General Practice, Solo & Small Firm DivisionMagazine

Volume 17, Number 5
July/August 2000


BY Cameron M. Harris and Jerry Salomone

You have completed the wills and/or living trusts for your clients. If they had an interest in a business, you designed a buy/sell agreement. You made sure they hold any life insurance in an irrevocable life insurance trust to keep it out of their estate. You reviewed the beneficiary designations of all the qualified plans and IRAs. The client has insured himself or herself against disability through a policy at work or through a separate personal policy. Your client's employer provides health care coverage under a group plan. The question is: "What did you fail to do?"

The cost of long-term care can pose the largest single financial burden an individual may face in his or her lifetime. You have neglected to advise your client on the potential significant costs that may be incurred by the client or the spouse relating to long-term care.

The costs of long-term care can wreck a lifetime of financial planning. According to the National Association of Elder Law Attorneys (NAELA), nursing home care can often cost from $2,500 to $4,000 per month (or more). Individual finances can quickly be exhausted. While the likelihood of entering a nursing home is somewhat less than those famous examples of certainty, death and taxes, a study by the U.S. Department of Health and Human Services stated that the average 65 year old faces a greater than 40 percent lifetime chance of entering a nursing home. The risk of entering a nursing home and the length of the stay increases with age.

Long-term care costs can also include at-home care. The cost of bringing a home health care aide into the home on a part-time basis just to perform basic assistance in dressing, bathing, preparing meals, and similar household chores could easily exceed $1,000 per month. Skilled help such as physical therapists or nurses would cost much more.

Who Pays?

Senior citizens are now the fastest growing segment of our population, so long-term care costs will only become a more frequent problem. You should be familiar with the financial sources that your client might use to pay these costs, if they do occur. The three primary sources include the personal assets of the client or the client's children, government assistance programs, or some form of insurance.

Individuals or their families pay for about one-third of all nursing home costs, according to the Health Insurance Association of America. The percentage of costs paid for in-home long-term care by the family is significantly higher. Planning to pay these costs with personal assets is really appropriate only for those with significant wealth. Some of the costs paid with personal assets are involuntary, as we will discover with the limits on Medicaid payments. For an individual to depend on the continued goodwill of wealthy descendants is not particularly palatable or sufficiently certain for many clients.

Government programs currently pay for a significant portion of all U.S. long-term care costs, including approximately half of all nursing home costs. The problem is that the primary government programs, Medicare and Medicaid, have significant limitations. Medicare generally covers only short-term nursing home care after hospitalization and some skilled at-home care for a short period. Medicare is a health care program, not a long-term care solution. Medicaid is designed to address long-term care needs and does cover almost half of all U.S. nursing home costs, but is designed as more of a safety net than a total solution.

Medicaid coverage is administered separately in each state, but generally requires that an individual have extremely limited resources in terms of both income and net worth, or that a person spend down these assets before Medicaid coverage will kick in. Some assets (including the family residence) are exempt, and the spouse is allowed to keep one-half of the available assets (up to a very low maximum). Yet, the broad definition of available assets (which includes life insurance, qualified plans, and IRAs), combined with the disregard of how assets are titled between a husband and wife, virtually ensures that either a single person or a non-institutionalized spouse will be impoverished before Medicaid is available. The three-year lookback period on gifts (five years on trusts) for Medicaid qualification purposes significantly reduces you and your clients' ability to plan to preserve assets. In short, another word for what Medicaid coverage requires is "poverty."

The Insurance Answer

A truly wealthy person can simply ignore long-term care costs as insignificant, while a poor person is already impoverished and can look to the Medicaid system. But those clients with substantial assets that need protecting who are in between the two extremes are put to a choice. They can accept the risk of needing long-term care at some point and causing Medicaid-mandated impoverishment, or they can insure around that risk.

Long-term care insurance is the most common response to the risk of impoverishment caused by the high cost of long-term care. Numerous companies offer this type of coverage, so it is important to clearly understand the nature and terms of the policy under consideration. Most individual policies can only be sold to people who are between 40 and 84 at the time of purchase. Long-term care policies are often offered as a stand-alone product, but sometimes are bundled with healthcare insurance, either on an individual or group basis. Note, however, that the healthcare insurance you typically will see offered by an employer does not include long-term care insurance because of the additional cost and limited attractiveness to younger employees.

If you were 40 or 45 and still feeling bulletproof, would you be voluntarily paying for long-term care insurance? At best you may see it as an option under a cafeteria-type plan. Thus, while most Baby-Boomers are covered by health insurance (91 percent, according to the American Health Care Association), these same people will see themselves as being unable to cover their own long-term care costs, or they have not even given serious thought to the problem.

