What is Traditonal Long-Term Care Insurance (LTCI)?

Traditional Long-Term Care Insurance (LTCI) helps cover the medically necessary care needed due to a chronic illness or injury. It has been available for over thirty years. You can customize a policy to help you pay for a wide range of services to assist you as you perform everyday tasks like:

Bathing – Your ability to clean and groom yourself (like shaving and brushing your teeth).
Eating – Your ability to feed yourself or remember to eat.
Dressing – Your ability to dress without struggling with zippers, buttons, and snaps.
Transferring – Your ability to walk, move from a bed to a wheelchair, or from a wheelchair to a bed.
Toileting – Your ability to get on and off the toilet.
Maintaining Continence – Your ability to control your bladder and bowel.

Like auto or homeowners insurance, there is no refund if you die and never use it. You choose the benefits you want in a policy.

Customizing Your Plan

When customizing your Traditional Long-Term Care Insurance policy, there are six (6) key features that affect the price you will pay:

The benefit amount, or the maximum dollar amount the insurance company will pay out on any day, week, or month.
How much coverage do you want for care in your Home or through your Community Care?
The benefit period, or the duration of the benefits.
The waiting period, or how many days you wait until the policy benefits begin.
Your age.
Any inflation protection you might desire.

We discuss these and other features in greater detail in our How To Choose section.

How to Pay for Traditional Long-Term Care Insurance

In exchange for a recurring premium, the insurance company provides coverage for your long-term care expenses. You can pay these premiums:

Monthly (Twelve times a year),
Quarterly (Four times a year),
Semi-Annually (Twice a year),
or Annually (Once a year)

Premiums for Traditional Long-Term Care Insurance are usually Guaranteed Renewable.

Guaranteed Renewable Premiums

With a Guaranteed Renewable Traditional Long-Term Care Insurance, an insurance company cannot cancel or drop you for coverage because of a change in your health or age. You can cancel anytime. However, the insurer cannot arbitrarily cancel a Guaranteed Renewable policy. As long as you pay premiums when due and benefits have not been exhausted, coverage will continue. The insurance company reserves the right to increase premiums for an entire group of people who own the same policy from their company.

You might consider a Linked Benefit Long-Term Care Insurance policy if you do not want regular premium payments or are concerned about possible rate increases in the future. A linked benefit policy typically takes a single (one-time) payment.

Two rules to paying for Traditional Long-Term Care Insurance

If your children are not helping you pay for your premium, there are two spending rules of thumb for buying a Traditional Long-Term Care Insurance Policy. Premiums should not exceed:

Five percent (5%) to ten percent (10%) of your income.
One percent (1%) to two percent (2%) of your total assets.

If your premium for your long-term care insurance policy is going to make it difficult to pay your bills or eat, then without help from an outside source, you probably should not buy it.

Advantages of Traditional Long-Term Care Insurance

Comprehensive Coverage: Traditional policies tend to offer robust coverage for a variety of care settings (nursing homes, home care, etc.), and can be customized with various features, including inflation protection, to ensure your benefits keep pace with rising care costs.
Peace of Mind: These policies are designed to provide you with care choices and help preserve your savings by covering expensive long-term care costs.
Flexibility: You can choose coverage amounts, benefit periods, and elimination periods (the waiting period before benefits begin).
Cost-Effective: Often the least expensive way to get a high level of long-term care coverage, especially if you buy at a younger age (e.g., mid-50s).
Tax Advantages: Premiums for “tax-qualified” policies may be tax-deductible for individuals, and business owners may be able to write off a portion of the premiums.
Waiver of Premium: Once you start receiving benefits, your premium payments typically stop.
Asset and inheritance protection: Helps preserve savings and estate for heirs.
Relieves family burden: Reduces reliance on family caregivers.

