Long-Term Care Insurance

(October 2007 courtesy of the Texas Department of Insurance Website)

Long-term care refers to the type of personal care services you may need if you become unable to care for yourself because of a loss of functional capacity or cognitive impairment.

Long-term care is different from traditional medical care. Traditional medical care treats physical problems directly in an attempt to permanently cure or control them. Long-term care services help you maintain your ability to perform normal daily activities. These services could include personal assistance or custodial care and skilled care provided in your home, an adult day care center, a nursing home, or an assisted living facility.

Paying for Long-Term Care Services

The cost of a nursing home stay could be $70,000 or more per year. Depending on the services you need and the costs in your area, average rates might be $200 a day or more.

The cost of home care is harder to estimate because of the wide range of skilled and personal assistance services it includes. Skilled services such as nursing or physical therapy generally cost more than homemaker or personal care services. Home care services, including skilled services, are normally less expensive than services provided in a nursing facility.

Medicaid pays most long-term care expenses. Medicaid is a state and federal assistance program for eligible individuals with low incomes.

To qualify for Medicaid, you must meet state and federal guidelines for income and assets. Many people pay for long-term care out of their own pockets until they become eligible for Medicaid. To learn more about Medicaid eligibility, call your local Area Agency on Aging or Texas Health and Human Services Commission office. A list of phone numbers is included on the inside front cover of this publication.

Medicare may pay some long-term care costs. Medicare is a federal program that pays for health care for people over age 65 and for people under age 65 with disabilities. It covers the cost of some skilled care in approved nursing homes or in your home in certain situations. Medicare also might cover some custodial care in your home if you are receiving skilled care.

If you don’t qualify for Medicaid or Medicare, you’ll either have to pay your long-term care expenses out of pocket, with a long-term care insurance policy, or by some alternative means.

Is Long-Term Care Insurance Right for You?

Long-term care insurance can help protect your assets against the high cost of extended long-term care. However, long-term care insurance usually only makes sense if you have significant assets to protect other than your home, car, and a small amount of cash.

Long-term care insurance may be too expensive or inadequate if the only policy you can afford won’t pay the full cost of your care. It’s also probably not a good idea if you have trouble stretching your income to pay for utilities, food, or medicine. If you don’t have significant assets, you may have to pay for your care out of pocket until you exhaust, or “spend down,” your assets enough to qualify for Medicaid.

To determine whether long-term care insurance is right for you, consider your personal risk factors, assets, income, costs, and available alternatives.

Long-Term Care ‘Risk Factors’

The following factors might affect your likelihood of needing long-term care:

• Life expectancy: The longer you live, the more likely it is that you will need long-term care. Consider whether your family has a tendency for long life expectancy.

• Gender: Women may need long-term care insurance more than men because they generally live longer.

• Your family situation: If you have a spouse, adult children, or other family members who can care for you at home, you might not need some types of long-term care services.

• Family health history: You may have a greater need for long-term care if chronic or debilitating health conditions run in your family.

Financial Considerations

Consider the following questions about your personal financial situation. You may want to seek help from a trusted personal or professional financial advisor.

• What are my assets (not including my home, car, and $2,000 cash)? Will they change over the next 10 to 20 years? Are my assets large enough to justify the expense of a long-term care policy?

• What is my current annual income? Will it change over the next 10 to 20 years? Will I be able to afford the policy if my income decreases or if the policy premiums increase significantly?

• If I retire, how will retirement affect my ability to pay premiums?

• How much does the policy cost? Will I pay the premiums from my income, savings, or investments? Will my family contribute toward the cost?

• Will I be able to pay for charges in excess of the policy’s daily benefit amounts and for other expenses if I’m in a long-term care facility for an extended time?

Alternatives to Long-Term Care Insurance

If you have life insurance, you may be able to pay for long-term care with an accelerated death benefit, a viatical settlement, or a life settlement. There may be tax considerations for each, so consult a tax adviser.

