JULY 2014 NEWSLETTER

WHY YOU MAY NEED LONG TERM CARE INSURANCE MORE THAN YOU THINK

When planning for retirement or creating an estate plan, one potential liability that many people forget about is the possibility that they will need long term care in the final years of their life. This is a cost which can significantly deplete a person’s assets, impoverishing a person and preventing them from leaving anything to their loved ones after their passing.

Likelihood of Needing Long Term Care and Costs

As we make medical advances and healthcare improves, people are living to be much older and the likelihood of needing assistance or skilled nursing care at some point is increasing every year. In the United States, the “average” nursing home stay is for 2.8 years and when one considers how much nursing home care costs, this can become a significant drain on one’s assets. In Pennsylvania, the median household income for people aged 65 and up is $33,942. The median annual cost for nursing home care in a private room in Pennsylvania is $104,390, which amounts to 311% of annual income. Many people prefer to stay in their home for as long as possible and while this is a more affordable option than a stay in a nursing home, this will still consume most, if not all, of the income of a middle income family. In Pennsylvania, the median annual cost for 30 hours per week of home care is $31,200, which amounts to 93% of the medium annual income. Using the average stay time of 2.8 years, an individual may have to pay $292,292 for a nursing home or $95,037 for part time care at home. These numbers constitute a major source of financial risk for most middle income families as these numbers do not factor in other additional costs which may be incurred during the nursing home stay and, if there is a spouse to support, there may be little to nothing left to support the spouse who does not need long term care.

Because it is impossible to know how much care you will need ahead of time, individuals who are concerned about how they would pay for long term care should plan on needing a nursing home. Many people who enter a nursing home plan on only being there for a short period of time, possibly to recover after surgery or after having a stroke. However, if the stay ends up being much longer than anticipated, the likelihood of returning home rapidly diminishes as people who stay in a nursing home for 100 or more days are far less likely to return to their home than people who have shorter stays. Despite the availability of long term care insurance, many people choose not to insure against this risk even though not doing so can lead to financial ruin. Currently, only 10 percent of Americans over age 50 have a long term care insurance policy.

Medicare and Medicaid

One reason why many people do not purchase long term care insurance is because they mistakenly believe that they can rely on Medicare and Medicaid to pay for long term care. However, Medicare only covers long term care under a very specific set of circumstance and Medicaid requires that your income and assets are reduced to a certain level before it will cover you as it is a program meant for the financially needy.

Medicare will pay for long-term care, but it may not pay for all of the long term care that you need. Medicare will pay for 100% of up to 20 days of skilled nursing care, but only if the skilled nursing care is medically necessary and if it follows a hospital stay of more than three days. Furthermore, the payments made by Medicare for skilled nursing care start declining on day 21 and are completely exhausted by day 100. Additionally, many of the situations ordinary people might think are grounds for medically necessary long term care will not be covered by Medicare. This includes those who need a caregiver because of cognitive ailments, like dementia, or simply because they’re unable to get around well enough to fully care for themselves.

Medicaid will pay for long term care in its entirety if your assets and income do not rise above their maximum threshold. However, this threshold is quite low and most people would prefer not to completely deplete their assets in order to receive government benefits. Generally, an individual can have no more than $2,000 in assets and must use all their income toward paying for the nursing home care before Medicaid will pay for the rest of the cost of the nursing home stay. This general rule becomes significantly more complicated if the person who needs long term care has a spouse who is remaining in the community and still resides in the marital home and needs the institutionalized spouse’s income to meet his or her daily needs.

Moreover, you cannot give away your assets to impoverish yourself to qualify for Medicaid as there is a 60 month (5 year) look back period in which Medicaid will determine what you gave away in the five years preceding the date of your application for Medicaid benefits and penalize you by not providing benefits until you have paid for that amount of services out of your own pocket. For example, if you gave $100,000 to your children two years before you applied for Medicaid benefits to go into a nursing home, Medicaid would require that you pay that much out of pocket for the nursing home, which is almost a year of nursing home care, before they will make any payments on your behalf. It is possible to give away a large portion of your assets and avoid the 60 month look back period by purchasing a long term care insurance policy to cover the look back period, but this should only be done in consultation with an estate planning attorney who is familiar with Medicaid planning.

