Long-Term Care Long-term care (LTC) is the term used to describe a variety of services in the area of health, personal care, and social needs of persons who are chronically disabled, ill or infirm. Depending on the needs of the individual, long-term care may include services such as nursing home care, assisted living, home health care, or adult day care. For a downloadable PowerPoint Presentation on "What is Long Term Care?", please click here. Who Needs Long-Term Care? The need for long-term care is generally defined by an individual’s inability to perform the normal activities of daily living (ADL) such as bathing, dressing, eating, toileting, continence, and moving around. Conditions such as AIDS, spinal cord or head injuries, stroke, mental illness, Alzheimer’s disease or other forms of dementia, or physical weakness and frailty due to advancing age can all result in the need for long-term care. While the need for long-term care can occur at any age, it is typically older individuals who require such care.

Individuals with Disabilities by Age

What Is The Cost of Long-Term Care?

Apart from the unpaid services of family and friend, long-term care is expensive. The table contains national average cost data (regional cost can vary widely) for typical long-term care services; it provides an approximate guide to the cost of long-term care:

Paying for Long-Term Care – Personal Resources

Much long-term care is paid for from personal resources:

• Out-of-Pocket: Expense paid from personal savings and investments.
• Reverse Mortgage: Certain homeowners may qualify for a reverse mortgage, allowing them to tap the equity in the home while retaining ownership.
• Accelerated Death Benefits: Certain life insurance polices provide for “accelerated death benefits” (also known as a living benefit) if the insured becomes terminally ill.
• Private Health Insurance: Some private health insurance polices cover a limited period of at-home or nursing home care, usually related to a covered illness or injury.
• Long-Term Care Insurance: Private insurance designed to pay for long-term care services, at home or in an institution, either skilled or unskilled. Benefits will vary from policy to policy.

Paying for Long-Term Care – Government Resources

Long-Term care that is paid for by government comes from two primary sources:

• Medicare: Medicare is a health insurance program operated by the federal government. Benefits are available to qualifying individuals age 65 and older, certain disabled individuals under age 65, and those suffering from end-state renal disease. A limited amount of nursing home care is available under Medicare Part A, Hospital Insurance. An unlimited amount of home health care is also available, if made under a physician’s treatment plan.
• Medicaid: Medicaid is a welfare program funded by both federal and state governments, designed to provide health care for the truly impoverished. Eligibility for benefits under Medicaid is typically based on an individual’s income and assets.

In the past, some individuals have attempted to artificially qualify themselves for Medicaid by gifting or otherwise disposing of assets for less than fair market value. Sometimes known as “Medicaid spend-down”, this strategy has been the subject of legislation such as the Omnibus Budget Reconciliation Act of 1993 (OBRA ’93). Among other restrictions, OBRA ’93 provided that gifts of assets within 36 months (60 month for certain trusts) before applying for Medicaid could delay benefit eligibility.

The Deficit Reduction Act of 2005 (DRA) further tightened the requirements to qualify for Medicaid by extending the “look-back” period for all gifts from 36 to 60 months. Under this law, the beginning of the ineligibility (or penalty) period was generally changed to the later of: (1) the date of the gift; or, (2) the date the individual would otherwise have qualified to receive Medicaid benefits. This legislation also clarified certain “spousal impoverishment” rules as well making it more difficult to use certain types of annuities as a means of transferring assets for less than fair market value.

Choosing a Long-Term Care Policy

Assessing the need for long-term care (LTC) insurance is an important part of any risk management program. The heavy economic burden of paying for such care should be measure against your available resources, If you need LTC for even a short period of time, what effect will that have on your estate and any legacy you may wish to leave to your heirs? The decision to purchase LTC insurance, either individually or under a group plan, generally must be made while you are still healthy. Once a disabling condition occurs, it is too late to act.

Common Elements in Long-Term Care Insurance Policies

• "Qualified" LTC policies: If a LTC policy meets certain criteria established by the federal government, the premiums for the policy are considered “medical care" and thus qualify for the medical expense itemized deduction. Federal law limits the amount of qualified LTC premiums that may be deducted each year.
• Amount of the benefit: Most policies pay a fixed dollar amount for each day you are eligible for the benefit; e.g., $200 per day. A survey of nursing homes in the local area can help determine the desired amount.
• Inflation protection: Since costs inevitably increase, a policy without a provision for inflation maybe outdated in a few years. Of course, an additional charge is incurred for this protection.
• Guaranteed renewability: Almost all long-term care policies sold today are guaranteed renewable; they cannot be canceled as long as you pay the premiums on time and as long as you have told the truth about your health on the application. The fact that a policy is guaranteed renewable does not mean that the premiums cannot be increased; insurers typically reserve the right to raise premiums for an entire class or group of policyholders. Some policies sold in the past were not guaranteed renewable and a few of these policies may still be in force.
• Waiver of premium: Some policies will waive future premiums after you have been in the nursing home for a specified number of days; e.g., 90 days.
• Prior hospitalization: This policy provision requires one to be hospitalized (for the same condition) prior to entering the nursing home or no benefits will be paid under the policy. Although prior hospitalization clauses have been prohibited in all states, some older policies still in force may contain this provision. Policies currently sold do not contain prior hospitalization clauses.
• Place of care: Does the policy require that the nursing home be licensed or otherwise certified by the state to provide skilled or intermediate nursing care? Must the facility meet certain record keeping requirements?
• Plan of care: A plan of care is part of the health care claims process. It is the result of an assessment prepared by the insured's physician, and a multi-disciplinary team, including practical nurses, social workers, and other health card professionals. The plan outlines the appropriate level of care needed to assist the insured in performing the activities of daily living.