An accelerated death benefit pays all or part of your life insurance policy’s death benefit while you’re still alive. If your policy has an accelerated death benefit, it will pay for long-term care services based on the same benefit eligibility requirements as a long-term care policy. The accelerated death benefit can be part of the life insurance policy or attached as a rider.

If you have a catastrophic or life-threatening illness, you can sell your policy for a cash payment called a viatical settlement. The payment is usually a percentage of the policy’s death benefit. The buyer becomes the policy owner, pays the premiums, and collects the policy’s benefit upon your death.

You may be able to sell your life insurance policy even if you do not have a catastrophic or life-threatening illness. This is a life settlement.

To get a list of registered viatical or life settlement companies and brokers, call the Texas Department of Insurance (TDI) Consumer Help Line or visit our website

1-800-252-3439
463-6515 in Austin
www.tdi.state.tx.us

You also may be able to pay for long-term care with an annuity. An annuity is a type of investment sold by some insurance agents, brokers, banks, and investment firms. Some annuities allow you to withdraw money without penalty to pay for certain long-term care services.

There may be other alternatives available to you to pay for long-term care that don't involve insurance, such as reverse mortgages. Talk to a financial advisor to learn more about these options

Services Covered by Long-Term Care Insurance

Long-term care insurance policies may pay for several types of care, including:

• Nursing home care in a licensed nursing facility.

• Assisted living care in a licensed assisted living facility.

• Skilled home health care or personal assistance in your home. Covered services may include part-time skilled nursing care and physical therapy. A licensed home health agency generally must provide this care.

• Adult day care in a licensed adult day care facility. Typical benefits include nursing or therapeutic care, social and educational activities, or personal supervision.

• Other services. Some policies will pay for hospice care, respite care (care to allow family members who are caregivers to have time off), care after a hospital stay, help with household chores, or caregiver training for family members.

The maximum amount a policy will pay per day (the daily benefit amount) is usually lower for home health care and adult day care than for nursing home care. The combined benefits for home health care and adult day care must be at least half of the total nursing home benefit for a year. For example, if your policy has a nursing home benefit of $50,000 for a year, the combined home health care benefit and adult day care benefit must be at least $25,000.

Services Not Covered by Long-Term Care Insurance

Long-term care policies may exclude coverage for some conditions, either completely or for a limited time. Policies typically exclude:

• Pre-existing conditions: A pre-existing condition is an illness or disability for which you received medical advice or treatment in the six months prior to applying for long-term care coverage. A long-term care policy can delay coverage of a pre-existing condition for up to six months after the policy’s effective date. This is the policy’s “waiting period.”

• Mental and nervous disorders: A long-term care policy can exclude coverage of some mental and nervous disorders, but the policy must cover Alzheimer’s disease and other age-related disorders. (However, a company can deny coverage to a person already suffering from Alzheimer’s.) A long-term care policy also must cover all serious biologically based mental illnesses and brain diseases, such as schizophrenia or major depressive disorders. An appropriately licensed medical practitioner must make the diagnosis.

• Care by family members: Most policies will not pay members of your family to take care of you. Some policies, however, will pay to train family members to be caregivers.

Standard Policy Exclusions

Texas long-term care policies may exclude coverage for conditions resulting from

• alcoholism and drug addiction

• attempted suicide or intentionally self-inflicted injuries

• participation in a riot, felony, or insurrection

• an act of war, whether declared or undeclared

• service in the armed forces

• aviation activities, if you were not a fare-paying passenger.

In addition, long-term care policies won’t pay for care already paid for by Medicare or any other government program, except Medicaid.

Types of Long-Term Care Policies

Long-term care insurance policies are not standardized. This means benefits and terms will vary by company and by policy. You can choose a combination of benefits, features, and costs that best fits your personal needs.

The most common long-term care benefits are nursing home and assisted living care, home health care, and adult day care. To receive benefits, you must receive care in licensed nursing homes or assisted living facilities or through licensed home health or adult day care agencies.

