Long Term Care
#1 Cause of Bankruptcy
For Retirees is Long Term Care Shortfalls
Hi, this is Doug again with an important series consumer alerts below.
In Georgia and many other states, NOT OWNING Long Term Care Insurance is a HUGE INVENSTMENT MISTAKE (statistics prove long term care is the number one cause for bankruptcy amongst retirees – running out of money for nursing home and assisted living costs before running out of life)… any good advisor worth his or her “salt” should tell their clients to:
“INVEST IN LONG TERM CARE INSURANCE!”*
The IRS considers Tax Qualified Long Term Care Insurance Plans to be an investment. You may even qualify for tax breaks so make sure to talk with a qualified tax expert/CPA who knows what they are doing (and not all do: one person who consulted with me invested in LTCi but her tax preparer forgot to include the deduction! – I had to educate the lady doing her taxes… so don’t assume your preparer is getting you all your deductions! * NOTE: retirees who qualify for Medicaid may not be able to or need to purchase LTCi and they should talk to the appropriate government office to find out what to do – see www.medicare.gov).
Here are key pointsthat you should take heed of for a better retirement:
- “Increasing life expectancies, the entry of baby boomers into retirement, and a number of other factors have severely eroded the boomer generation’s capacity to pay for long-term care. These circumstances have led its members to turn more and more to state Medicaid programs for help, thereby straining the budgets of most states. State LTC partnership programs provide incentives for consumers to fund their own long-term care needs through the purchase of a private insurance policy and thus ease the burden on state Medicaid programs. By purchasing a partnership policy, consumers are assured that assets equal to the amount of the policy’s benefits will be protected from the Medicaid spend-down requirement as well as its estate recovery rule. The enabling legislation for today’s partnership programs was the DRA of 2005. In addition, these programs are framed by and draw from the NAIC’s Long-Term Care Model Law and Regulations and HIPAA 1996, which establish standards for tax-qualified long-term care policies.
Personal Savings and Investments
People don’t have to plan to use their personal savings to pay their long-term care costs—if they don’t make a different plan, people will have to use their personal savings to pay their long-term care costs. And after their personal savings run out, they may have to apply for Medicaid.
Some individuals may be able to cover all of their long-term care costs out of pocket but most can’t when you consider that it can cost as much as $10,000 per person to stay in a Nursing Home if you need mobility care (transferring to and from bed, chair and toilet; being pushed in a wheel chair to the dining room – who wants to eat alone in their room all the time?!). But consider the following:
- The average length of a nursing home stay is 2.4 years.6
- The average annual cost of a private room in a nursing home is $83,950.
Based on these facts, the average total cost of a nursing home stay—in today’s dollars—is about $209,875. That total does not include any costs associated with care that commonly precedes entry into a nursing home. Assume, for instance, an individual who was no longer able to care for himself enlisted the services of a home health aide for a year prior to entering a nursing home. The aide provided 35 hours of services every week. At a rate of $19 an hour, that cost alone would have amounted to almost $35,000. If the source of funding this person’s long-term care needs for these three years had been his personal savings, he would have had to have had savings of $245,000.
Personal savings is always a good idea. And for some fortunate individuals, this may be the best solution to funding their long-term care needs. Certainly, self-funding—as long as it’s sufficient—provides for freedom of choice as to where and how care will be obtained. However, the risks of self-funding long-term care costs for even the most prosperous individuals are not insignificant. They include
- not being able to define future long-term health-care costs;
- not knowing when long-term care will be needed;
- being forced to “sacrifice” savings or investments that were intended to be passed on to family members, heirs, and dependents; and
- losing the ability, through dementia or similar cognitive failure, to understand what type of care the money should be spent on.
Generally, self-funding is possible only for individuals with above average wealth. Those whose disposable incomes exceed the cost of care are the best candidates for self-funding. For most others, attempts at self-funding will result in exhaustion of assets, eventually leading to Medicaid eligibility.
6 MetLife Market Survey of Nursing Home and Home Care Costs
Long-Term Care Insurance
Addressing the need for long-term care presents many challenges:
- The need can be very costly—potentially, hundreds of thousands of dollars.
- The need is unpredictable, both in terms of its timing and in the extent of care that will be required.
- The need has the potential to inflict a tremendous burden—financially and emotionally—on family and friends who themselves may not be capable of assuming it.