Disadvantages of Traditional Long-Term Care Insurance

Premiums Can Increase: Traditional policies may have increasing premiums, which can become unaffordable as you age. While policies sold today are more accurately priced, insurers can still raise premiums for groups of policyholders with state regulatory approval. These rate hikes can be significant.
Use-It-or-Lose-It: If you don’t need long-term care, you may pay premiums for years and not receive any benefits. There is no cash value or death benefit for Traditional LTCI policies.
Medical Underwriting: It can be challenging to qualify (if you can) for a traditional policy if you have pre-existing health conditions.
Complexity: Policies can be difficult to understand, with many different riders and options, making it hard to compare policies.
Benefit Caps: Most policies have a cap on the total amount they will pay out, which might not be enough to cover a very long period of care.
Elimination period: Must pay out-of-pocket expenses before benefits start.

Long-Term Care Partnership Programs

Partnership programs represent a joint effort between Medicaid, Long-Term Care Insurance (LTCI) companies, and state insurance departments. The state’s Medicaid eligibility requirements are modified to provide financial incentives to purchase a long-term care insurance policy. Most states, but not all, participate in offering partnership plans..

If you require long-term care services, your partnership policy helps cover the costs of your care. Assuming you still need care after all the partnership policy’s benefits are paid, you can apply for Medicaid. However, you will be able to keep assets equal in amount to the benefits the policy paid out. This is dollar-for-dollar asset protection. The standard asset limit that the state Medicaid program would otherwise impose does not apply. Also, those assets become exempt from Medicaid estate recovery upon your passing.

Your Participation in a partnership program provides two significant benefits:

You can avoid the Medicaid spend-down requirement for a larger amount of assets than are normally exempt.
You can protect those same assets from Medicaid’s estate recovery requirement

The original four partnership states, California, Connecticut, Indiana, and New York, had the options for dollar-for-dollar asset protection and total asset protection. In 1993, Congress passed the Omnibus Budget Reconciliation Act (OBRA), which froze other states from offering partnership plans. The Deficit Reduction Act (DRA) in 2005 reintroduced the LTC partnership program to all states.

A Policy For One

Traditional Long-Term Care Insurance is typically designed to cover you alone. If you are trying to cover a spouse or another person in your home, the common method is for each of you to apply for a policy separately. Discounts are usually available when two people in the same household apply for coverage.

The Shared Account Plan

Married couples or two people in the same household who purchase Traditional Long-Term Care Insurance for less than a lifetime benefit may be eligible for extended two-person benefits. A policy with a two-year, three-year, four-year, or five-year benefit could pay a claim twice as long with a shared account rider. This rider allows one person who goes on claim to tap into the benefits provided by the other person’s policy, once they exhaust the benefits in their own policy.

For example, you and another person in your household buy a three-year plan. You make a claim for care that extends past the three years of benefits your policy provides. You can then begin using the other person’s policy for your care using this shared account plan. However, if the other person ever goes on a claim, his/her benefit period would be reduced by whatever was spent on your care.

It is less expensive to have a shared account than to buy a similar but longer benefits in separate policies for each person. However, there are sometimes restrictions on gaining access to the other person’s policy benefits. If you are considering this feature, make sure you ask about it, but become familiar with how you can collect extended benefits from the shared account rider of the company you select.

Taxation

Traditional Long-Term Care Insurance is intended to be Qualified Long-Term Care Insurance Contracts under Sections 26 U.S.C. § 7702(b) of the Internal Revenue Code with benefits paid out tax-free.

You Might want to Compare Insurance Companies

There are a few rating services that analyze the financial strength of insurance companies. The financial strength of an insurance company is a very important factor to consider when purchasing long-term care insurance. Claim payments are backed by the financial strength and claims-paying ability of the insurance company or companies you chose. Hence, it may be in your best interest to choose a highly rated insurance company, or better yet, more than one company. You can check ratings from sources like AM Best, Fitch, Moody’s, and Standard and Poor’s.

The Bottom Line:

Traditional Long-Term Care Insurance can provide payments for your care due to a chronic illness or injury. You can customize it to meet your specific needs. You pay for it with a recurring premium every year.

Speak with a Specialist

Let’s begin the conversation. If you’re curious about whether long-term care insurance is right for you, now is the time to get the facts before you make any long-term decisions. The earlier you plan, the more options you’ll have.