Most long-term care policies sold in Texas are individual policies. Some employers offer group policies to their employees, and some associations and professional organizations offer them to their members. To buy a group policy, contact your employer or the organization offering the policy. You can buy individual policies from insurance agents. Some insurance companies also sell individual policies by direct mail or telephone. This publication primarily describes individual policies.

Benefit Eligibility Triggers

Your policy must pay for covered long-term care services if you are unable to perform a specified number of activities of daily living (ADLs) or if you require supervision and services because of cognitive impairment.

ADLs are activities considered essential to a normal lifestyle – bathing, continence, dressing, eating, toileting, and transferring (moving around).

Cognitive impairment is a loss in your intellectual capacity that requires you to have substantial supervision to maintain the safety of yourself and others. The loss can be due to Alzheimer’s disease, senility, an accident, or other causes. A doctor or other health practitioner licensed to make such a diagnosis in Texas must certify your cognitive impairment.

Companies selling long-term care policies must offer a policy that pays benefits based on your cognitive impairment or your inability to perform two ADLs. Separately, companies may offer a policy based on your cognitive impairment or your inability to perform two or three ADLs.

A company cannot offer you an individual policy with benefits based on three ADLs unless it also offers coverage with benefits based on only two ADLs and cognitive impairment. You must either reject the two ADL and cognitive impairment policy in writing or acknowledge in writing that the company offered it to you.

Companies must provide a description of the premiums and benefits payable for two ADLs, three ADLs, and cognitive impairment in their policies and long-term care marketing materials and applications.

Optional Features Companies Must Offer

Companies must offer the following optional features for an additional premium:

Inflation Protection

It may be years before you actually need long-term care services. During that time, long-term care costs could increase significantly. Inflation protection helps you keep up with increasing cost of services between the time you bought your policy and the time you actually need them. The younger you are, the more important inflation protection may be. The amount of additional cost for inflation protection primarily depends on how old you are when you buy the policy.

Policies must offer inflation protection in at least one of the following ways:

• Benefits automatically increase by 5 percent or more each year, compounded annually.

• Your original benefit amount increases by 5 percent or more compounded each year on the policy’s renewal date. If you don’t want the increase, you must reject it in writing within 30 days after the policy renewal date.

• The policy covers a specified percentage of actual or reasonable charges for as long as you own it, with no maximum daily limit or policy limit.

The company must give you a graphic comparison of benefits on a policy with and without inflation protection over a 20-year period. If you don’t want inflation protection, you must reject it in writing.

Nonforfeiture Benefit

Companies must offer you a guarantee that you will receive some of the benefits you paid for even if you later cancel or lose coverage. This guarantee is called a “nonforfeiture benefit.” In most cases, the longer you pay premiums on the policy, the larger the nonforfeiture benefit will be.

Generally, a nonforfeiture benefit will either pay up to the total amount of all premiums paid or 30 times the daily nursing home benefit at the time the policy lapsed, whichever is greater.

A nonforfeiture benefit can significantly increase a policy’s premium. If you decide not to buy a nonforfeiture benefit, you must reject the offer in writing and the company must explain its “contingent lapse benefit.” The company must also offer a contingent lapse benefit each time it raises your premium substantially. A contingent lapse benefit allows you either to choose a reduced benefit amount to prevent premium increases or to convert your policy to a paid-up status. The paid-up status will be the greater of either the total sum of all premiums paid for your policy or 30 times the daily nursing home benefit at the time the policy lapsed.

Other Optional Benefits

Waiver of premium: Many policies include a waiver of premium provision. This provision allows you to stop paying premiums when you are in a nursing home and the insurance company has started to pay benefits. Companies may waive the premium as soon as they make the first benefit payment or after a specified time, usually 60-90 days after the first payment. This provision may not apply if you are receiving certain benefits (home health care or adult day care, for instance).

Refund of premium: The company will refund some or all of your premiums – minus any claims paid under the policy – if you cancel the policy. Your beneficiary will receive the refund if you die. Usually, you must have paid premiums for a certain number of years before this benefit becomes effective.

