Individual and group long-term care insurance

What long-term care insurance is for

Long-term care (LTC) is help with the basic tasks of daily life, needed over a long period because of a chronic illness, a disability, or a cognitive impairment such as Alzheimer's disease. It is mostly custodial care, not medical treatment. Ordinary health insurance and Medicare pay for acute care and for short stretches of skilled care after a hospital stay. They do not pay for years of help with bathing, dressing, or supervision. Medicaid does pay for long-term care, but it is means-tested: a person must meet strict income and asset limits, and many people qualify only after using up much of their savings. Long-term care insurance exists to fill that gap and to protect savings.

When benefits are triggered

LTC policies do not pay because of a diagnosis alone. They pay when the insured meets a benefit trigger. For a federally tax-qualified policy, the insured must be certified by a licensed health care practitioner as a chronically ill individual, which means one of two things:

• unable to perform, without substantial assistance, at least 2 of the 6 activities of daily living (ADLs) for a period expected to last at least 90 days, or
• needing substantial supervision because of a severe cognitive impairment.

The six ADLs are eating, toileting, transferring, bathing, dressing, and continence. The certification must have been made within the preceding 12 months, and the care must follow a plan of care prescribed by a licensed health care practitioner. Some older or non-qualified policies also allow a broader "medical necessity" trigger.

Levels and settings of care

Exam questions describe three levels of care:

• Skilled nursing care: daily care ordered by a physician and given by licensed medical staff such as registered nurses or therapists.
• Intermediate care: occasional nursing and rehabilitative care, less than daily.
• Custodial care: help with ADLs, which can be given by people without medical training. This is the care most LTC claimants need.

Modern policies pay for care in many settings, not only nursing homes: home health care, adult day care, assisted living facilities, respite care (short-term care that gives a family caregiver a break), and hospice care.

How the benefit is structured

Four choices shape every LTC policy and its premium:

1. Daily (or monthly) benefit amount: the most the policy pays per day of care.
2. Elimination period: a waiting period, measured in days, before benefits begin. The policy states whether it counts calendar days or only days on which covered care is received. It works like a deductible measured in time. A longer elimination period lowers the premium.
3. Benefit period or maximum lifetime benefit: how long, or how much in total, the policy pays, for example 3 years or a pool of dollars.
4. Reimbursement or indemnity basis: a reimbursement policy pays actual expenses up to the daily limit. An indemnity, or per diem, policy pays the stated daily amount regardless of the actual cost.

Federal tax qualification

A qualified long-term care insurance contract must cover only qualified long-term care services, generally must not pay expenses that Medicare reimburses, must be guaranteed renewable, and must have no cash surrender value that can be borrowed or pledged. Premium refunds and dividends must reduce future premiums or increase benefits, except a refund at death or on a complete surrender or cancellation of the contract, which cannot exceed the premiums paid. A qualified contract is treated as accident and health insurance. Its benefits are treated as amounts received for personal injuries and sickness, so they are generally received income tax free. Per diem payments are tax free up to the greater of a daily limit that is indexed for inflation each year or the actual cost of care, reduced by any other reimbursements received for that care. Premiums count as medical expenses, subject to age-based limits.

Individual versus group coverage

Individual LTC is bought by one person, who owns the policy and is individually underwritten. Premiums are based mainly on age at issue, so buying younger is cheaper. Premiums are level but not guaranteed: on a guaranteed renewable policy the insurer cannot cancel the insured or raise one person's rate, but it can raise rates for a whole class.

Group LTC is sold through an employer, association, or similar group. The group holds a master policy and members receive certificates. Actively working employees are often offered coverage with little or no underwriting, while spouses, parents, and retirees usually face more questions. When a member leaves the group, group LTC typically offers continuation or conversion so coverage is not lost. An employer plan that provides qualified LTC coverage is treated as an accident and health plan, so employer-paid premiums are generally deductible to the employer and not taxable to the employee.