Private Long-Term Care Insurance

Long-term care insurance (LTCI) can be purchased privately. Many policies cover a range of services in several settings, including homes, adult day service centers, assisted living, and nursing facilities. However, some people may be unable to buy a policy because they have a preexisting condition or cannot afford one. For others, such as people who would become quickly eligible for Medicaid if they needed long-term services and supports, such insurance is not appropriate. A variety of factors have made the business model for LTCI more problematic over the years. 

Insurance carrier profitability is suffering due to extremely low-interest rates on investments and the failure of policyholders to drop coverage as often as the industry predicted. These trends are putting pressure on insurance carriers to address profitability by raising rates and reducing policy incentives and product features. These actions, in turn, make LTCI less attractive to new purchasers. 

As a result, many insurance carriers have decided to stop selling LTCI. Others are raising premiums, tightening medical underwriting, and eliminating or reducing policy discounts. 

LTCI provisions can be very difficult to understand. Potential buyers need to understand many unfamiliar terms—such as non-forfeiture protection and benefit triggers—and the importance of optional features such as inflation protection. Some companies offer LTCI policies with special benefits, including reimbursement of family caregivers, payments for caregiver training, and the option to receive a cash benefit that consumers can use for any purpose. Consumers need to be educated about the importance of these benefits. 

New insurance product options may be available in some states to purchase more affordable short-term care insurance, which offers benefits for up to one year. Short-term care insurance (also known as short-duration LTCI, limited LTCI, and recovery care insurance) may offer home health, assisted living, nursing home, adult day services, and in some plans, prescription drug benefits. However, benefits may be limited and may not cover all levels of care. 

Some companies have begun to offer hybrid insurance products that combine life and LTCI or LTCI and an annuity. These products are overly complex and generally require a substantial up-front premium, so they are not an option for people without significant resources. 

At least 11 states are considering establishing long-term services and supports (LTSS) insurance programs to help consumers better prepare for the cost of future LTSS needs. Washington state recently did so. The Washington program is funded through a payroll tax. It offers a maximum benefit of $36,500, which is roughly equivalent to the cost of one year of home care. The limited nature of this benefit creates a need for new wraparound supplemental coverage. It would give consumers more comprehensive coverage. Plans for a new long-term care insurance offering are underway in Washington state. Such additional coverage may be necessary in other states that opt to develop their own long-term care insurance programs.  

Premium rate stability: An important issue for consumers is whether LTCI premiums will increase to a point where they become unaffordable. When policyholders drop their coverage because they can no longer afford it, they can lose their entire premium investment. Insurers are not required to return any portion of it, no matter how large the payments were. Some policies do provide some return, in cash or benefits, on the value of premiums invested. This is known as a non-forfeiture benefit. Non-forfeiture provides a reduced level of benefits after an insurance policy lapses or has been canceled. However, because the benefit is minimal—often covering no more than three months of nursing facility care—non-forfeiture is a last resort for consumers who can no longer afford their premiums. One consumer protection alternative is to give policyholders a contractual right to reduce the amount or duration of benefits in any combination. 

Consumer information needs: Because of the high cost and complexity of LTCI, prospective purchasers need objective information to help them determine whether to buy it based on their financial circumstances, age, living situation, and health status. Such information would help ensure that consumers purchase appropriate coverage. 

It is critical that agents who sell LTCI have adequate training to explain how differences in a policy’s terms can affect future benefits. For example, differences in inflation protection or waiting periods might make one policy less expensive. Still, the purchaser needs to understand that future out-of-pocket costs would be considerably higher with such a policy. It is also important to standardize policy definitions and describe benefit triggers in a clear, uniform format to help consumers compare policies, benefits, and costs. 

Lack of Portability: LTCI products often suffer from a lack of portability. For example, an individual who purchases an LTCI policy while living and working in New York and subsequently moves to Florida upon retirement may have difficulty accessing benefits after moving to a new state. This lack of portability discourages the purchase of private LTCI policies, increasing the burden on public programs in the process. 

Federal and state efforts to encourage the purchase of LTCI: There are some federal and state efforts to educate consumers about their risk for needing long-term services and supports and options for financing services including LTCI. These include the federal-state Own Your Future Awareness Campaign and the National Clearinghouse for Long-Term Care Information. 

Nearly all LTCI policies sold today meet federal standards for favorable tax treatment. Premiums are treated as medical expenses, which can be deducted to the extent they exceed a certain portion of adjusted gross income. People with qualified LTCI policies can add the cost of their premiums to medical expenses up to a maximum limit that increases with age. In addition, benefits received under an LTCI policy are not subject to federal taxes. Employers may also offer LTCI as a tax-free benefit. 

A drawback to tax incentives is that they disproportionately benefit people with higher incomes, who pay higher marginal tax rates, and thus, benefit more from each dollar spent on LTCI. Moreover, many people have incomes too low to owe taxes or have insufficient expenses to meet the medical deduction threshold.