Tips on Buying a Policy

Purchasing a long term care insurance policy can help you pay for most, if not all, of the long term care you may need as you age. Most policies pay a set amount of money for a set period of time and after that is exhausted no more benefits will be paid. Many people are deterred by the seemingly high price of long term care insurance, but buying when you are younger and healthier can make this a more affordable option. As the prices for these policies are determined in part by your health when you apply, if you apply before you develop health problems it is less likely that your application will be turned down. This is especially important as once you buy the policy, the insurance company cannot cancel your policy because your health deteriorates; it can only cancel for non-payment. Generally, it is best to consider buying a long term care policy when you are in your mid-50s or early 60s as your health probably will not have deteriorated significantly at that point and you should be able to determine whether self insuring or buying a policy makes the most sense based on your income and accumulated assets at that point in your life. If you believe you have a higher risk of developing a chronic condition, 5 such as heart disease or diabetes, it might be wiser to make the affirmative decision regarding long term care insurance in your early 50s.

Even if you cannot comfortably afford a policy that will cover the average cost of long term care, purchasing a policy that covers a portion of the care can go a long way to preserving your assets for your spouse and heirs. Depending on your budget, you may purchase a policy that provides a set benefit per day for a set period of time (such as $150 per day for three years), a policy that provides set benefits but gives you the option to add other benefits in late years, or a policy that keeps up with inflation. One study reported that policies generally covered 60 percent to 73 percent of an individual’s care costs at any given time and approximately 35 percent of long term care insurance claims paid for home care and 40 percent of claims paid for care in assisted living. These are both options that most people prefer to nursing home care but still constitute a significant personal expense so even one of the more basic plans can go a long way toward meeting these costs.

Most policies will require proof of how many of the activities of daily living, such as bathing, dressing, eating or using the toilet, that you need help with before they will make any payments. If you can afford it, a policy that begins payment after you need help with only one or two activities of daily living is preferable. Furthermore, you need to be aware of the waiting period required before coverage will begin; many require that you pay for 30, 60, or 90 days of care out of pocket before they will pay any claims. A longer waiting period usually correlates with lower monthly premiums.

Finally, purchasing a long term care policy should only be done with an insurance underwriter who has several years of experience with these policies and works with several insurance providers to be sure you get the policy that best meets your needs. Unlike home or auto insurance, it is almost never advantageous to switch insurers as your premiums are determined by your health and age at the time you apply.

Tax Deductions

If you buy a tax qualified long term care insurance policy, you may be able to deduct a portion of the premiums on your income tax return as a medical expense deduction. To be eligible for benefits under a tax qualified long term care insurance policy, a licensed health care practitioner must certify that you are “chronically ill” and prescribe a plan of care. The term chronically ill applies to individuals who need substantial assistance with performing at least two activities of daily living for at least 90 days or requires substantial supervision due to severe cognitive impairment such as Alzheimer’s or dementia.

For individuals, the amount that can be deducted depends on the person’s age and the deduction increases as you age. Corporations, partnerships, and LLCs that purchase tax qualified long term care insurance on behalf of its employees can deduct the full amount of the premium. If a partnership or LLC purchases the premium on behalf of a partner or member, it can deduct the amount of the premium and the premium will be included in the partner/member’s income and then the partner/member must follow the IRS guidelines for self-employed persons. Self employed persons can deduct the lower of the full amount of the premium or an amount provided by the IRS based on the age of the person for whom the premium was purchased, similar to what 6 individuals are permitted to deduct.

Conclusion

If you are contemplating long term care insurance and have any questions or concerns regarding how to best to incorporate purchasing a policy into your estate, please do not hesitate to contact us and set up an appointment.