2. Insurance Planning. 8. Long-Term Care Insurance Flashcards
Module Introduction
Historically, family members, through extended family living arrangements, provided care for each other. Even today, families remain the primary source of care for the sick. However, numerous factors have converged to decrease the ability of families to provide supportive care such as, the continuing demise of the extended family along with the rise of single-parent households. Perhaps the greatest concern of seniors is the fear surrounding loss of dignity and/or control that accompanies old-age health deterioration and wealth depletion. Due to these and other reasons, American society has witnessed a rapid growth in the demand for long-term care (LTC) services.
The Long-term Care Insurance module will explain the need and the benefits of long-term care insurance.
The online portion of this module takes the average student approximately two hours to complete.
Upon completion of this module you should be able to:
* Describe LTC insurance
* Explain the meaning of LTC insurance
* Describe LTC insurance options
* List the benefits associated with LTC insurance, and
* Enumerate the limitations of LTC coverage.
Module Overview
Many societies are currently dealing with the issues associated with a rapidly aging population. Advances in medicine and a more health-conscious society have increased life expectancy. Illnesses and injuries that once resulted in death now can be treated to preserve life, allowing more individuals to live with prolonged illnesses. We know that a substantial proportion of elderly individuals will require care at some point. Estimates for the United States suggest that 40% of elderly people will require nursing home care at some point in their lives. By age 65+, the odds of requiring some form of long-term care increases to 70%.
The demand for LTC insurance is expected to grow as more and more people become aware of the extraordinary costs of LTC. The average cost of a year’s stay in a private nursing home in the United States is about $102,000 (2019), with nursing homes in metropolitan areas easily costing twice that amount. The average long term care need is ~2.2 years for males & ~3.7 years for females, with about 20% lasting more than five years. Of course, individual costs can be much higher than the averages suggest, meaning an even more rapid depletion of personal assets. While Medicaid provides restricted care to those who are impoverished, for the average family, it is advisable to consider LTC insurance.
This module will give you an overview of LTC insurance and discuss the meaning of LTC insurance and its options. The benefits associated with LTC insurance are also covered.
To ensure that you have an understanding of long-term care insurance, the following lessons will be covered in this module:
* Long-Term Care Insurance
* Long-Term Care Benefits
Section 1 – Long-Term Care Insurance
Long-Term Care Insurance (LTCi), which was first introduced in the 1970’s, promises to pay expenses incurred if the insured is unable to engage in certain day-to-day activities called activities of daily living (ADLs). The individual’s inability to engage in such essential activities requires that someone provide care, either at home or in an institution such as a nursing home.
Long-term care benefits are offered on both an individual and group basis. The LTCi market developed initially through the individual product route, but group LTCi is increasingly playing an important role.
To ensure that you have an understanding of LTC, the following topics will be covered in this lesson:
* Defining Long-Term Care Insurance
* Long-Term Care Coverage
* Regulations
* Tax Treatment
Upon completion of this lesson, you should be able to:
* Define LTC,
* Explain LTC insurance coverage,
* Enlist essential elements of LTC, and
* The options of LTC.
Identify the essential elements of Long-Term Care.
I. Services that assist individuals in performing ADLs.
II. The need for medical, personal, or social services.
III. Needs resulting from an accident, illness, or frailty.
IV. Services provided in the home or a nursing home.
* I only
* I, III, and IV
* II and IV
* I, II, III, and IV
I, II, III, and IV
* All of these are essential elements of LTC.
Exam Tip, Audio & Practitioner Advice
Describe the Medicaid Option and Look back period
In the United States, Medicaid is the “provider of last resort” for the impoverished. Medicaid is a joint federal and state entitlement program that pays for medical expenses for qualified recipients. Eligibility for Medicaid long-term care services is based on each state’s income and resource standards. Though specific thresholds vary from state-to-state, in general, individuals cannot have more than $2,000 in countable assets to apply, and some assets are not counted, such as household goods, personal possessions, clothing, furniture, jewelry, a car, and up to $500,000 or $750,000 of home equity. Assets that are considered countable include savings, CDs, money market accounts, real estate, stocks, bonds, and other investments.