- The need may ultimately result in having to rely on public assistance, which greatly limits one’s options and choices.
Long-term care insurance answers these challenges in a way that few other options do. As with other forms of insurance, long-term care insurance deals effectively with cost, unpredictability and the transfer of risk and financial responsibility. That’s because the event that creates the need also creates the funds to address the need.
Private funding for long-term care makes use of the income, assets, and personal resources an individual may have. Virtually any type of savings or investment product, including life insurance and annuities, can be used for this purpose, as can the equity in a home. However, the cost of long-term care can be extraordinarily high; for other than the very wealthy, relying on personal income and assets may fall short of adequately covering the need. For many, long-term care insurance may be the best option.
Benefit triggers are the provisions that define the circumstances under which a long-term care policy will pay benefits. There are three types of benefit triggers that long-term care insurance policies may use:
- inability to perform a certain number of activities of daily living (ADLs)
- cognitive impairment
- medical necessity
Activities of Daily Living (ADLs)
Activities of daily living (ADLs) are basic personal care tasks that people generally perform themselves. ADLs are used in long-term care insurance policies (as well as in a number of health-care contexts) to measure or assess an individual’s functional capacity or degree of functional incapacity.
Though the exact list of ADLs may differ depending on the particular context in which it applies, for long-term care insurance policies, the line-up is generally consistent. For LTC policies, the following tasks are considered the core activities of daily living and are the most commonly listed ADLs:
- transferring (getting in and out of bed)
- maintaining continence
An individual’s functional capacity depends on the ability to perform these six tasks without substantial assistance from another person. An individual’s degree of functional incapacity is measured by the number of ADLs the individual is unable to perform on his or her own.
A long-term care policy that uses an ADL benefit trigger (which most do) will pay benefits when an individual is unable to perform a certain number of ADLs, typically two.
Cognitive impairment is another common benefit trigger for LTC policies. In this context, cognitive impairment means the diminishment of mental capacity in regard to:
- the ability to think or reason deductively or abstractly
Even in a mild form, cognitive impairment is noticeable to other people and will show up on tests. It may be caused by diseases such as Alzheimer’s or Parkinson’s, or it may result from head trauma or conditions like stroke. In severe cases, it can lead to dementia.
A long-term care insurance policy will pay benefits when an individual’s cognitive impairment becomes severe enough to require that the individual be supervised for his or her own safety and the safety of others. The policy’s benefit trigger provision may require that the cognitive impairment be diagnosed and certified by a physician.
Medical necessity is a broad and somewhat vague term that means a physician has determined that long-term care is needed for medical reasons. This benefit trigger is not used much anymore, for two reasons:
- It depends heavily on a physician’s subjective judgment, which makes it hard for insurers to predict the number of claims that may result.
- It does not address the many types of long-term care that do not involve medical treatment.
Although medical necessity is not a common benefit trigger in today’s long-term care insurance policies, producers should be aware of it because some policyowners may own older policies that include it as a trigger.
DRA 2005 Clears Way for New Partnership Programs
Were it not for another federal tax act, there might be no discussion of partnership programs beyond those of the original four states. Fortunately for the remaining 46 states, that is not the case. The estate recovery rules that froze the program in place were eliminated with the passage of the Deficit Reduction Act in 2005. Now, every state can implement an LTC partnership program, provided it conforms to certain standards and specific requirements. DRA also requires that partnership programs include specified consumer protections, which align with those contained in the NAIC’s Long-Term Care Insurance Model Act.
9 According to the Kaiser Commission, Medicaid accounts for 41 percent of long-term care funding. The other major funding resources are Medicare for post-acute care (20 percent) and consumer out-of-pocket (15 percent). Private long-term care insurance accounts for only about 7 percent.
DRA and the Long-Term Care Insurance Partnership Program
The following is how the DRA defines a qualified state LTC partnership program:
. . . an approved State plan amendment [to the state’s Medicaid laws] . . . that provides for the disregard of any assets or resources in an amount equal to the insurance benefit payments that are made to or on behalf of an individual who is a beneficiary under a long-term care insurance policy. . . .