Most long-term care policies are indemnity-type policies, which means that they pay a specific amount on the occurrence of a specific condition, such as a fixed dollar amount chosen by the insured for each day the insured receives specified care, either in a nursing home or at home. The amounts are chosen considering the average daily cost of a nursing home with a lower daily amount for in home care. The insured can typically choose between amounts ranging from $50 to more than $300 per day for nursing home care, but there will generally be either a period limit on how long or an overall dollar limit on how much in benefits are paid. The policy will only pay a fixed amount and any excess costs are the insured's responsibility. Recent policies feature an inflation adjustment option, which increases the premium cost, consisting of either an automatic annual benefit increase, a right to increase benefit levels periodically without proof of insurability, or policy coverage of a specific percentage of actual or reasonable charges (like a healthcare policy).

The payment of premiums in a long-term care policy is usually comparable to term life insurance rather than to permanent life insurance. The need for long-term care must generally arise within the term covered by the payment of premiums. Premiums typically continue as long as the policy is in force, although many policies provide for a waiver of premium payments when the insured is drawing on the long-term care benefit. Newer policies are renewable without a new proof of insurability (or being over any particular age) and have an exclusion period on the front end of the term for preexisting conditions that cause a need for coverage. Most policies offer options for returning a percentage of premiums or shortening the overall benefit period or amount if the insured either dies or drops the coverage.

The Health Insurance Portability and Accountability Act of 1996 clarified a number of federal income tax questions regarding long-term care insurance. Benefits generally are not taxable. Premium payments by individuals are deductible as an itemized medical expense deduction (like health insurance premiums), or a percentage is deductible as an adjustment to adjusted gross income (i.e., above the line) for self-employed taxpayers. Employer payments of premiums are deductible by the employer and excluded from the employee's income.

Obviously, with so many policies on the market and so many options in policies, it is difficult for a client or even a lawyer to understand all of the features and conditions of alternative long-term care policies. The use of a single or even multiple checklists will allow you to provide a far greater service to the client than a seat-of-the-pants evaluation (see "For More Information").

Long-term care insurance can be a real benefit to your client and his or her family, but it has some disadvantages. Premium costs can be high and generally increase along with the age of the insured. The costs of continuing an existing policy or purchasing a new policy increase later in life when your clients may need it most. Yet, a person could spend years paying premiums and never need long-term care. Finally, if you think that it's hard to get clients to do something about their wills because they refuse to discuss their own mortality, imagine trying to have a meaningful discussion of long-term care insurance when the clients don't believe that they will ever have any long-term care needs.

Other Solutions

There is an alternative to long-term care insurance. Some permanent life insurance policies (typically whole life) have a supplemental benefit that allows the insured to receive all or a portion of the death benefits during his or her lifetime for the payment of long-term care costs. The insured can draw on this accelerated benefit if needed before death for long-term care, within the limits of the contract, or the policy can be left alone and payable at death as a normal death benefit. The payment will typically be capped as a percentage of the death benefit payable per month and will not ordinarily be taxable as income to the insured. This type of combined long-term care and life insurance product is sometimes referred to as life insurance with a "convalescent care rider," "accelerated benefits," or "supplemental long-term care benefits."

At least one insurance company appears to be designing some of its products around this accelerated benefits concept. The accelerated benefits product can utilize either single or second-to-die life insurance policies, with premiums paid on a single premium, a premium for a designated number of years, or an annual premium basis. The benefits, compared to traditional long-term care insurance, include guaranteed premium amounts, guaranteed benefits whether or not the long-term care benefit is used, and cash values that could be accessed for non-long-term care reasons. Naturally, the accelerated benefits product will cost more than an equivalent life insurance policy without the accelerated benefits.

These accelerated benefits products should be evaluated using the same checklists used for long-term care insurance evaluation. A direct comparison should look at separate life insurance and long-term care policies compared to an accelerated benefits product, keeping in mind that the death benefit under the accelerated benefits product will be reduced by any long-term care benefits paid out.

No one financial product will ever be best or even suitable for every client. Always take the time to help your clients evaluate what is appropriate for them.

For More Information

To find out more about long-term care insurance, and to obtain excellent checklists of desirable long-term care insurance policy provisions, visit these websites:

  • Health Insurance Association of America.
  • National Association of Elder Law Attorneys.

Because long-term care insurance is regulated at the state level, various state departments of insurance have developed their own long-term care insurance checklists. Check the government listings for the state insurance department in your phone book. An additional source is the National Association of Insurance Commissioners, Suite 800, 2301 McGee Street, Kansas City, MO 64108, 816/842-3600.

Cameron M. Harris, JD, CPA, LLM, is Director of Advanced Planning for AXA Advisors, LLC, Texas Region. Jerry Salomone, JD, works for AXA Advisors, LLC. This article represents the opinions of the authors only and does not necessarily represent the opinions of AXA Advisors, LLC.

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