Until recently, many financially well-off families, facing the need to provide long-term care for an aged parent, would arrange for the transfer of the parent’s assets either to children or to a trust, to voluntarily “impoverish” the parent who would then be eligible for Medicaid. In response, Congress imposed strict limitations on the transfer of assets when it passed the Deficit Reduction Act of 2005. Now certain transfers for less than fair market value made within the “look back” period will incur a penalty period of ineligibility. Medicaid payments would be withheld for a calculated period of time once the nursing home resident depletes his assets to the state’s qualifying levels.
The penalty period begins on the later of:
* the date of the asset transfer, or
* the date a person entering a nursing home is eligible for Medicaid coverage if it weren’t for the imposition of the transfer penalty.
The following provisions are applicable to all potential Medicaid recipients; they are intended to minimize financial manipulation:
Property transferred to individuals, charities, or a trust within 60 months of application for Medicaid is considered as owned by the applicant and must be disclosed. Applicants must provide five years’ worth of financial records to satisfy the “look back” period, regardless of whether transfers were made to a trust or to others.
State Medicaid programs are required to attempt to recover any Medicaid payments from the estates of recipients.
Exam Tip: “Live in the moment” … “the past is past” speak the sages and devout practitioners of mindfulness. Sadly, these words of wisdom get tossed to the side when it comes to the Medicaid Long-Term Care asset-counting qualifications.
Listen in for a quick summary of the Medicaid ‘five-year lookback and an explanation about why it counts.
Audio:
Be aware of and understand the “look back” provision of Medicaid - where one cannot give away all their money and immediately go on Medicaid for LTC and nursing home.
Applications - all financial records from past 5 years are subject to inspection.
If transfers found, not immediately eligible. There will be a delay.
Will look at total assets transferred in 5 years and divide it by a “penalty divisor”, which is the typical cost of care in that state, and the result is the number of months they have to wait to be eligible for Medicaid.
Ex. Transferred $100k in 5 year period. Typical cost of care is $4k/month. $100k/$4k = wait 25 months before eligible for Medicaid.
Practitioner Advice: Though Medicaid continues to provide some financial security to the truly needy, it will no longer be subject to the same types of manipulation as before. The message is clear: If there is any way for people to cover their own LTC expenses, they should try to do it. Many states now have long-term care “partnership” programs that allow buyers to qualify for Medicaid after the policy’s benefit period ends, and protect some assets from spend-down requirements. For example, if a policy is purchased with $100,000 in benefits, the buyer can keep that amount of assets and still qualify for Medicaid. Ownership of LTC insurance may also exempt the nursing home resident’s estate from payment recovery. See your specific state for details.
Exam Tip:
Describe the 3 LTC Levels of Service & what Medicare pays for
Policies often provide for three levels of LTC care. They include skilled nursing care, intermediate nursing care, and custodial care. Formerly, most LTC policies required a hospital stay before admission to a nursing home. Also, the stay must have been certified “medically necessary.” This is no longer the case.
Exam Tip: Understanding when and where Medicare may apply to the different levels of LTC care is a highly testable CFP Exam topic. For example, Medicare will never pay for Custodial Care while there is a specific scenario in which Skilled Nursing Care could receive Medicare coverage.
Listen in below for additional information on LTC coverage options and permitted expenses under Medicare.
Audio:
* Medicare will only pay for Skilled Nursing Care for a period of time following hospitalization of 3 days
* Medicare will never pay for Custodial Care
* Custodial Care would have to be self-pay or with LTCi
Exam Tip:
Describe the Activities of Daily Living (ADLs)
Most policies agree to pay benefits if the insured cannot perform basic living activities without assistance. The typical policy requires that the insured be unable to perform two of five or six ADLs (activities of daily living) for 90+ days, depending on the policy.
Because LTCi contracts are not standardized, the policies can contain any of the following list of activities of daily living (ADLs):
* Eating
* Bathing
* Dressing
* Toileting
* Continence
* Transferring
Some individuals can physically perform all ADLs and yet cannot be left alone safely. When substantial services are required to protect the individual due to Alzheimer’s, dementia, or cognitive deterioration. Can start LTC benefits alone (no 2 of 6 ADL requirement). This special coverage is referred to as the cognitive impairment clause.
