Picking any type of insurance can be tricky, but considering the addition of long-term care insurance adds a whole new set of questions and concerns. This type of insurance is ideal, simply because you never know what the future holds for you healthwise. Long-term care insurance can be purchased from an insurance specialist or from a federal program. States regulate which companies can sell the insurance, so make sure you contact your state’s Department of Insurance to determine what’s offered.
Different types of state partnership policies
As of 2020, most states take part in the Long-Term Care Partnership Program. States not participating in the program include Alaska, Hawaii, Illinois, Massachusetts, Mississippi, Utah and Vermont.
This program was created in the hopes of encouraging people to purchase long-term care policies. To do that, the program raised the total value of assets allowed to be retained while still being eligible for Medicaid.
So how does the partnership work? Under a partnership plan, if you buy a long-term care policy, you can protect a portion of your assets that you’d normally have to pay down before qualifying for Medicaid. To qualify for Medicaid in most states, you can have no more than $2,000 in personal assets. But things change under a partnership plan: the $2,000 figure is raised by the number of benefits received under a private long-term care policy. For example, if you have a partnership plan that pays $100,000 in long-term benefits, you could have $102,000 in personal assets and still be eligible for Medicaid. This is ideal because you don’t have to rid yourself of your personal savings for adequate health care.
Something to keep in mind is the rules of policy transfer if you move states. Most states accept partnership programs started elsewhere, with the exception of California, which doesn’t offer reciprocity. If you move to California after starting a program in another state, you’ll have to spend down your assets to below California’s own Medicaid maximum to receive Medicaid benefits.
Life insurance policies with long-term care riders
A popular option for long-term care insurance is to purchase a life insurance policy with what is known as an either/or policy feature. With this feature, if the insured passes away, a death benefit is paid out just like a normal life insurance policy would do. But if the insured needed long-term care before their death, those specified benefits are paid, taking precedence over life insurance. If there are no benefits to be paid before death, the policy expires.
Typically, this sort of policy is paid for using periodic premiums for fewer than 10 years and may not account for inflation. Unexpected, lengthy medical costs can drain you of your savings and leave you in a bad situation. In fact, a nursing home stay costs about $250 on average per day. This sort of hybrid policy is targeted for people who may require constant daily care.
If the insured specified any long-term care benefits that weren’t used before death, those are provided as a reduced death benefit. Essentially, you’re buying a policy with the potential to cover both long-term care and death. This type of policy costs around $75,000 or more.
People like this option because the insured individual is guaranteed a benefit even if all the money designated for long-term care is used. One of the downsides to this option is most people who buy long-term care insurance don’t need life insurance. Since it covers both, premiums are generally higher.
Tax-qualified and Non-tax qualified policies
When purchasing long-term care insurance, two questions typically pop up: Are the premiums you pay tax-deductible? And are the benefits you receive under those policies taxable?
Normally, medical expenses are tax deductible if they exceed 10 percent of your gross income. Premium payments for qualified insurance policies fall under this, too, and can be counted as a medical expense. But the Internal Revenue Service puts a cap on how much can be deducted. The maximum amount of your long-term care premium you can deduct on your taxes depends on your age at the end of each tax year. As of 2018, deductions looked like this according to the Texas Department of Insurance:
- Age 40 or younger: $420
- Age 41 to 50: $780
- Age 51 to 60: $1,560
- Age 61 to 70: $4,160
- Age 71+: $5,200
If you purchased a long-term care policy before 1997, it is tax-qualified. Any policy sold after January 1, 1997 is either tax-qualified or non-tax qualified. An easy way to tell which policy you have is to look at your at your policy and determine if you see a statement that talks about the policy being “intended to be a qualified long-term care insurance contract as defined by the Internal Revenue Service.”
Group and employer policies
If you’re trying to save money while still working, taking out a policy through your employer or a group might be your best option. These sorts of plans are cheaper because a larger number of people are taking them out, so the company can charge less per policy. Sometimes employers even contribute to the plan, which drives down costs as well. Even if they don’t contribute to the plan — most don’t — they often negotiate a favorable group rate.
Normally the cost of the plan is deducted from your weekly paycheck, so it can help you budget better with your finances. It can help your family at a time of crisis, by giving them access to a sum of money that can be used to pay for care.