Long-term care (LTC) insurance is a product that helps cover costs associated with aging and/or chronic medical conditions, such as an extended or permanent disability or cognitive impairment. Since it generally pays for expenses not covered by Medicare or health insurance, it can be used as a planning tool to assist individuals in paying for LTC expenses in the future.
Coverage provides income to fund caregiving expenses while also protecting income and assets that may be designated for other expenses and goals, such as generating retirement income for a spouse, and charitable gifts. These policies provide both payment for care, and also allow the client greater control and choice on care decisions.
Qualified LTC insurance policies offer tax-free benefits that can help cover the costs of a multitude of LTC services in a variety of settings. They must meet certain standards regarding service:
Qualified LTC Services: necessary diagnostic, preventative, therapeutic, curing, treating, mitigating, and rehabilitative services; maintenance or personal care services that are required by a chronically ill individual and are provided pursuant to a plan of care prescribed by a licensed health care practitioner.
Licensed Health Care Practitioner: any physician (as defined in Section 1861(r)(1) of the Social Security Act) and any registered professional nurse, licensed social worker, or other individual who meets such requirements as prescribed by the Secretary of the Treasury.
They must also satisfy certain benefit triggers, which include:
Chronically Ill Individual: any individual who has, in the preceding 12 months, been certified by a licensed health care practitioner as:
being unable to perform - without substantial assistance, either hands-on or standby, from another individual - at least two activities of daily living (ADLs) for a period of at least 90 days due to a loss of functional capacity
having a similar level of disability
requiring supervision to protect him or her from threats to health and safety due to severe cognitive impairment
Activities of Daily Living: The LTC insurance contract must use at least five of the following six ADLs in determining whether the insured is chronically ill: Eating, toileting, transferring, bathing, dressing, and/or continence
Qualified Long-Term Care Insurance
Qualified LTC insurance has three major offerings:
Traditional (individual) LTC insurance
Hybrid “asset-based” life/LTC using life insurance
Qualified LTC accelerated benefit riders added to individual life insurance policies
Traditional LTC
Traditional LTC is a guaranteed renewable LTC product. This product provides the lowest price point and the clearest guidance for tax deductions. Nearly all products available require lifetime premium payments. Coverage is for a specific term and is generally "use it or lose it." Cash value or life insurance benefits are not available, although some products do offer a return of premium at death or before age 65 (less any LTC benefits used).
Hybrid Life/LTC
Also known as asset-based or linked life/LTC products, hybrid life/LTC insurance is a product that pays benefits for long-term care first and the death benefit second. If long-term care is needed, funds are used to cover the costs and the death benefit is reduced accordingly. Otherwise, the entire death benefit passes to the policy’s beneficiaries tax-free.
Hybrid life/LTC is typically funded with a single premium payment or premiums over 10 years. Single-pay options are often funded by a repositioned, low-yielding asset such as a certificate of deposit (CD). Other multi-year payment options are available. Premiums are leveraged to provide a greater LTC benefit pool.
There are three benefit triggers to the policy:
Return of Premium: A client may terminate the policy and get 70%-100% of their premiums back.
LTC Benefits: Often, a total LTC benefit pool of three to six times the initial premium amount is used to fund qualified LTC expenses.
Life Insurance: Death benefits go to a beneficiary. The amount may be reduced dependent upon the amount of LTC benefits utilized.
Life insurance benefits are minimal as product emphasis is on LTC benefits. Premiums and benefits are guaranteed.
Qualified LTC Accelerated Benefit Riders
Qualified LTC accelerated benefit riders are added to life insurance policies and reduce life insurance benefits dollar-for-dollar based on the type of rider chosen.
Please note that not all accelerated benefit riders are qualified LTC riders. Many carriers offer chronic illness riders that do not meet all requirements and definitions discussed earlier.
Qualified LTC vs Chronic Illness Riders
Life insurance allows various accelerated death benefit options. For extended care events, insurance companies often offer one or both of the following riders as defined by the Internal Revenue Code:
7702B – Qualified LTC
101g – Chronic Illness
Qualified LTC has uniform standards regardless of product type. Chronic Illness may look similar, but could also be defined differently at the insurance company’s choosing.
General Summary
Traditional LTC | Life Insurance Benefit | Return of Premium Cash Value | Inflation Options | Premium Funding | Premiums/ Rate Guarantees |
Traditional LTC | No | No | Yes | Mostly lifetime premiums | Guaranteed renewable policies |
Hybrid (Asset-based) Life/LTC | Yes | Yes | Yes | Mostly single-pay and 10-year payments, but other options available, including lifetime | Guaranteed premiums |
Qualified LTC Rider on Life Insurance | Yes | No | No | Highly customizable | Premium may vary depending on underlying life policy |
The facts and circumstances of an individual’s situation will determine the most appropriate and suitable choice for LTC insurance. It is important to consider multiple alternatives and compare the advantages and disadvantages of each. For more information, please schedule a time to talk with our team.
This material and the opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual or entity. To determine what is appropriate for you, please contact TRC Financial. Information obtained from third-party sources are believed to be reliable but not guaranteed.
The tax and legal references attached herein are designed to provide accurate and authoritative information with regard to the subject matter covered and are provided with the understanding that neither M Financial Group, nor TRC Financial are engaged in rendering tax, legal, or actuarial services. If tax, legal, or actuarial advice is required, you should consult your accountant, attorney, or actuary. Neither M Financial Group, nor TRC Financial should replace those advisors.