This paragraph succinctly describes the defining characteristic, and arguably the chief benefit, of any state’s LTC partnership program. It states that if an individual who is insured under a qualified partnership policy ends up needing Medicaid assistance after the policy’s benefits have been paid, he or she may apply to Medicaid and, if coverage is granted, keep personal assets—assets that might otherwise be subject to spend-down rules—equal to the total amount of benefits paid by the policy. In addition, the assets that are protected from Medicaid spend-down cannot be recovered by the state at the insured’s death.
DRA directed the states to amend their Medicaid programs to accommodate the asset spend-down exemption that is an integral part of the partnership program. Let’s take a closer look at this side of the program.
The Asset Spend-Down Exemption
Arguably the most important benefit of any state’s LTC partnership program is the asset protection it provides insureds who find it necessary to apply to Medicaid.
Should the insured’s need for long-term care services continue beyond the point where policy benefits are exhausted (or should the insured need care at a higher level than the policy provides), the insured may apply for Medicaid coverage to maintain the care. If the insured is an eligible participant in the state’s partnership program and if he or she qualifies for Medicaid assistance, then some portion of his or her personal assets—above the standard Medicaid asset allowance—will be shielded from the spend-down rules.
To qualify as a participant in the state’s partnership program, the individual must
- own a partnership-qualified long-term care insurance policy (and have purchased the policy after the state’s program became effective);
- reside in the state sponsoring the partnership program at the time of Medicaid application (or reside in a state with a reciprocal partnership agreement with the issuing state); and
- have resided in the state sponsoring the partnership program when the policy was issued.
How the Asset Spend-Down Offset Works
Though the four original state partnership demonstration programs provided for two asset protection models—the dollar-for-dollar approach and the total asset approach—DRA removed the total asset approach from the list. Now only the dollar-for-dollar method is permitted with new partnership programs.10 Under this method, every dollar in benefits paid by a qualified long-term care partnership policy protects one dollar of the insured’s assets against the Medicaid spend-down requirement. These protected assets are disregarded for purposes of determining Medicaid eligibility, and they remain protected while the insured is receiving Medicaid assistance and upon the insured’s death.
The amount of assets that can be protected for partnership participants is in addition to the standard amount that may be retained under Medicaid requirements. As discussed earlier, the asset eligibility limit for Medicaid assistance in most states is about $2,000 for a single individual and $3,000 for a married couple who both require Medicaid assistance. (The value of the home may or may not be countable, depending on the individual’s circumstance.) As to income, if a person qualifies for Medicaid and enters a nursing home, virtually all of his or her income must be spent on the cost of the nursing home care.
As a point of comparison, an individual applying directly to Medicaid for LTC assistance would be eligible for Medicaid coverage only when he or she had spent down countable assets to his or her state’s asset eligibility level (generally around $2,000). Furthermore, applying directly to Medicaid for long-term care financing means fewer choices of care providers. Asset disregard is not available under long-term care policies that are not partnership policies.
Asset Protection Example
Alice owns a state partnership-qualified LTCI policy with maximum potential benefits of $150,000. Alice enters a nursing home, and the policy pays its benefits. If she were to require LTC services that exceed the policy’s maximum benefit coverage and she were to apply for Medicaid, $150,000 of her personal assets plus any noncountable assets and the $2,000 of countable assets she would otherwise be permitted to keep will be disregarded and therefore exempt from consideration when determining her eligibility for Medicaid qualification. What’s more, these assets remain preserved for Alice’s heirs; thanks to DRA, they are exempt from Medicaid estate recovery rules.
Assets and future income exceeding the asset spend-down exemption amount ($150,000 plus noncountable assets and $2,000 in countable assets in Alice’s example) would be subject to the state’s Medicaid eligibility spend-down rules. So, for example, if Alice were to receive a $1,000-per-month Social Security benefit and was receiving care that costs $2,500 per month, she would pay the first $1,000 of the cost by assigning the Social Security benefit to the state’s Medicaid program. Medicaid would pay the remaining $1,500.
It bears repeating that a partnership program participant benefits by more than just the Medicaid asset spend-down exemption. In Alice’s case, her use of insurance to finance LTC allows her the most freedom (short of simply paying costs out of pocket) in choosing the type of care she needs and, equally important, the care facility she wants.
