Understanding Long-Term Care Insurance
As anyone with an elderly relative or friend who is unable to provide for his or
her own care can tell you, the cost of that care—whether at home or in a facility—is
a major expense. The financial outlay for such care, because of advanced age or
chronic illness or injury, may not be an issue for the very rich, with significant
personal resources, or the very poor (who qualify for government assistance).
But, for the vast majority of people, whether to purchase a long-term care insurance
(LTCI) policy is a worthy topic for discussion. Below we provide a few questions
and answers that may assist in determining whether you want LTCI coverage.
1. How likely is it that you will need long-term care?
According to the National Council of Insurance Commissioners, one person in three
who turned 65 in 1990 will stay in a nursing home, with one in ten staying five
years or more. On the other hand, according to recent statistics, over 25 million
people in the U.S. between age 65 and age 84 are living independently. Other statistics
suggest that those who do spend time in a nursing home usually remain there under
But what about the chances that you will need long-term care? Perhaps one of the
best steps that you can take is to evaluate your family’s medical history. You are
more likely to need LTCI if there have been instances of early onset of dementia,
heart disease or stroke in your family. Longevity may be a factor, too. If your
parents, grandparents or their siblings have lived into their 90s or later, it’s
not an unrealistic assumption that you will, too—thereby increasing the chances
that you will need some kind of professional care or assistance.
2. What does LTCI cover?
Terms differ from policy to policy. Generally, LTCI covers care in a qualified nursing
home, in an assisted living facility or in your home. But, often, policies will
pay less for care given in the home than in a facility.
As is the case with most insurance, coverage offers protection from catastrophic
loss of your assets and income should you require assistance. Coverage varies, but
the ability to perform a certain number of “activities of daily life” (ADLs) is
a common measure of when benefits will be paid. The most common ADLs are: eating,
dressing, bathing, transferring in and out of bed, toileting and continence.
3. What kind of LTCI coverage do you need?
LTCI policies offer a wide variety of options. The good news is that you should
be able to fashion a policy that closely suits your needs. The not-so-good news
is that you are going to have to spend a significant amount of time reviewing different
Some examples: Based upon your financial circumstances, you may be able to pay for
home care and thus need coverage only if you enter a facility. Do you have a relative
or a friend who might provide care? Then you’ll want a policy that permits payments
to unlicensed caregivers. Again, based upon your resources, you may want to lengthen
or shorten the waiting period before coverage begins. You might consider inflation
protection, as well.
4. What does it cost?
The cost of LTCI coverage depends upon a variety of factors. Your age at the time
that the policy is issued will determine your annual premium. The terms of the policy
as well as your health at the time that the policy is issued also will be a factor.
Another consideration is whether your premiums are locked in or may be adjusted
in certain circumstances, such as for inflation. Don’t automatically reject a policy
that doesn’t lock in your premium rate. It may not necessarily be a good idea: An
insurer with insufficient income to meet claims may go bankrupt and, possibly, be
unable to pay benefits.
5. Are there any tax breaks available with LTCI?
LTCI premiums are deductible in the same manner as your regular health insurance.
Your expenditures are added to your medical expenses, and you may deduct the amount
that exceeds 7.5% of your adjusted gross income. The deduction is capped, based
upon your age.
Benefits received from LTCI policies may be exempt from federal income tax—if the
LTCI policy is “qualified” (i.e., meets government standards). Generally, qualified
LTCI policies cannot exclude coverage by type of treatment, medical condition or
accident. Preexisting conditions can be excluded only for the first six months of
coverage. And the policies may not be cancelled for reason of nonpayment of premium.
Most states now are offering some form of tax incentives for LTCI policyholders
For tax issues involving LTCI in your personal circumstances, contact your tax advisor
before taking any action.