Long Term Care – LTC

The term “long term care” (LTC) coverage and related terms as used broadly on this page include formal long term care and also “living benefits” (or “accelerated benefits”), which provide coverage for one or more of chronic illness, terminal illness, critical illness, and critical injury. Insurance for LTC planning includes policies designed specifically for long term care, as well as certain insurance policies having life insurance or an annuity as a basis. Many life insurance and annuity policies include “living benefit riders” (LBRs) (or accelerated benefit riders (ABRs)), which provide benefits while the insured is living.  A LBR is automatically included (i.e., free) in some of these policies, while in some policies, such riders are available for additional cost. LBRs (ABRs) are treated as life insurance for tax purposes, while formal LTC insurance is treated separately as a type of health insurance.

The following statistics might convince you at least to consider obtaining some kind of long-term care (LTC) insurance.

  • On average, 70% of people age 65 or older will need some form of long-term care.
  • The national average cost of a private nursing home room in 2021 was $297 daily or $108,000 annually.
  • In some states, however, the cost was higher: Massachusetts, $162K; Connecticut, $182K; New York, $159K; Oregon, $133K; Colorado, $117K; Alaska, $378K (while in Texas, a mere $85!). (Source: medicaidplanningassistance.org)
  • In year 2021, the national average annual cost was $53 for assisted living, and $50K to $200K for in-home care depending on level of care and number of hours.
  • Of Americans who are 65 years old and older, only about 16% have LTC insurance.
  • Unpaid family members and friends provide 80% of all long-term care in the U.S.

Should you get LTC  Insurance?

Based on the statistics, most people do not have LTC insurance, but they probably should get some form of LTC protection. Typical annual costs of $50K to $150K can quickly deplete the accumulated wealth of most people. If you have substantial equity in your home, then a reverse mortgage can provide a financial reserve. For most people, however, several years of LTC expenses can significantly reduce, if not obliterate, any legacy they intended to leave to their family.  

No Good Reasons to Avoid LTC Planning

People typically avoid LTC planning for a combination of some obvious, but not very good reasons. Firstly, conventional LTC insurance can be expensive. Since there is no absolute certainty that LTC will be necessary, many people resist paying for something they might not need, and then hope for the best. The statistics do not justify that hope, however.

Medicare or Medicaid Alternatives? Many have misguided ideas about the role of Medicare and Medicaid. In short, Medicare only covers short-term rehabilitation after a hospital stay. In contrast, Medicaid will cover long-term care expenses at government/tax-payer expense, but only if an individual has no income and no assets. (Note: certain Medicaid-planning techniques available from elder-law and estate-planning attorneys can ameliorate some of Medicaid’s draconian means testing and collection procedures. See more at Law Office of Thomas J. Swenson.)

Long Term Care Coverage

Coverage of LTC and chronic care expenses depends on the type of insurance policy purchased. Some policies are directed solely to LTC; others are focused primarily on life insurance or an annuity but are designed to include LTC and chronic care additionally. Some policies cover only nursing home care, while others cover in-home care as well as a number of other expenses. The coverage will have a limit (usually a daily or monthly limit) over a set period of years, or a lifetime total. Some newer products (described below) extend LTC coverage for the lifetime of the insured (and spouse).

What triggers LTC benefits?

Generally, cognitive impairment OR when one cannot perform “2 of 6 ADLs” without help. ADL stands for activities of daily living: Bathing, Dressing, Toileting, Transferring, Continence, and Eating.

LTC Options

Traditional LTC Insurance. This is generally the most comprehensive type of LTC insurance. It arguably provides good leverage in terms of LTC benefits per dollar of premium. You pay an annual premium of $2,500-$10,000+ a year (depending on your age); and if you incur LTC expenses, the policy will pay up to its daily limit. Only traditional LTC policies may qualify for a state’s Medicaid partnership program. Most states have approved particular LTC policies that provide an exemption against Medicaid collection for personal assets up to the LTC policy amount. (Some states, like New York, have a blanket exemption for all assets if a qualified LTC policy was in place before going on Medicaid.) Traditional LTCI was like term life insurance – use it or lose it.  If you did not use it, you did not get the premiums back. Newer tax-qualified LTC policies now often offer some version of a return of premium or a guaranteed minimum death benefit rider, by which some or all of the premiums paid into the policy are paid back to the owner (or owner’s estate) upon death of the insured.