Exam Tip: Memorize all of the ADLs (i.e., B-E-D, C-O-T) and be sure to know a few activities that will not be considered as an ADL (i.e., blindness or wheelchair use).
Listen in below for a frequently tested application of ADLs and LTC coverage qualification.
Audio:
Not ADLs - being blind or in a wheelchair
Each of the following are common Activities of Daily Living (ADLs) EXCEPT:
* Continence
* Walking
* Dressing
* Transferring
Walking
* Walking is not considered a basic Activity of Daily Living (ADL).
The common ADLs include:
* Bathing
* Eating
* Dressing
* Continence
* On-Off the Toilet (Toileting)
* Transferring
Practitioner Advice:
Describe Community Care
Most elderly are happier and healthier when they can maintain as much control over their own affairs and experience independence. LTC policies usually provide benefit payments for those insured who require assistance but who are able to remain in their homes or communities. The benefits, usually stated as a percentage (such as 50 percent of the full nursing home benefit) are available for a variety of programs and services.
Community Care serves as one of many broad categories of Long-Term Care Treatment Locations. In addition, there are Facility and Home Care services that may be appropriate for a given individual based on their health status and personal needs.
Practitioner Advice: Many LTC policies now offer a rider, for an additional premium, that increases the home care benefit to 100% of the daily benefit. This gives the client more financial support to stay in their community and makes the policy easier for them to understand, e.g. “I will get benefits up to $200 a day, whether I get care at home or in a nursing home.”
Section 1 – Long-Term Care Insurance Summary
Long-Term Care (LTC) refers to a broad range of supportive medical, personal and, social services rendered to people. These people are either aged or not in a position to take care of themselves. The various options provided in this coverage also extend to those who are unable to function properly because of illness or injury for an extended period of time.
In this lesson, we have covered the following:
- The Need for LTC Insurance has become imperative as a result of need for medical and social services for the sick and the elderly.
- The Medicaid Option is available only to those with very few assets.
- LTC insurance policies not only include nursing home care (i.e., Facility Care) but also home care and community care.
- Services provided for Activities of Daily Living (ADLs) assist the individual in performing the essential functions of daily living.
- The LTC options are Facility Care, Community Care and Home Health Care.
In the United States, Medicaid is reserved for the impoverished.
* False
* True
True
* In the U.S., Medicaid is solely for the benefit of the poor.
* Beneficiaries of this policy must have very few assets.
Which of the following complement nursing care?
* Medicaid
* Assisted Living Facilities (ALF)
* Hospice care
* Cognitive Impairment
Assisted Living Facilities (ALF)
* ALFs provide supervision and limited health services to relatively healthy senior citizens.
* They provide less medical care than nursing homes, but more care than that rendered by common living arrangements.
Which of the following LTC policy benefits help patients in need of constant medical attention?
* Nursing Home Care
* Intermediate Nursing care
* Custodial Care
* Community Care
Nursing Home Care
* Nursing home care is the only kind of LTC that provides for required round-the-clock medical supervision prescribed by a doctor.
* Custodial and community care do not provide medical services, but are more for assistance with ADLs.
* Intermediate nursing care generally is for those who need a little more care than with just ADLs, but not full-time medical attention.
Section 2 – Long-Term Care Benefits
The LTC policy’s benefit provisions outline what would be payable by the insurer if an insured event occurs. These provisions are concerned with the types and levels of care for which benefits are provided. Some insurers offer a lifetime benefit period, however, no policy covers all LTC expenses.
To ensure that you have an understanding of LTC benefits, the following topics will be covered in this lesson:
* Benefit provisions
* Contract protection
* Coverage limits
* Regulations
* Tax treatment
Upon completion of this lesson, you should be able to:
* List all types of benefit provisions,
* Describe factors which determine LTC premiums,
* Identify coverage limitations of LTC policies,
* Specify the provisions that policies must meet to be considered LTC insurance, and
* List the criterion for tax treatment.
Calculate the maximum lifetime payout if a Long-Term Care benefit on a policy is $100 per day and the stated benefit period is four years.