Restoration of benefits: Some policies restore benefits to the original maximum amounts if you don’t need long-term care services for a specified period, usually 180 days. For example, assume your policy has a maximum benefit period of three years and you were in a nursing home for a year. If you do not require additional long-term care services for at least six months after leaving the nursing home, your benefit period would automatically be restored to the original three years.

Bed reservation: If you must leave a nursing home to go into a hospital, some policies will pay to reserve your bed in the nursing home for a specified number of days or until you return.

Daily Benefit Payment Methods

Generally, policies pay benefits in one of two ways, either on an “expense incurred” basis or an “indemnity” basis.

An expense-incurred policy pays the actual cost for eligible services, up to the policy’s daily benefit amount. For example, assume you have a policy with a daily benefit of $200, and the nursing home charges $150 per day. An expense-incurred policy will pay $150 per day.

An indemnity policy pays the policy’s daily benefit amount, regardless of the actual cost of the services you receive. For example, if your policy has a $200 daily benefit and the nursing home charges $150 per day, the indemnity policy would pay $200 per day, even though the cost of care is less.

Both expense incurred and indemnity policies pay benefits to you, or you may “assign” them to be paid directly to the facility or agency providing the service.

Tax-Qualified Long-Term Care Policies

You may be able to deduct part of the premium for a tax-qualified long-term care policy from your taxes as a medical expense. In addition, qualified long-term care policy benefits are generally not taxable as income.

Policies sold on or after January 1, 1997, may be either tax-qualified or non-tax-qualified. All policies sold before January 1, l997, are automatically tax-qualified.

To determine whether your policy is tax-qualified, look for a statement on your policy similar to this: “This policy is intended to be a qualified long-term care insurance contract as defined by the Internal Revenue Code of 1986, Section 7702B(b).”

Consult with an attorney, accountant, or tax advisor about the tax implications of purchasing long-term care insurance.

To claim a tax deduction for long-term care premium payments, your out-of-pocket medical expenses, including long-term care premiums, must be more than 7.5 percent of your adjusted gross income. The maximum amount of long-term care premium you can deduct depends on your age at the end of each tax year.

Maximum Long-Term Care Premium Deductions, 2007*

*Maximum deduction amounts change annually

A tax-qualified policy sold on or after January 1, 1997, must pay long-term care benefits if you have a written plan of care from a licensed health care practitioner and meet one of the following conditions:

• You are unable because of a loss of functional capacity to perform at least two of six ADLs without substantial help from another person for at least 90 days

• You need substantial supervision to protect your health and safety, and the health and safety of others, because you have a severe cognitive (mental) impairment.

Non-Tax-Qualified Long-Term Care Policies

Premiums for non-tax-qualified long-term care policies are not tax deductible. In addition, you might have to pay taxes on any benefits the policy pays above expenses incurred. Buying a non-tax-qualified policy could increase your tax liability and reduce the value of your benefits.

To receive benefits from a non-tax-qualified policy, you must have a cognitive impairment, such as Alzheimer’s or a similar disease, or be unable to perform two of six ADLs. However, some policies may offer more favorable benefit eligibility requirements. For example, a policy might require only an inability to perform one of six or two of seven ADLs.

Finding a Policy That’s Right for You

There are many factors to consider when choosing a long-term care policy. Your policy should meet your possible future needs, but still fit your budget. Your choices about benefits and features, as well as your age and health at the time of application, will affect your premium. Use TDI’s online Long-Term Care Insurance Rate Guide to learn about the policies companies offer, including rate estimates, benefits, and benefit eligibility triggers.

Before you buy a long-term care policy, ask your agent:

• What types of care are covered and in what setting?

• What are the benefit eligibility requirements?

• How much is the daily benefit amount for each benefit? How long will the policy pay benefits?

• How long is the elimination period?

• Does the policy have a pre-existing condition waiting period? If so, how long is it?

