Long-Term Care Policies in Depth

Long-term care insurance pays for help with daily living over a long period, which is different from paying for medical treatment. A policy’s value depends on a handful of terms: the level of care it recognizes, the trigger that starts benefits, the daily maximum, the elimination period, and how the benefit grows. Worked examples cover each of those, followed by the optional benefits, the federal tests for a tax-qualified policy, underwriting, and the partnership programs that connect a policy to Medicaid. Names and dollar amounts are invented. Michigan’s rules for these policies are pointed to where they change the result.

Levels of Care

Long-term care means help with personal needs and daily living, given at home, in the community or in a facility. Medicare does not cover it. Medicare Part A pays for skilled nursing facility care, and for a nursing home only when the person needs skilled care and not custodial care alone. A person who needs only help with bathing, dressing or meals gets no Medicare payment. Medicare supplement policies generally do not pay for long-term care either.

Policies name levels of care, and each level has its own benefit amount, provider and setting. Standard policy definitions describe a level by the skill required, the nature of the care and the setting where it is given, and a policy that uses a term such as “skilled nursing care,” “assisted living care” or “home care” has to define it that way.

Level	What it is	Typical setting	Who gives it
Skilled nursing care	Daily nursing or rehabilitation ordered by a physician and given or supervised by licensed health personnel	Skilled nursing facility, or at home	Nurses and therapists
Intermediate care	Care less than skilled nursing but more than room and board, including help with daily living that persons without medical skill can give	Intermediate care facility, or a licensed nursing facility	Staff without medical skill
Custodial care	Help with activities of daily living that needs no medical skill	Nursing home, assisted living, or home	Aides, family members, caregivers
Home health care	Medical and nonmedical services given in the person’s residence, such as nursing, therapy, personal care and homemaker help	The person’s home	Home health agencies and aides
Assisted living	Housing with meals, personal care and some supervision	An assisted living facility	Facility staff
Adult day care	A daytime program of social and health services for six or more people	A community group setting	Program staff
Respite care	Short-term care that relieves the usual caregiver	Home, a facility or an adult day center	Temporary caregivers

Michigan defines a skilled nursing facility as one certified by the state to provide skilled nursing care, and an intermediate care facility as one certified to provide intermediate, custodial or basic care that is less than skilled nursing but more than room and board (MCL 500.3901(m), (g)). Michigan’s definition of long-term care insurance includes care in a setting such as an assisted living facility operating legally in the state, and a policy that covers assisted living must define in plain English which facilities qualify (MCL 500.3901(h), 500.3913(3)).

Facility definitions matter at claim time. A policy that pays for care in a “licensed nursing facility” may not pay for a personal care home or a rest home. A policy that lists covered facilities may exclude a state-licensed facility that does not appear on the list. A person who moves to another state should ask whether the policy recognizes the facilities there.

Classifying the Care

Hector can no longer cook or manage his medications and moves into a facility with meals, help with bathing and an aide on each shift. No nurse delivers care. That is assisted living, and a policy pays only if it covers assisted living. Marguerite needs a nurse to change a surgical dressing daily after a hip operation. That is skilled care and Medicare may pay for part of it. Elaine has dementia and lives at home, where her daughter gives most of the care. A policy may cover home care by a home health aide or agency, but most policies do not pay benefits to a family member who gives the care, so Elaine’s coverage helps only when the care comes from a provider the policy recognizes.

Benefit Triggers

A benefit trigger is the test an insurer uses to decide when benefits start. A policy generally uses one or more of these:

• Activities of daily living: a loss of ability to perform some number of the standard six, which are bathing, continence, dressing, eating, toileting and transferring.
• Cognitive impairment: a deficiency in memory, orientation, reasoning or judgment about safety, usually severe enough that the person needs supervision.
• Medical necessity: a physician orders the care. Tax-qualified policies cannot use medical necessity as a trigger.

A common requirement is the inability to perform two activities of daily living without help, expected to last 90 days. The model regulation that many states follow sets a ceiling on how restrictive a trigger may be: no more restrictive than a deficiency in not more than three activities of daily living, or the presence of cognitive impairment. The deficiency cannot require more than the hands-on assistance of another person, or, if the cause is cognitive impairment, supervision or verbal cueing needed to protect the insured or others. A licensed or certified professional, such as a physician, nurse or social worker, performs the assessment, and the policy must describe how a denial can be appealed. Some policies accept stand-by assistance, which means someone nearby to help if needed. A policy that requires hands-on help is harder to qualify under.