* $146,000
* $36,500
* $26,000
* $104,000
$146,000
- The maximum lifetime payout would be $146,000, calculated as follows:
$100 (daily benefit) x 365 days = $36,500
$36,500 (annual maximum) x 4 years = $146,000
Practitioner Advice:
Describe the Elimination Periods
The policies offered provide a choice of elimination (waiting) periods before benefits become payable. Available elimination periods range from zero to 365 days. A longer waiting period warrants a lower premium, when all other policy provisions remaining the same.
Practitioner Advice: The 20-day elimination period may be selected to match the time period when Medicare stops paying 100%. The 60-day elimination period has a lower premium, and is more popular with clients who are willing to “self-insure” the first two months of care.
Use a balance sheet to determine the cash needed for a 6-month reserve and determine the current ratio (current assets / current liabilities). Assume a client would like to purchase a long-term-care policy and that long-term-care expenses are estimated at $120,000 per year or $10,000 per month. The client gets several quotes, and, in an effort to minimize the insurance premium, chooses a longer elimination period. The advisor should discuss with the client the cash flow needed to bridge long-term-care expenses that will not be covered until the policy starts paying. For example, if the client chooses a 6-month elimination period, point out that approximately $60,000 (6 months x $10,000 long-term-care expenses) is required to cover all costs until the elimination period has passed.
Describe LTCi Benefit Provisions
The benefit provisions in LTCi policies outline what will be payable by the insurer if an insured event occurs. These provisions relate to the types and levels of care for which benefits will be provided, any prerequisite for benefit eligibility, and the level of benefits which are payable. However, no policy guarantees to cover all LTCi expenses; there are always certain limits and/or “cost-sharing” amounts the insured incurs.
The policies offered by many companies provide a choice of elimination periods before benefits become payable. The schedule of the benefit periods offered might range from two to five years. Some insurers even offer a lifetime benefit period, which works out to be quite an expensive option.
Community-based care is less expensive than nursing home care, and is usually preferred by the elderly. The maximum daily benefit varies by contract from 50 percent to 100 percent of the maximum daily benefit for nursing home care. The length of the benefit period is often the same for both of the coverages, but different insurers require different waiting periods. LTCi policies now offer some kind of inflation protection rider for an additional premium.
Practitioner Advice: The average national long-term care expenses are inflating at a rate of 3.11%. However, there is great variability in the long-term care price point for a given level of care at the regional, state, or local level. Calculate the costs of LTC care in your region, state, or municipality by visiting the Genworth Cost of Care website.
Describe Inflation Protection rider on LTCi
If a policy is purchased with no inflation protection, the benefit amount remains at its original level indefinitely. The client needs to be aware of purchasing power risk (detailed further in the Investment Course), which is the risk that inflation will erode the real value of the investor’s assets. In this case, the value of the long-term-care policy is the client’s asset.
Inflation and LTC Benefits Example:
Assume a client purchases a long-term-care policy without inflation protection for $275 per day and a 3-year term. In addition, inflation for long-term-care costs is a constant 4.5% increase over the next 20 years. Twenty years later the client is a resident in a nursing home, receiving a $275 per day benefit when the actual cost per day is $663. This is calculated as: n = 20; I = 4.5; PV = ($275); FV = $663.
A majority of LTC policies offer some kind of inflation protection for an additional premium, which is designed to ensure that the benefit amount increases with the cost of living. As shown in the example above, inflation protection of 4.5% would fully hedge the purchasing power risk. A 3% inflation protection on the policy would increase the daily benefit to $497, calculated as: n = 20; I = 3; PV = ($275); FV = $497.
Any shortfall will erode assets that would normally be distributed to beneficiaries upon the policyholder’s death. As the financial planner, you will need to help the client determine whether it is worthwhile to pay the increased premiums or whether this would constitute paying for benefits that may never be utilized in the future.
Many companies offer options such as:
Increasing the benefit amount by 3% of the original amount per year.
Increasing the benefit amount by 3% compounded annually.
Adjusting the benefit amount annually according to increases in a price index, such as the consumer price index in the United States.
Practitioner Advice: The inflation rider is the most expensive LTCi rider. The Compound Inflation rider can equal half of the total premium, especially for younger insureds. For people in their fifties though, it doesn’t make sense to buy LTCi without the inflation protection. Consider much coverage a daily benefit of $200 would actually provide twenty-five years from now if inflation averages 3%.