Choosing a Long-Term Care Policy

• Level of care: There are three generally recognized levels of care in an institutional setting:
  • Skilled care: Daily nursing and rehabilitation care under the supervision of skilled medical personnel; e.g., registered nurses and based on a physician's orders.
  • Intermediate care: The same as skilled care, except it requires only intermittent or occasional nursing and rehabilitative care.
  • Custodial care: Help in one's daily activities including eating, getting up, bathing, dressing, use of toilet, etc. Persons performing the assistance do not need to be medically skilled, but the care is usually based upon the physician's certification that the care is needed.
• Pre-existing conditions: Depending on the state, a policy may limit coverage of pre-existing conditions to discourage persons who are already ill from purchasing a policy. Many policies will provide benefits if the pre-existing condition was overcome six months or more prior to applying for the policy. Also, some policies will not pay benefits if the pre-existing condition re-occurs within six months after the effective date of coverage.
• Deductible or waiting period: Most LTC policies require you to “pay your own way” for a specified number of days (generally ranging between zero and 120 days) before the insurance company will begin to pay benefits. Of course, the shorter the waiting period, the higher the cost will be. This is usually referred to as an "elimination period."
• Alzheimer's disease: Most policies now include coverage for organic brain disorders like Alzheimer's diseases.
• Home health care (home care): Many long-term care policies can provide coverage in the insured's home. It is most often offered as a rider (requiring an additional premium) to nursing facility coverage, and reimburses the cost of long-term care received at home.
• Rating the company: Companies should be financially sound and have a reputation treating policyholders fairly.

Seek Professional Guidance

A perfect LTC policy does not exist. Many policy features must be compared and weighed. As a general rule, the more benefits included in a policy, the higher the premium will be. Professional guidance is extremely important in this complicated area.

Long-Term Care Tax Issues

Federal law provides generally favorable tax treatment of the expenses connected with long-term care (LTC). However, a number of rules must be carefully followed in order to maximize these tax benefits.

Key Definitions

• Qualified LTC Services: The necessary services required by a "chronically ill" individual, provided under a treatment plan prescribed by a licensed health care practitioner.
• Chronically Ill Individual: An individual unable to perform at least two of the activities of daily living (ADLs) for at least 90 days, or who requires protective supervision because of severe cognitive impairment. Certification by a licensed health care practitioner within the previous 12 months is required.
• Qualified LTC Policy: A LTC policy that meets certain tax-related requirements set by the federal government.

Long-Term Care Expenses

Long-term care expenses are medical expenses: Unreimbursed amounts an individual pays for qualified LTC services, as well as premiums paid for qualified LTC policies, are included in the term "medical care." lRC Sec. 213(d)(1), as amended. For individual taxpayers, such expenses thus qualify for the medical expense itemized deduction. Qualifying medical expenses are deductible as an itemized deduction to the extent they exceed 7.5% of adjusted gross income (AGI).

Current law limits the annual amount of LTC premiums that can be deducted, based on the age of the insured.

These annual limitation amounts are adjusted for inflation each year.

Long-Term Care Tax Issues

Long-Term Care Policy Benefits

Benefits excluded from income: Beginning with policies issued in 1997, benefits received under a qualified LTC contract are generally excluded from income as an amount "received for personal injury and sickness." (See [RC Sec, 7702B.) In order for benefits paid under a policy to be excluded from income, the policy must meet strict federal tax requirements to be a qualified contract. Further, benefits must be for services provided to a chronically ill individual. A limited grandfather clause applies to contracts in existence before 1997.

The exclusion from income is limited to the greater of $260 per day (calendar year 2007), or total un-reimbursed LTC expenses actually incurred. The dollar limitation is adjusted for inflation annually.

Other Tax Issues

• Employees: Generally, if an employer chooses to purchase tax-qualified long-term care insurance for an employee, neither the coverage provided nor the benefits paid (subject to the limitations described earlier) will be taxable to the employee. If certain requirements are met, self-employed individuals may also include themselves for such coverage.
• Self-employed individuals: Self-employed individuals are permitted to deduct qualifying health insurance premiums, including tax-qualified long-tem care premiums, as an adjustment to gross income, rather than as an itemized deduction subject to the 7.5% of AGI limitation. This deduction is also generally available to general partners in a partnership, limited partners in a partnership receiving guaranteed payments, and more than 2% owners of subchapter S corporations who receive wages from the corporation.
• Combination contracts: A "combination contract" is an annuity or life insurance contract that also provides qualified LTC coverage. Under the Pension Protection Act of 2006 (PPA 2006), withdrawals from the cash value of either the annuity or life portion of a combination contract to pay for the LTC coverage are generally not includable in income and no medical expense deduction is allowed for such charges. The LTC portion of the contract is treated as a separate contract and amounts received are treated for federal income tax purposes as LTC insurance benefits.

Seek Professional Guidance

Federal, state, and local income tax law can be complex and confusing. The guidance and counsel of a qualified tax or other financial professional is highly recommended.

Please contact us for cost and further details of coverage, including exclusions and reductions or limitations and the terms under which the policy may be continued in force.

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