What is long term care insurance?

In general, long-term care refers to a wide range of services to help people who can't do normal activities by themselves.  For example, there are physical and mental conditions that can prevent someone from doing such basic things as eating, dressing, bathing, or moving around.

In return for your payment of premiums, a long-term care insurance (LTCI) policy will pay a selected dollar amount per day (for a selected period of time) for your skilled, intermediate, or custodial care in nursing homes and, sometimes, in alternative care settings, such as home health care. Because Medicare and other forms of health insurance do not pay for custodial care, many nursing home residents have only three alternatives for paying their nursing home bills: their own assets (cash, investments), Medicaid, and LTCI.

Long-term care may be divided into three levels:

·                          Skilled care--Continuous "around-the-clock" care designed to treat a medical condition. This care is ordered by a physician and performed by skilled medical personnel, such as registered nurses or professional therapists. A treatment plan is drawn up.

·                          Intermediate care--Intermittent nursing and rehabilitative care provided by registered nurses, licensed practical nurses, and nurse's aides under the supervision of a physician.

·                          Custodial care--Care designed to assist one perform the activities of daily living (such as bathing, eating, and dressing). It can be provided by someone without professional medical skills, but is supervised by a physician.

How is LTCI useful as a protection planning tool?

The risk of contracting a chronic debilitating illness (and the resulting catastrophic medical bills incurred) is considered by many to be one type of risk best transferred to an insurance company through the purchase of LTCI.

A number of factors can increase your risk of requiring long-term care in the future. Naturally, your health status affects your likelihood of incurring a long stay in a nursing home. People with chronic or degenerative medical conditions (such as rheumatoid arthritis, Alzheimer's disease, or Parkinson's disease) are more likely than the average person to require long-term nursing care. And because women usually outlive the men in their lives (if any), females stand a greater chance of requiring long-term nursing care.

However, if you already have a primary caregiver (like a spouse or child), your likelihood of needing a long stay in a nursing home will be less--particularly if you're a man. Because the cost of long-term care can be astronomical and may exhaust your life savings, purchasing LTCI should be considered as part of your overall asset protection strategy.

When can it be used?

Naturally, if your income and asset levels are so low that you'd probably qualify for Medicaid anyway, it doesn't make sense to purchase LTCI. And cost is certainly a factor for most people. Although the cost of LTCI varies depending on your age, the benefits you choose, and the insurer, according to a recent survey, a person aged 65-69 purchasing an individual policy would pay premiums of between $2,000 to $10,000 per year.

When buying an LTCI policy, you must consider not only whether you can afford to pay the premiums now, but also whether you'll be able to continue paying premiums in the future, when your income may be substantially decreased.

                                                                PROS

Subsidizes nursing home bills
Aging is inevitable, and the gradual inability to function independently is a great concern for many people. Although the prospect of entering a nursing home is a daunting one, equally frightening is the expense of nursing home care--the monthly fee can easily average (and may exceed) $4,640 per month in many areas.

Purchasing an LTCI policy can give you some peace of mind; it's comforting to know that the first few years of nursing home care will be paid for. You can buy the amount of coverage that you want. Moreover, although most nursing homes have waiting lists, it is easier for a private-pay patient to enter a nursing home than it is for one who needs Medicaid assistance immediately.

Allows you to protect your assets
Purchasing an LTCI policy allows you to transfer your assets to your loved ones after you enter a nursing home. The policy should cover your nursing home bills during the Medicaid ineligibility period caused by the transfer. Without such a policy, you'd either have to transfer your assets years before entering a nursing home or else deplete some of your assets by private-paying the nursing home during the period of Medicaid ineligibility caused by your late transfer of assets. The LTCI policy allows you to preserve your assets for your loved ones instead of spending them on nursing home bills.
 

Premiums may be tax deductible
If you purchase a tax-qualified LTCI contract, some or all of your LTCI premium may be deducted on your federal income tax return. Simply add the applicable portion of your premium to your other deductible medical expenses. To claim a deduction, the total of your medical expenses must exceed 7.5 percent of your adjusted gross income.

CONS

May be too expensive for people of modest means
Although the cost of LTCI varies depending on your age, the benefits you choose, and the insurer, according to a recent survey, a person aged 65-69 purchasing an individual policy would pay premiums of between $2,000 and $10,000 per year. And when buying an LTCI policy, you must consider not only whether you can afford to pay the premium now, but also whether you'll be able to continue paying premiums in the future (when your income may be substantially decreased).

 As with any investment, risk is involved
Paying insurance premiums each year in the expectation that you might (at some future time) require nursing home care is a risky move. There is always the possibility that you will remain healthy and able to function independently when you are aged. Or perhaps you could die suddenly in an accident after paying expensive premiums for many years. The money you pay out in premiums is money that you cannot give to your children or other loved ones, so be aware of the tradeoff.

 Not necessary if you'll qualify for Medicaid
If you have modest resources (i.e., less than $50,000 net worth), it's probably not a wise move to purchase LTCI. Very likely, you can qualify for Medicaid by spending down some assets and/or engaging in a little Medicaid planning a few years ahead of time. That way, you'll be able to avoid paying the high cost of premiums over a number of years.

 How to do it
If you are interested in purchasing LTCI, there are a couple of steps you should follow:

 (1)  Compare policies and check the financial security of the companies you're reviewing

You can determine the financial security of a company by reviewing its A. M. Best's rating along with the ratings of other services, such as Moody's or Standard & Poor's, at your local library. You should select a company that has received a rating of A or A+ from A. M. Best.

(2)  Review the policy's provisions carefully to ensure that it offers the features you require

There are a number of factors you should be concerned about, such as inflation protection, a full range of care (including home health care), and exclusions for pre-existing conditions.

Tax considerations

Income tax
Benefits you receive from a "qualified" LTCI policy are not taxable to you as income and are treated as excludable benefits received for personal injury and sickness to the extent that such benefits do not exceed a per diem limitation. However, benefits received from a policy that is not a tax-qualified one might be taxable as income.

 Deductibility
Federal law allows you to deduct all or part of the premium paid for a tax-qualified (LTCI) contract. A portion of your LTCI premium should be added to your other deductible medical expenses. To claim a tax deduction, the total of your medical expenses must exceed 7.5 percent of your adjusted gross income.

Caution: 
Not all long-term care contracts are tax-qualified--your policy must meet certain federal standards.