Two cases show the trigger at work.

• Nolan can feed himself, use the toilet and control his bladder. After a stroke he cannot bathe, dress or transfer from a chair without a person’s help. He has lost three activities of daily living. A policy with a two-of-six trigger pays, and so would a three-activity trigger.
• Dolores passes all six activity tests but wanders, leaves the stove on and cannot recall the day or place. She needs supervision to be safe. Her policy has an activities-of-daily-living trigger and a cognitive-impairment trigger. The cognitive trigger is what she meets.

Medicare’s skilled nursing benefit requires a hospital stay of at least 3 days first. Long-term care policies generally do not require a prior hospital stay, and Michigan bars conditioning benefits on prior institutionalization (MCL 500.3915).

Benefit Amounts, Elimination Periods and Benefit Periods

How Benefits Are Paid

Most policies today pay on an expense-incurred basis: the insurer pays the lesser of the actual expense or the policy’s limit. An indemnity policy pays a set dollar amount whatever the cost. A disability-style policy pays the full daily amount once the insured is eligible, whether or not services are used. Policies set the limit by the day, week or month. Home care is commonly set at a percentage of the facility amount, such as 50 percent or 75 percent, though many policies now pay the same for both. Michigan requires a policy that covers nursing facility care to cover home care with a total of at least half of a year of the nursing home benefit (MCL 500.3907(4)).

Maximum benefit is stated in years, in a total dollar amount, or as unlimited. The usual minimum is one year of coverage. A policy that pays $220 a day for 3 years has a pool of $220 x 365 x 3 = $240,900. The model regulation lets home care benefits count against the policy’s maximum, so one pool is spent by whichever care the insured uses.

A Facility Claim

Rosa has a policy with a $220 daily maximum for nursing facility care, a 3-year pool, and a 90-day elimination period counted by calendar days. She enters a nursing facility that charges $260 a day and stays 140 days.

1. Days 1 to 90 are the elimination period. The insurer pays nothing. Rosa pays 90 x $260 = $23,400.
2. Days 91 to 140 are 50 days of benefits. The insurer pays the lesser of the $260 expense or the $220 maximum, which is $220 a day, or 50 x $220 = $11,000.
3. Rosa pays the $40 daily difference on those 50 days, which is $2,000.
4. The facility charged 140 x $260 = $36,400 in all. The insurer paid $11,000 and Rosa paid $23,400 + $2,000 = $25,400.
5. The pool is $240,900 minus $11,000, which leaves $229,900.

Counting the Elimination Period

An elimination period is the number of days of care the insured pays for before benefits begin. Common choices are 20, 30, 60, 90 or 100 days, and a shorter period costs more in premium. It can be counted in two ways. Under the calendar-day method, every day that the insured meets the benefit trigger counts. Under the service-day method, only a day on which paid, covered care is received counts. A policy may also require the period to be met once in a lifetime or again for each episode of care.

Consider a home care claim. Sam meets the benefit trigger on a Monday and starts care that day with a home health aide Monday through Friday at $150 a day. His policy pays home care at 75 percent of its $220 facility amount, or $165, and has a 90-day elimination period. The $165 daily limit is above his $150 cost, so after the elimination period the policy pays the whole charge.

• Calendar-day method: 90 calendar days fall in 12 weeks and 6 days. A Monday start includes 65 weekdays of care, costing 65 x $150 = $9,750. Benefits begin on the next care day, calendar day 92.
• Service-day method: Sam must pay for 90 days of care. At five days a week that takes 18 weeks, costing 90 x $150 = $13,500. Benefits begin the next Monday after the 90th care day, calendar day 127.

The service-day method costs Sam $13,500 minus $9,750, or $3,750, more before the first benefit is paid, and it starts 35 calendar days later. Some policies also do not count days of care given by family members toward the period.

Inflation Protection

An insurer must offer inflation protection. Michigan, like the model Act and regulation, says the offer must be no less favorable than one of three designs (MCL 500.3909(1)): benefits that increase each year, compounded annually at a rate not less than 5 percent; the right to buy increases periodically without evidence of insurability; or coverage of a stated percentage of actual or reasonable charges with no maximum amount. The insurer must show a graph comparing benefits with and without inflation protection over at least 20 years (MCL 500.3909(3)(a)).

