While many people think they know what Long-Term Care Insurance (LTCI) is, there are many misconceptions out there. Here, we review three important facts to help you gain a clearer understanding of LTCI.
Fact #1: Medicare Isn’t the Same as Long-Term Care Insurance
According to AARP, a surprising number of people still believe that Medicare will cover their Long-Term Care (LTC) expenses. However, they find out too late that Medicare offers limited coverage and applies only to skilled care (LTCI covers a number of types of care). In addition, for LTC services to be covered under Medicare, you must meet several stringent requirements:
- You must first be admitted to a hospital for at least three nights. If you are in for observation, those days will not count towards the three-night requirement.
- You must then be admitted to a Medicare-approved nursing facility, in a Medicare-approved bed.
- You must need skilled care (such as nursing care or physical therapy). In contrast, LTCI coverage isn’t triggered by the need for skilled care, but by the inability to perform two out of six activities of daily living, as discussed in last week’s commentary, “Your 2-Minute Introduction to Long-Term Care Insurance.”
Typically, if you are expected to recover from a health condition or surgery, Medicare will cover 100% of your skilled care for up to 20 days. From the 21st to 100th day, Medicare will cover everything except $157.50 per day (in 2015). However, most Medicare supplements will pay this as long as the patient still meets Medicare requirements.
According to studies, most Medicare patients need skilled care for about 23 days. Of course, LTCI covers additional forms of care (home care, assisted living, adult day care, etc.) and for much longer periods.
Fact #2: LTCI Covers Alzheimer’s Disease
Many people are under the impression that LTCI does not cover Alzheimer’s Disease. The fact is, LTCI polices cover Alzheimer’s, dementia, and other cognitive conditions just like any other illness or injury.
However, LTCI carriers won’t issue new policies to people who already have been diagnosed with Alzheimer’s or another cognitive disorder. Such a condition would render a person uninsurable. This may be where the confusion arises.
Fact #3: There Are Two Ways to Buy Long-Term Care insurance
Many people don’t realize that LTCI policies fall under two categories: “traditional” plans, which have been around for more than 40 years, and “asset-based” plans, which combine life insurance with LTCI or an annuity with LTCI. Some people refer to these as “hybrid policies” because they combine two types of coverage in one policy.
Traditional LTCI plans, still the more popular of the two, typically offer a more customized approach to plan design, with more benefit choices and options, such as a shared care rider for spouses. Premiums typically start low, but insureds need to plan for future rate increases.
However, asset-based plans are rapidly growing in popularity. One key reason is because the premiums are guaranteed not to increase. In addition, premiums may be paid using a variety of payment schedules, such as a single pay plan (one lump sum), a 20-pay plan (20 annual payments), or lifetime payments.
Other advantages of asset-based plans are:
- If you don’t use your LTCI benefits, or only use a portion of them, your beneficiary can receive a life insurance or annuity benefit.
- You can replace an existing life insurance policy or annuity with an asset-based LTCI plan without incurring tax consequences, thanks to a tax code provision called a 1035 exchange.
- With most plans, you can cash in your policy for any reason and get some or all of your initial premiums back.
In other words, you have choices.
For most of us, health care and long-term care expenses may be one our largest expenses in retirement. If you would like help developing a plan to meet your long-term care needs and protect you against a future LTC event, we may be able to help. That’s just part of what we do.