Single Premium Life Insurance. Specialized single premium life insurance policies have a LTC benefit. Most people are not aware that they can purchase a life insurance policy that has an LTC benefit. Why would you purchase this type of policy? Because if you ever need the money you paid in premiums, it is accessible. That’s right. If you paid a $200,000 one-time premium for a policy and needed the money in years two, three, or whenever, you could ask the insurance company for a refund of your entire premium.

Additionally, some policies grow money in the policy similar to money market/certificate of deposits. This type of policy is a good fit for an older client who has money sitting in CDs and money market accounts because he thinks he might need the money some day and, therefore, does not want to allocate it to buying traditional LTCI.

Deducting the cost of LTC Insurance. Under some circumstances, 100% of the premiums paid by a business owner for LTC insurance are deductible. To learn how to obtain a 100% deduction for LTC insurance premiums, please click here.

Cash-Value Life Insurance (CVLI) with a Free Living Benefits Rider. Growing wealth through the use of cash-value life insurance, particularly indexed universal life insurance (IUL), can be a terrific idea for many. A nice by-product of using a CVLI product is that many come with a free living benefits rider (LBR), also known as accelerated benefits rider (ABR). Essentially, if you cannot perform two of six ADLs, the insurance company will give you a percentage of your death benefit early (tax-free). This type of coverage might not be as extensive as a traditional LTC policy; but if you are buying a policy to build wealth, why not buy one with free living benefits?

Life Insurance or Annuity with LTC Rider. Select life insurance and annuity policies have been designed to provide a multiple of account cash value for tax-free LTC benefits, while maintaining access to funds (return of premium) and minimum death benefit in case of early death.

Tax-Free Distributions and Leverage for LTC

Under the Pension Protection Act of 2006,  insurance companies can offer a specific type of annuity that distributes funds tax-free if used to pay for qualifying long-term care expenses or to pay qualified long-term care insurance premiums. The money used for LTC expenditures is no longer taxable income but considered as a reduction of cost basis. Benefit payments under long-term care riders of life insurance are also not taxable. Essentially, these tax-advantaged vehicles must be funded with post-tax money, but once funded, the accounts grow tax-free and proceeds used for LTC are distributed tax-free.

Leveraging post-tax dollars to get tax-free LTC benefits. Select insurance companies have created life insurance and annuity policy riders that provide leveraged LTC benefits.  The term “leveraged LTC benefits” here means that that the insurer pays some multiple (e.g., 2X or 3x) of the base account value for LTC if and when the base value is depleted. Other annuities can be designed to provide a LTC benefit for the insured’s lifetime.

Tax-Deferred to Tax-Free LTC

The Pension Protection Act (PPA) of 2006 also provides for 1035 exchange of an existing tax-deferred annuity to a PPA-qualified annuity. The benefits of a PPA-qualified annuity could include: guaranteed growth; tax-free distributions for LTC; distributions for income (usual taxation); payment of death benefit to heirs from un-used funds; leveraged LTC benefits. Combined with the leveraging opportunities described above, an existing annuity (perhaps one containing considerable tax-deferred growth) can be exchanged and leveraged to provide tax-free LTC. Common to virtually all annuity products with LTC riders, funds in the account are also available for non-LTC expenditures, but without the tax benefits for non-basis funds.

Life insurance policies are also eligible for a 1035 exchange from a policy without linked LTC benefits to a LTC-qualified annuity offering tax benefits for LTC.

Unfortunately, money in qualified pre-tax tax-deferred annuities, such as IRA, 401(k), and 403(b) plans, are not available for a 1035 exchange. Nevertheless, other valuable solutions are available for converting and leveraging money from pre-tax plans to tax-free LTC benefits.

Idle Money? Tax-deferred annuities, as well as cash instruments like CDs and money market funds, often contain significant value on which their owners intend to rely during retirement. Since many people, especially if they live long enough, will need long-term care (LTC) for some period(s) of time, they will inevitably need to draw upon their cash or tax-deferred funds to pay for LTC.  By leveraging these available funds for extended LTC, an owner avoids portfolio exhaustion, can leave a bigger legacy to family and charity, and maintains more and longer control over funding and management of potential LTC (incl. avoiding Medicaid).