Effectively Utilizing Long-Term Care Insurance as Part of an Elder Law and Estate Plan

When recommending the purchase of long-term care insurance (“LTCI”) to my clients, the most often heard response has historically been, “I don’t want to have to pay the premiums for the rest of my life.” For many 55 to 70 year olds, a potentially lengthy premium payment period is a psychological obstacle they are unable to overcome in making the decision to purchase LTCI.

According to the U.S. Department of Health and Human Services, nearly 70% of people turning age 65 will need long-term care at some point in their lives. While realistically there is no way of predicting who will need to enter a nursing home or need in home care, the reality is that many will. The fact that less than one third of Americans aged 50+ have begun planning for long-term care in any fashion is cause for concern.

LTCI is designed to cover a variety of long-term services such as personal and custodial care either at home or in a nursing home. The insurance company pays out a daily amount based on the size of the policy (extent of coverage). The cost of individual LTCI policies range greatly depending on a number of factors including age, health, scope and length of coverage, etc.

During the last five years, I’ve noticed that a number of seniors have become significantly more receptive to the purchase of LTCI specifically as part of a comprehensive elder law plan, which include making transfers of assets to a Medicaid Asset Protection Trust. The transfer of assets to said trust would effectively create a five-year “look back” period for Medicaid nursing home (not home care).

Once the “look back” period has been established, an ideal opportunity exists for the purchase of LTCI as protection from the cost of a nursing home during this five-year period. Ideally, the purchase of LTCI should coincide with Medicaid planning to provide coverage in the event that nursing home care is necessary during the “look back” period. Once the five years have elapsed (and the individual has effectively protected his or her home and/or other assets), the decision can be made whether or not to keep the policy.

For those still reluctant to purchase traditional LTCI, another option to consider is a hybrid policy combining life insurance with LTCI. Still relatively new, hybrid products were introduced in the market about five years ago and continue to gain in popularity. While individual policies can vary greatly in terms of cost, benefits and potential restrictions, the most attractive aspect remains the same – the purchaser receives some benefit from their premiums even if long-term care is never needed. In such an event, death benefits would be paid to the purchaser’s beneficiary.

In my experience, LTCI is best utilized as part of an overall asset protection plan rather than as a stand-alone long-term care option. It allows the individual the comfort of knowing that there is a light at the end of the tunnel as to the payment of policy premiums, rather than placing them in the difficult position of choosing to purchase a policy that may never be used (with the possibility that premiums will have to be paid for a potentially lengthy period of time). Depending on the needs and assets of the individual, hybrid insurance may also be a viable alternative to traditional LTCI. Either approach, however, will require a coordinated effort between your elder law attorney and financial advisor or insurance agent.

What is the Greatest Threat to a Senior’s Financial Well Being?

Elder law attorneys have made significant strides in the past two decades educating the public as well as the legal profession on the importance of seniors engaging in advance planning to protect their life savings from the costs of long term care. While it appears that most have become more knowledgeable on the subject (and virtually every senior has heard of the “five year rule”), there are still a significant number of seniors who have not implemented any advance planning strategies.

If a senior does not have sufficient long term care insurance, is not wealthy enough to be self insured, and has resources greater than the amounts permitted by Medicaid, he or she will need to privately pay for care in a nursing home or at home. These costs can be financially devastating. In Westchester County, NY, for example, the average private cost of 24/7 care at home can average between $7,000 to $10,000 per month when utilizing a qualified agency. Obviously, this is significantly less expensive than the cost of a nursing home, which in Westchester averages $140,525 to $155,125 per year.

Unfortunately, it is unlikely Medicaid in the future will be as generous as to benefits and eligibility as it has in the past. These costs highlight the critical importance for seniors to focus upon implementing advance planning strategies prior to needing long term care. A Last Will, Revocable Trust or an estate tax plan is not sufficient for long term care planning purposes.

One of the most popular advance planning strategies utilized by elder law attorneys is creating and funding an Irrevocable Medicaid Asset Protection Trust (a/k/a an Irrevocable Income Only Trust). This trust can be funded with the senior’s home and part or all of his or her savings. For tax purposes the trust is structured so that the senior (a) is taxed as the owner of the assets in the trust; (b) has the right to reside in the home for the rest of his or her life; (c) can have the right to receive all of the income generated by the trust assets; and (d) has the right to change his or her mind as to the ultimate beneficiaries of the trust. The trustee(s) cannot make payment of the trust principal to or for the benefit of the senior/grantor of the trust. However, the trust can permit invasion of principal for persons other than the grantor/senior.

The funding of an Irrevocable Medicaid Asset Protection Trust does create a five-year look back period, and thus, allows for the assets held in the trust to be non-available for Medicaid eligibility purposes once the five year period has expired. However, the transfer of assets to this trust will not affect one’s eligibility for Medicaid Home Care, as the transfer of asset rules and look back period do not apply in such a case.

Obviously, other forms of gifting assets remain a viable option, as does purchasing long term care insurance.

The rules and regulations relevant to Medicaid eligibility and the transfer of assets are complex and frequently changing. Navigating these regulations does require the skill and experience of a seasoned elder law attorney. It is imperative that the public be constantly educated and reminded of the benefits of advance planning as well as the potential consequences of waiting too long.