be paid. This is no longer the case.
Common Provisions – Care Level
This refers to whether the policy pays only if skilled nursing, intermediate, or custodial care, as specified in the policy, is required at the time the individual enters the nursing home. This is extremely important, since some policies pay only if intermediate or skilled care is involved, whereas custodial care, which is the most common type required by elders, may not be included. The best policies are those that will pay regardless of the level of care.
Common Provisions – Hospice Care
Hospice care is often offered as an optional benefit under LTC policies. The primary focus of hospice care is pain control, comfort, and counseling for the terminally ill patient and the patient’s family. A hospice is simply a facility whose purpose is to help terminally ill patients die with dignity and with as little suffering as possible. Typically, the expenses incurred in a hospice will be room and board and medication for pain.
Common Provisions – Respite Care
Respite care is normally associated with hospice care. With this benefit, the patient is admitted to a nursing home for needed care for a short period, or the LTC policy will cover the cost of replacing for a short period (a day or weekend perhaps) the primary care giver, usually a family member, who is looking after an elderly person in the home.
Common Provisions – Home Health Care
Most LTC policies now cover home health care as an alternative to nursing home care. Home health care is provided in the individual’s home and must begin within a prescribed period following a nursing home stay. Usually, the home health care benefit under the policy will be 60% of the regular daily nursing home benefit. Home health care is an extension of intermediate custodial care. The patient is in need of some health care but is able to generally function without the need to be confined to a nursing home. Home health care might include physical therapy and some custodial care, such as meal preparation.
Common Provisions – Adult Day Care
LTC policies also increasingly make provision for adult day care to allow primary caregivers who work the opportunity to tend to their employment responsibilities. The day care may be provided in the home or in an adult day care facility. Adult day care is basically social and health care services for functionally impaired adults. This benefit provides reimbursement for expenses pertaining to an adult day care center such as a neighborhood recreational center, a community center, and others. Typically, adult day care includes transportation to and from a day care center and a variety of health, social, and related activities. This care usually also includes meals and certain medical services. Specialized care for patients with Alzheimer’s is usually included in adult day care benefits.
Common Provisions – Professional Care Advisor
Coverage may be provided for the services of a care coordinator to help design the most appropriate plan of treatment.
Common Provisions – Benefit Amount
The prospective insured may be offered a choice of the maximum daily benefit amount for a nursing home stay or covered home health care. Naturally, higher daily benefits mean higher annual premiums. Most LTC policies provide a daily benefit during confinement. Traditionally, this benefit has been provided as a maximum daily amount (reimbursement for charges up to the stated limit, but not more than the daily limit). Benefit amounts range from $50 per day to $150 or $200 per day. However, some insurers provide coverage on an expense-incurred basis (full reimbursement for the actual charges incurred). The maximum policy benefit may be calculated by multiplying the daily benefit by the number of days in the benefit period. Most policies specify the dollar amount per day that will be paid for skilled nursing care. Some policies may include sublimits for special types of care or services (e.g., home health care or adult day care). The benefit for home health care or adult day care is usually a fixed percentage of the specified daily benefit, usually 50%. In addition, there may be a deductible amount that must be satisfied before the policy begins to pay.
Common Provisions – Benefit Amount example
To illustrate these points, let’s use the example of Kim, who has an LTC policy with a 30-day elimination period, a daily benefit of $75 per day, and a two-year benefit period. Her maximum policy benefit is $54,750 ($75 a day times 730 days). If Kim is confined to a nursing home for a total of seven months, her benefit calculation will be as follows: First 30 days: no benefit paid (elimination period); Next six months: $75 per day (assumes 30-day month); $75 × 180 = $13,500. If Kim’s actual charges were more than $75 per day, she would have to pay the additional amount.
Common Provisions – Benefit Periods
LTC policies vary as to the maximum period for which benefits will be paid, usually from three to five years. Some policies offer unlimited benefit periods. Some policies may contain both a benefit period per stay plus a lifetime maximum benefit period. The benefit period may also end when a maximum amount has been paid out.
Common Provisions – Exclusions
Each policy should be read carefully to determine what is excluded. A major stride in current policies is that most now cover Alzheimer’s disease and organic-based mental illness, both of which formerly were often excluded. However, some exclusions remain. Among these are war and acts of war, alcohol or drug dependency, self-inflicted injuries, mental illness and nervous disorders without a demonstrable organic cause, and treatment provided without cost to the insured (such as that received in a veteran’s hospital).
Common Provisions – Preexisting Conditions
Most—but not all—LTC policies do not cover conditions that existed during the six months before the policy effective date. A few policies have no such exclusion.