• What types of inflation protection does the policy offer?

• Is the policy tax-qualified?

• Can I upgrade this policy later by purchasing more benefits? (Most companies will require you to submit a new medical questionnaire.)

An agent or company is required to give you an outline of coverage when offering a long-term care policy. This outline is a short description of all the policy’s features, benefits, limitations, and exclusions.

Other Factors to Consider

Daily benefit amounts: Daily nursing home benefits may range from $50 to $250 per day. The average cost for a day of nursing home care could be $150 to $200, depending on where you live, the level of services you need, and other factors. To determine how much coverage you might need, call local nursing facilities, home health care agencies, and adult day care facilities and ask about their cost for daily care. Keep in mind that costs will likely be higher by the time you need services.

Elimination period: Elimination periods (the amount of time you have to wait before a policy will pay any benefits) usually range from zero to 100 days. The most common options are for benefits to start at zero, 20, 30, 60, 90, or 100 days after you enter a nursing home or begin to receive other covered services. A policy with a 30-day elimination period will begin paying benefits on the 31st day. You can lower your premium by choosing a longer elimination period. However, keep in mind that you’ll have to pay all your expenses out of pocket for a longer period before the policy will pay.

Some policies have only one elimination period, while others require an elimination period for each new “period of care.” Be sure to check how the elimination period works before buying a policy.

Benefit period: A benefit period is the amount of time a policy will pay benefits. Benefit periods may range from one year to a lifetime. The most common benefit periods are one, two, three, or five years, or for a lifetime. The premiums for longer benefit periods are higher. Some companies provide a maximum benefit as a total dollar amount rather than an amount of time. For example, if you buy a policy with a lifetime benefit of $73,000, the policy would pay for each day of care until you reach the maximum benefit. If the current charge is $200 per day, the benefit would last for 365 days.

Qualifying for Coverage

Companies selling long-term care insurance “underwrite” their coverage. That means they look at your current health status and health history and will issue a policy only if you meet their established guidelines.

Some companies ask only a few questions about your health. Others may ask for more details, examine your medical records, ask for a health statement from your doctor, or require you to take a medical exam.

Answer all health questions truthfully and thoroughly. If a company later learns you did not fully disclose your health status on the application, it could cancel your policy or refuse to pay your claim.

Long-Term Care Rates

Insurance companies determine long-term care premiums based on several factors. Some of these include:

• Age: The younger you are, the lower your premium will be.

• Your health: Your health at the time the policy is issued will affect your premium. Your premium will be higher if you have health problems.

• Elimination period: The longer you can pay your expenses before the company begins paying benefits, the lower your premium.

• Benefit amount and duration: Rates are higher for policies with higher benefit amounts and longer payment durations.

• Other factors: Long-term care costs may vary greatly from one area to another. Where you live will affect the cost of your coverage. Optional benefits you decide to add to your policy also will increase your premiums.

Premium Increases

Premiums on most long-term care policies will increase over time. Companies can raise the premiums on policies that don’t have fixed rates, but only if they increase the premiums for everyone in your “rate class.” A company cannot single you out for a rate increase, regardless of any change in your health or the number or amount of claims you’ve made. The company can base your rate class on your age, where you live, and your health status at the time you purchased your policy. The company must give you at least 45 days notice of any premium increase.

An agent or company that offers you a long-term care policy must show you a 10-year premium history from Texas and any other state where it sells the policy. The history must include the amount or percent of each rate increase. You must sign an acknowledgement that the agent or company provided you with the potential rate increase disclosure information.

Replacing a Policy

If you’re considering replacing a long-term care policy, first determine how your current policy differs from the new one. Your current policy might have benefit limitations that a newer policy won’t have. For instance, policies issued prior to 1992 could include the following limitations:

• requiring a hospital stay before nursing home benefits are available

• no home health care or adult day care benefits or only minimal coverage

• no inflation protection or other benefit increases

• no protection against cancellation due to a loss of mental or physical capacity

• no nonforfeiture benefits

• benefit amounts that are too low to cover today’s long-term care expenses.

