LTC insurance prevents financial wipeout

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Long-term care insurance is a tough sell, yet it’s something middle-income people with substantial nest eggs should consider since the need for personal care can quickly deplete financial reserves. A relatively new partnership program adopted by many states may make this insurance more palatable to more people.

Why consider it? The likelihood of filing a claim for long-term care is higher than for a home wrecked by fire. A 65-year-old man has a 27 percent chance of entering a nursing home at some point in his life; a 65-year-old woman faces a 44 percent probability of doing so, according to the Centers for Medicaid and Medicare Services. The cost of a private room in a nursing home averages more than $70,000 per year.

State governments on average spend 18 percent of their general fund budgets on Medicaid. But Medicaid doesn’t pay the bill for those with financial resources. The jointly funded, federal-state health insurance program is designed for low-income, needy people. Medicare, the federal health care program for those over 65, doesn’t cover routine nursing home care.

The case of Ethel and Jim Mann

When Ethel and Jim Mann of Mountain Home, Ark., reached their 60th wedding anniversary, Jim made the painful decision that he couldn’t take care of Ethel any longer.

Ethel had mild dementia, so Jim moved her into a nursing home. She didn’t get any better, but she didn’t get any worse either.

After more than two years of paying the increasingly large bills, Jim Mann simply ran out of money and was forced to shift the cost of his wife’s care to Medicaid.

That decision cost Jim Mann plenty. The Medicaid rules are different depending on which state you live in — and they are confusing in every state — but in general, they divide the couple’s assets in half and allow the spouse who remains in the community to keep household goods, the car, prepaid burial plots, the house (as long as the equity in it is less than $500,000 in most states; $750,000 is the cap in some states) and a very small amount of cash. The other half of the couple’s assets must be spent until only $2,000 is left, and then Medicaid will begin paying the nursing home bills.

The problem for many couples is that the spouse living in the community hasn’t enough money left to cover daily living, let alone emergency costs such as a car repair or a roofing job on the house — and nothing to leave to heirs. It’s a punishing kind of policy that only gets worse if the second spouse later needs medical care as well. If he or she must enter a nursing home then there’s no money left for health care costs beyond the basics and no cash for any of the niceties of daily living: no favorite cosmetics or even robes and slippers.

Purchasing long-term care insurance might have saved the Manns and others like them from this economic disaster, but many people with modest incomes are reluctant to purchase it because they haven’t been able to afford policies that really provide help.

Partnership for Long-Term Care

Recently a coalition of insurance companies, nonprofits and government organizations has come up with a solution known as Partnership for Long-Term Care. It encourages people to purchase a modest amount of long-term care insurance, leaving them still eligible for Medicaid if they spend up the insurance. And it preserves their savings dollar for dollar of insurance purchased.

Result: Spouses who live in the community aren’t impoverished and those who need nursing care for a long period of time continue to have some savings to cover costs that Medicaid doesn’t pay. There may even be a little money left to leave behind.

Private insurance companies sell partnership policies. They work like this: If a partnership policyholder, a single person or a couple, buys $250,000 in benefits, they will be able to leave $250,000 in the bank or keep $250,000 in other personal assets such as a rental property and still qualify for Medicaid.

The federal budget legislation that authorized these policies required that the partnership plans be inflation adjusted, so the value of the policy will rise with time, and benefits will keep pace with the rising cost of care.

States have been supportive of the partnership plans because they promise to cut back on tax dollars spent.

So far these partnership programs, which were authorized by the federal Deficit Reduction Act of 2005, are available in about half of the states. In the other half, legislation spelling out the details still hasn’t passed. To find out if the plan is offered in your state, contact your state insurance regulator.

While the laws are different in every state, in general the following information is true no matter where you buy a partnership plan, according to the Insurance Information Institute; Mark Meiners, professor in the Department of Health Administration and Policy at George Mason University; and Chad Shearer, attorney and program director for the Center for Healthcare Strategies.

Common features of partnership policies

  • Two types of policies are available: one that covers only benefits delivered in a nursing home or residential care facility, and one that covers a broader range of care, including home care, a community facility, residential care or a nursing home. The more flexible a policy is, the more expensive it is, although the option to have home care is increasingly a part of even the least-expensive policies.
  • Plans have a waiver of premiums, so you don’t have to pay to keep the insurance in place while you are receiving benefits in a nursing home.
  • There’s state reciprocity. If you buy a plan in one state, other states will honor it. But consumers will be subject to the different Medicaid eligibility rules and benefits if they purchase a policy in one state and apply for Medicaid in another.
  • If you currently have a long-term care plan that isn’t a partnership plan, you can probably trade it for one that is.
  • The cost of long-term partnership plans is roughly the same as other sorts of plans. The time to buy them is when you are fairly young. A single, 55-year-old can expect to pay about $1,100 annually for a plan that offers $250,000 in benefits. The annual cost will stay the same unless the insurance company gets permission from your state insurance commission to raise the price for every policyholder in the same “class” — generally age or locale. If you delay purchasing long-term care, the cost of the same policy will be significantly higher every year, plus, if you develop a medical problem, you may not be able to buy a policy at all.
  • These policies are designed to help middle-income people, and the most you can effectively shelter is about $350,000. While there are no limits on the amount of insurance you can buy, because of Medicaid rules in most states, buying more than $350,000 won’t increase protection for your nest egg, according to Meiners and Shearer.

Shearer says he believes these policies cut down on insurance companies’ tendencies to push for big sales, a hardcore approach that scared away some potential customers.

“I think insurance companies used to go the route of pushing very expensive lifetime coverage and that was off the mark. Now they can sell insurance that has appeal to a much broader range of people,” Shearer says.

What if income is high?

Another issue that people with moderate incomes who contemplate buying these partnership policies face is the possibility that they will never qualify for Medicaid because they have too much retirement income. How much is too much? Each state sets a protected resource amount, or PRA, which in 2009 can range from $21,000 to $109,000.  Earning even a little more than the PRA can put moderate-income couples in a situation where much of the family income goes to pay the nursing home bills, leaving the spouse in the community without enough money to continue living comfortably.

Meiners of George Mason University points to the possibility of resolving that issue with a Qualified Income Trust, or QIT. This trust permits legally diverting income and assets into a trust, where the income is not counted toward the Medicaid eligibility income cap, although some of it may have to be paid back to Medicaid after the death of the Medicaid recipient. Setting up this kind of trust requires expert legal advice and anyone contemplating purchasing a partnership policy who might find themselves in this situation should get that kind of help.