Common Provisions – Elimination Period
Similar to a disability income policy, no LTC benefits will be paid until the elimination period is satisfied. Most long-term care policies provide for a period, usually expressed in days or months, at the beginning of a confinement in a long-term care facility, during which no benefits are payable. The elimination period could be defined as a “time deductible.” The elimination period could be 30 days or longer. Thus, after the insured is confined to a nursing home for a period of 30 days, LTC benefits begin. The longer the waiting period, the lower the premium, all other facts being equal. The waiting period can be viewed as the deductible in an LTC policy.
Benefit Triggers – Activities of Daily Living
ADLs are functions or activities that are performed by individuals without assistance, thus allowing personal independence in everyday living. These functions are used as measurement standards to determine the level of personal functioning capacity. Examples of ADLs would include: mobility (or transferring)—the ability to walk; dressing—being able to adequately clothe one’s self; personal hygiene—being able to go to and from the toilet and remain continent; eating—being able to take in food; and bathing. An individual who cannot accommodate these needs will need some type of care. Some LTC policies base eligibility for nursing home benefits on the inability to perform some of the activities of daily living in lieu of sickness or injury. These contracts do not require prior hospitalization or that the insured be admitted to a nursing facility as a result of sickness or injury. Federal standards that determine whether an LTC policy is tax qualified also base eligibility on ADLs.
Benefit Triggers – Cognitive Impairment
This means a deficiency in the ability to think, perceive, reason, or remember, which results in the inability of individuals to take care of themselves without the assistance or supervision of another person. LTC policies may base eligibility for nursing home benefits on cognitive impairment.
Benefit Triggers – Medical Necessity
An LTC policy by definition provides coverage only for medically necessary diagnostic, therapeutic, rehabilitative, maintenance, or personal care services.
qualified long-term care policy
must stipulate that the insured be incapable of performing at least two of the ADLs without assistance for at least 90 days to qualify for benefits. The cognitively impaired must require substantial supervision. A physician must certify that the insured is chronically ill and provide a plan of care. A long-term care policy will not be qualified if it does not conform to these standards. Remember, however, that nonqualified long-term care policies do not have to conform to these federal standards. A nonqualified policy, for example, might require that the insured need assistance with only one ADL with no stipulated time period in order to be eligible for policy benefits. The prospective insured’s concern over qualification for benefits must be weighed against tax consequences when considering qualified versus nonqualified long-term care policies.
Just as with Medicare supplement insurance, long-term care policies are heavily regulated by the state Insurance Departments. States frequently regulate minimum standards, renewability, the insured’s right to return the policy, replacement, marketing standards, and the appropriateness of recommending the purchase of LTC insurance. As with Medicare supplement insurance, frequently the delivery of a buyers guide and outline of coverage is mandatory. Federal law allows the sale of long-term care coverage that “substantially” duplicates that provided under Medicare or Medicaid (but not multiple policies) to Medicare beneficiaries, provided the company discloses the duplication and the policy pays without regard to other benefits.
Emerging LTC Issues
There are literally hundreds of individual contracts, which have not been standardized like Medicare supplement policies. Some emerging issues in the LTC field include inflation protection and nonforfeiture provisions. New federal standards that determine whether an LTC policy is tax qualified require consumer protections, such as the offer of inflation protection and nonforfeiture provisions, as well as imposing additional disclosure requirements.
Emerging LTC Issues – Inflation Protection
Many states require that insurers offer optional inflation protection at the time of policy purchase. The feature must increase benefit levels annually, cover a specific percentage of actual or reasonable charges, or allow the insured to periodically increase benefit levels without needing to provide evidence of continued insurability.
Emerging LTC Issues – Nonforfeiture Provisions
These protect the policyholder from forfeiting all policy values or benefits when the policyowner stops paying premiums and lapses the policy for any reason. Standard nonforfeiture options may include cash surrender value (a lump sum payable upon policy surrender), reduced paid-up insurance (a reduced daily benefit payable for the policy’s benefit period with no further premium payments required), or extended term insurance (a limited extension of coverage for the full amount of policy benefits, without further premium payments required). Nonforfeiture provisions are not commonly included in LTC policies but are beginning to appear in some contracts.
Marketing LTC Coverage
In addition to individual LTC policies, a growing number of insurers offer group LTC plans with provisions similar to those mentioned previously. Still, a third marketing device involves attaching an LTC rider to a life insurance policy called an accelerated benefits rider or a living benefits rider. Accelerated benefits may be available to insureds who are chronically ill and need money for long-term care. Such riders are subject to the same rules as individual long-term care policies, especially with respect to benefit triggers. They also may be designed to cover home health care and nursing home care. Adding an accelerated benefits rider to a life policy costs money in the form of additional premium. How much may be paid by such a rider varies from policy to policy. Some limit benefits to 50 or 75% of the policy’s face value. Others place an absolute ceiling on the amount paid out: for example, $250,000. All, however, take into consideration any outstanding loans against the policy. Payments are ordinarily made to the insured on some kind of periodic basis. Naturally, any accelerated benefits paid out are subtracted from the death benefit paid to the beneficiary when the insured dies.