An older policy also might not include some of the benefits that companies must now offer. Compare all of your current policy’s benefits to any new policy you are considering. Remember, that a new policy with better benefits may cost significantly more than your current policy. Also, if you bought your current policy before January 1, 1997, it is tax-qualified. A new policy might not be.

If you decide to replace your policy, don’t cancel your current policy until the new one is in effect to avoid any gaps in coverage.

Policy Renewals and Cancellations

Long-term care policies are “guaranteed renewable.” This means the company must renew your policy each year unless you lied about your health status in your application, failed to pay your premiums, or exhausted your benefits. You can cancel your policy at any time by providing notice to the insurance company. The company must return any unearned premium to you.

After a policy has been in force for two years, a company cannot cancel it or refuse to pay claims because of misstatements in the application, unless the misstatements are fraudulent. If a policy has been in force less than two years, a company can deny an otherwise valid claim or cancel the policy if it can prove misrepresentation or intent to deceive.

When you buy a long-term care policy, the company will ask you to designate another person who will also receive notice if your policy is about to be canceled because you have not paid the premium. The other person can be a relative, friend, or a professional, such as your lawyer or accountant. Although the company is required to ask, you do not have to designate anyone to receive this notice.

A company may not cancel a policy for nonpayment of premium unless the premium has gone unpaid for at least 65 days past the due date. The company must wait 30 days after the due date before notifying you and any person you designated that it will cancel the policy for nonpayment. Once the company has mailed the notice, it must allow five days for you to receive it. From that date, the company must give you 30 days to pay the premium.

You may want to consider paying your long-term care policy premiums by automatic bank draft. However, you’ll have to notify the company and the bank in writing to stop the withdrawals if you no longer want the policy or you want to change the method of payment.

If the company cancels your policy for nonpayment, it must reinstate the policy upon receiving proof within five months of the cancellation date that you failed to pay premiums because of mental or physical impairment. The company must also pay any claims for eligible services. You will have to pay back premium to the date the policy lapsed.

Shopping Tips

• If your income and assets qualify you for Medicaid, you do not need long-term care insurance.

• Ask your employer before you retire if it offers a long-term care policy.

• The older you are when you buy a long-term care policy, the higher your premium will be. Buying a policy long before you expect to need benefits may save you money over time.

• Get quotes from several agents and companies, and compare policies.

• Make sure that any agents or companies you deal with have the proper licenses. You can learn the license status of companies and other information by calling TDI’s Consumer Help Line or viewing company profiles on TDI’s website. Company profiles show the company’s history, complaint record, and financial rating.

• Take your time. Don’t be pressured into buying a policy.

• Never buy a policy or sign something you don’t understand.

• Answer all questions truthfully. An insurer may deny a claim or cancel a policy if your answers are incorrect or untrue.

• When buying by mail, ask if the company has a local agent or a toll-free number you can call with questions.

• Never pay with cash. Pay by check or money order and insist that the agent give you a receipt. Make checks payable to the insurance company, not to the agent.

• Don’t buy multiple policies. It is not necessary to purchase several policies to get enough coverage. One good policy is enough.

• If you decide to change long-term care policies, make sure you have received and carefully reviewed the new policy before you cancel the current policy.

• Check the benefits and list of exclusions before you buy a policy.

• Use your “free look period.” Insurance companies must give you at least 30 days to look over your long-term care policy after you receive it. Read the policy carefully to be sure it has the benefits and features you want. If you decide to return the policy within the 30 days, you will get a full refund of any premium paid. It’s a good idea to use certified mail so you will have proof that you returned the policy. Be sure to keep a copy of everything you return.

• Use the Centers for Medicare & Medicaid Services’ Long-Term Care Planning Tool to help you understand long-term care services, costs, and financing options. Visit the Medicare website

**Information is courtesy of the Texas Department of Insurance website.