Assets That Cannot Be Protected
It should be noted that there are two types of assets that cannot be protected under a long-term care partnership program. Federal Medicaid requirements stipulate that, upon the death of a Medicaid recipient, the following assets must be available to the state for the reimbursement of Medicaid benefits paid:
- amounts in a special needs trust or a pooled trust (which are designed to hold assets for those who are physically or mentally disabled without affecting their ability to receive certain government-provided benefits)
- annuity interests in which the state must be named as remainder beneficiary
Exhaustion of Benefits
As more and more states began to implement partnership programs after DRA, the question arose as to whether the benefits under a long-term care partnership policy had to be exhausted before the disregard of assets applied. A CMS guidance document explains that under DRA, insurance benefits do not have to be exhausted; eligibility may be determined by applying the disregard based on the amount of benefits paid as of the month the insured applies for Medicaid, even if additional benefits remain available under the policy. However, though federal law does not require that policy benefits be depleted, this aspect of a state’s long-term care partnership program is left to the state. To date, most states do not require exhaustion of policy benefits before granting asset protection. Consequently, it is possible for a partnership participant who is receiving Medicaid assistance—and whose policy continues to pay benefits—to continue to accumulate a level of asset protection equal to the benefits paid out over the life of the policy.
The Question of Reciprocity
DRA requires that reciprocity standards be established to promote uniformity among state partnership programs and to provide a measure of stability for both the partnership participant and a state’s Medicaid program. Specifically, the reciprocity measures enable participating states to use the same asset disregards for Medicaid qualification and estate recovery. Each state that participates in a reciprocal agreement must provide that the amount of asset disregard granted to a partnership participant in another state will be accepted by that state.
10 Grandfathering rules permit the original model states to continue using the methods currently in place, and in two cases—New York and Indiana—this includes the total asset protection option.
Realities of State Partnership Programs
It is anticipated that LTC partnership programs will provide at least a partial solution to the critical problem of funding long-term care costs. However, these programs have their limits. Consumers who are considering these plans and producers who sell policies for these plans must understand the following:
- Partnership participation does not automatically guarantee enrollment in Medicaid or the payment of Medicaid funds once a policy’s benefits are exhausted. The insured individual must still meet Medicaid requirements for long-term care eligibility—medically, functionally, and financially.
- Partnership participation protects assets, not income. If a partnership participant qualifies for Medicaid and his or her income is above the state’s Medicaid income eligibility limits, the income will have to be spent on the cost of care, down to the income limit.
- Partnership participation may not protect all of an individual’s assets. Because protection is limited to the amount of benefits paid under the policy, any assets the participant has above this amount may have to be spent down in order for the participant to qualify for Medicaid. (Total asset protection is limited to partnership programs in New York and Indiana.)
- Partnership participation does not guarantee that the insured will be able to receive care in his or her home or in a facility of his or her choosing. If and when a partnership participant turns to Medicaid, he or she may be forced into another facility or be required to forego home care. In addition, partnership participation does not extend Medicaid coverage to a care setting that is not covered by Medicaid. A partnership participant who lives in an assisted living facility and applies for Medicaid, for example, would not be eligible for assisted living if assisted living is not a Medicaid-covered benefit in his or her state.
- Partnership participation does not guarantee that future Medicaid eligibility requirements will be the same. Income and asset requirements could be more stringent in years to come, making it more difficult to qualify for Medicaid benefits.
- Partnership participation does not ensure that asset protection will be available if the participant moves to another state that does not have a partnership program or that does not have a reciprocity agreement with the original state. Furthermore, reciprocity between states for partnership protection of assets does not ensure that the requirements for Medicaid eligibility will also be the same in each state.
- Increasing life expectancies, the entry of baby boomers into retirement, and a number of other factors have severely eroded the boomer generation’s capacity to pay for long-term care. These circumstances have led its members to turn more and more to state Medicaid programs for help, thereby straining the budgets of most states. State LTC partnership programs provide incentives for consumers to fund their own long-term care needs through the purchase of a private insurance policy and thus ease the burden on state Medicaid programs. By purchasing a partnership policy, consumers are assured that assets equal to the amount of the policy’s benefits will be protected from the Medicaid spend-down requirement as well as its estate recovery rule. The enabling legislation for today’s partnership programs was the DRA of 2005. In addition, these programs are framed by and draw from the NAIC’s Long-Term Care Model Law and Regulations and HIPAA 1996, which establish standards for tax-qualified long-term care policies.