November 2008 • Vol. 28 No. 10 | An E-Publication of the Los Angeles County Bar Association

Long-Term Care Insurance: Pay Now or Pay Later

To learn more about LACBA’s long-term care program, contact CounselAssure toll-free at (866) 799-9795 or (Substantial discounts and easier approval available for LACBA members.)

Long-term care is becoming an increasingly important topic due to the benefits of improved healthcare, longer life expectancy, and the growing number of retiring baby boomers. 

The average cost of long-term care in America can be daunting, and for California residents, even worse. Based on the Mature Market Institute’s 2007 study of nursing home costs, the average Los Angeles-area private nursing home costs more than $78,000 per year. Top-shelf care can cost as much as 40 percent more. Home healthcare can run $20 per hour.

Recent changes made in government policy encourage private solutions to this dilemma by providing favorable tax treatment to long-term care insurance buyers.

Changes in Government Policy

In February 2006, President Bush signed the Deficit Reduction Act of 2005. Provisions highlight the need for estate planning and the role that long-term care insurance plays in protecting one’s assets. Among other things, the act:

  • Extends the look-back period for all asset transfers from three to five years. An even longer look-back period now makes it more difficult to transfer funds out of one’s estate to qualify for welfare and long-term care benefits. 
  • Makes ineligible for Medicaid (Medi-Cal in California) any individual with home equity above $500,000 (a limit that states can raise to $750,000, which California is expected to do). Previously, the value of an individual’s home was not included when determining eligibility for Medicaid. The implications for California homeowners, where home values skyrocketed over the past decade, are clear.
  • Requires Medicaid applications with annuities to name the state as remainder beneficiary. No longer can annuities be used as a loophole to shield assets.

The end result of these policy changes is that most Americans can depend less on the government for long-term care needs.

What to Consider When Purchasing LTC

How much coverage is necessary? The monthly or daily benefit selected is the maximum dollar amount that the insurance company must pay for covered long-term care expenses. Note, however, that the higher the benefit, the higher your premium. 

Location has a big impact on deciding this amount as the cost for care can vary greatly within the state and even within cities. It’s important to choose a benefit amount that corresponds to the cost of care where one will receive the care.

When will coverage begin? The elimination period (often thought of as a deductible) is the length of time one must pay for long-term-care services before the insurance policy begins to pay benefits. The choices range from zero to one or two years. The longer the elimination period, the lower the premium. 

How long will the coverage last? The benefit period (usually expressed in years) is the minimum amount of time one receives benefits and ranges from one to five years to lifetime unlimited coverage. The longer the coverage, the higher the premium. Most policies offer integrated benefits that create a pool of money for long-term care in various settings.

Inflation protection. To guarantee that daily benefits keep pace with rising healthcare costs, a 5 percent compound inflation rider is recommended (for those up to 70 years of age and 5 percent simple thereafter). This rider costs more than an optional Consumer Price Index rider, but the premium is fixed when the policy is purchased.

Family history. If longevity or chronic disease runs in one’s family (especially dementia-related diseases), one may be more likely to need long-term care. Furthermore, women live longer than men on average and are 50 percent more likely to need nursing home or extended care after age 65.

Funding LTC with Pre-Tax Dollars

For individuals itemizing their taxes, tax-qualified long-term care premiums (for themselves, their spouse, or tax dependents such as parents) are considered a deductible medical expense, subject to IRS limitations and the 7.5 percent threshold based on the filer’s adjusted gross income. 

For employees whose employers offer a health savings account, eligible long-term care premiums may be paid with these pre-tax dollars. 

Subject to IRS age-based limitations, the self-employed may deduct tax-qualified long-term care premiums as a business expense similar to health insurance. 

And when a business purchases a tax-qualified policy for its employees (including their spouses and dependents), the corporation can take a 100 percent deduction as a business expense on the total premium paid. In addition, businesses are not subject to nondiscrimination rules, so they may be selective in the classification of employees they cover. 

Buying for Two or More

Optional enhancements such as shared care policy riders allow spouses to share each other’s benefit pools. And multi-life programs allow small businesses to offer long-term care insurance as an employee benefit at discounted rates of 5 percent to 10 percent, which may include simplified underwriting.

Most important, individuals need to know that they must undergo medical underwriting to be eligible for coverage, with additional discounts possible for those in excellent health.

Planning for long-term care before the need arises can save time—and money.

To learn more about the LACBA’s long-term care program, contact CounselAssure toll-free at (866) 799-9795 or visit (Substantial discounts and easier approval available for LACBA members.)


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