Summary of Long Term Care Insurance

LTC Policy Design:

All long-term care insurance policies function in essentially the same way, but there is also a great deal of variation in product design.

Most policies are designed to meet the requirements for federal tax-qualified status, but a few are nor. Some policies meet the requirements of state long-term care partnership programs, and others do not
The benefit triggers of tax-qualified policies must adhere to HIPAA rules, and as a result there is a high degree of standardization in this area. Benefit eligibility is based on a physical impairment (the inability to perform a certain number of ADLs without assistance) or a severe cognitive impairment.

LTCI policies may cover only facility care or only home care, but most cover care in a variety of settings. Policies may provide benefits for such items as homemaker services, transportation, informal caregiving, respite care, bed reservations, and care coordination.  

Under a reimbursement policy (the most common type), the insured is reimbursed for the actual covered expenses he incurs, up to a daily or monthly benefit amount. Under indemnity and disability policies, the full daily or monthly benefit is paid regardless of the actual amount of covered expenses incurred. Each of these payment models has advantages and disadvantages, for both the insured and the insurer.

An LTCI policy must be either guaranteed renewable or noncancellable. The NAIC models, which have been adopted in whole or in part by most states, mandate other policy provisions designed to protect the consumer.

Policy Options

When an individual purchases an LTCI policy, she must select benefit amounts and decide if she wants any optional features.

The purchaser sets the length of the elimination period by choosing from options offered by the insurer. A long elimination period makes a policy cheaper, but it means that the insured will have to pay for care out of her own pocket for an extended time before she receives benefits. Elimination periods vary in terms of when they start, how days are counted, whether they must be satisfied more than once, and whether there is an accumulation period.

The buyer selects a daily or monthly benefit amount, and also sometimes the percentage of the facility benefit that will be paid for home care. The benefit amount should be based on the cost of long-term care services, but the buyer must also keep in mind that this amount has a direct proportional impact on the premium.

An LTCI policy normally limits the total amount of benefits the insured may receive during the life of the policy. Most commonly, the purchaser selects a lifetime maximum benefit, and she receives benefits until the total amount received for all types of care reaches this maximum, regardless of how long this takes. Some older policies have a benefit period -- they pay benefits until a certain amount of time has elapsed.

As long-term care costs rise, fixed benefit amounts become inadequate. Inflation protection options are available to address this problem. They add to the cost of a policy, but they are important, especially for those who expect to need care many years after they purchase coverage. One approach is automatically increasing benefit amounts every year at a set rate, without a premium increase. An alternative is allowing the insured to purchase additional benefit amounts at set intervals, with a corresponding increase in the premium.

A nonforfeiture option adds to the price of a policy, but it allows an insured to receive something if she decides to let the policy lapse. Other options, such as shared care, the dual waiver of premium, and a survivor benefit, can be advantageous to couples. And a limited pay option may be attractive to those who do not want to pay premiums during retirement.

LTC Premiums

The amount of the premium of an LTCI policy is based on product design, the benefit amounts selected by the purchaser, and any options she chooses. It also depends on the purchaser's age, in some cases her health, and any discounts she may qualify for.

An LTCI premium is not increased automatically as the age of the insured increases, but it is based on the insured's age when she applied for the policy. For that reason, it is generally advantageous to purchase coverage earlier in life rather than later.

Some insurers adjust the premium of an individual LTCI policy according to the health of the applicant. Most people pay a standard rate, but the healthiest people may be offered a discount and the less healthy may be charged more.

Most commonly, group LTCI coverage is offered on a guaranteed issue basis, without underwriting of individual participants. But in some cases modified guaranteed issue is used, or simplified or full underwriting is conducted.

Premium discounts may be offered to those who meet certain health criteria as well as to married people or members of the same family. Discounts normally apply to group coverage and may be offered to members of groups buying individual policies.

Tax Treatment

HIPAA established requirements that must be met for an LTCI policy to have federal tax-qualified (TQ) status and granted TQ policies favorable tax treatment. Most policies today are tax qualified, but a few are not, and some are grandfathered -- that is, they do not meet HIPAA requirements but are granted favorable tax treatment anyway because they were already in force when HIPAA became effective.  

To be federally tax-qualified, an LTCI policy must include certain information on its cover page, including an indication of its TQ status. Benefits must generally be paid only for "qualified long-term care services" provided to a "chronically ill individual" under "a plan of care prescribed by a licensed healthcare practitioner," as these terms are defined by HIPAA. Certain consumer protection provisions related to renewability, inflation protection, nonforfeiture, exclusions, and other matters must be included.

Benefits from TQ reimbursement policies are not subject to federal income tax, and benefits from TQ indemnity and disability policies may be taxed only to the extent that they exceed a certain level. Premiums paid by individuals on TQ policies are not generally tax-deductible; but taxpayers with large deductible medical expenses may be able to deduct their premiums to some extent. Premiums paid by employers on behalf of employees are generally deductible by the employer and not included in employees' taxable income.