Compound and simple increases give very different results. Take a $200 daily benefit and a 3 percent increase, with the cost of care assumed to rise 5 percent a year:

Year	Benefit, 3% compound	Benefit, 3% simple	Cost of care, 5% compound	Compound covers	Simple covers
0	$200.00	$200	$200.00	100%	100%
10	$268.78	$260	$325.78	82.5%	79.8%
20	$361.22	$320	$530.66	68.1%	60.3%
30	$485.45	$380	$864.39	56.2%	44.0%

Simple 3 percent adds 3 percent of the original $200, which is $6, every year. Compound 3 percent adds 3 percent of each year’s larger amount. Neither keeps pace with care that rises 5 percent. A policy that compounds at 5 percent matches the cost assumption in the table. Inflation protection raises the premium, and it matters most to a younger buyer, who has more years for the gap to widen. Under the model regulation, 5 percent compound protection is included in the policy unless the applicant signs a rejection, which may be on the application or on a separate form.

Guarantee of Insurability

The second design, a guaranteed right to buy more coverage, is often called a guarantee of insurability or future purchase option. Every few years the insurer offers an increase, and the insured need not prove good health. The additional benefit must be at least the difference between the existing benefit and that benefit compounded at 5 percent for the elapsed time. Ahmed buys a $160 daily benefit. At the first offer, 3 years later, compounding at 5 percent for 3 years gives $185.22, so the offer must add at least $25.22 a day. The premium for the added amount is based on Ahmed’s age when the offer is accepted. If he declines an offer, a later offer may require proof of health or cost more, so declining is a decision with a price.

Other Optional Benefits

A buyer can usually add features, and each raises the premium.

• Shared care: two insureds share one pool of benefits. If a couple has a $150,000 shared pool and one spouse uses $25,000, $125,000 remains for either of them. Some designs add a third pool to protect each spouse from the other using it all.
• Waiver of premium: the insured stops paying premiums once benefits begin. Some policies waive from the first benefit payment, and others wait 60 to 90 days.
• Premium refund at death: the estate receives premiums paid, generally reduced by benefits paid. If Ahmed paid $28,000 and the insurer paid $11,000 in benefits, the refund is $17,000.
• Downgrade: the insured can reduce benefits to lower the premium instead of letting the policy lapse.
• Third-party notice: the insured names someone to receive a lapse notice. Michigan requires an insurer to obtain a designation before issuing an individual policy, or a signed waiver (MCL 500.3906).

Nonforfeiture and Return of Premium

An insurer must offer a nonforfeiture benefit, which gives the insured something when premiums stop. In a shortened benefit period design the daily benefit stays the same and the length of coverage is limited. In a reduced paid-up design the benefit period stays the same and the daily benefit shrinks. Under the model regulation the standard credit for a shortened benefit period equals 100 percent of all premiums paid, and never less than 30 times the daily nursing home benefit. Suppose an insured with a $200 daily benefit lapses after paying $2,250 a year for 10 years. Premiums paid are $22,500, which exceeds the $6,000 floor (30 x $200). The paid-up coverage pays up to $200 a day until $22,500 is used, which is 112.5 days. A return of premium design instead refunds some or all of the premiums paid if the insured drops the policy after a set number of years. It usually costs the most. An insured who declines the offer receives a contingent benefit on lapse after a large premium increase, which gives the choice of reduced benefits at the same premium, a paid-up policy or the higher premium. The size of the increase that triggers it falls with the insured’s age at issue (MCL 500.3910, 500.3910a).

Qualified Plans

A tax-qualified policy meets federal rules and gets federal tax treatment. A policy is treated as accident and health insurance when it meets these conditions (26 U.S.C. 7702B(b)):

• It covers only qualified long-term care services, which are services a chronically ill person needs under a plan of care prescribed by a licensed health care practitioner.
• It does not pay for what Medicare pays, except where Medicare is only the secondary payer.
• It is guaranteed renewable.
• It has no cash surrender value that can be borrowed against or pledged, and refunds and dividends go to reduce future premiums or increase benefits, except a refund at death or surrender that cannot exceed premiums paid.
• It meets the consumer protection requirements, which include provisions of the model Act and regulation and rules on nonforfeiture.

A chronically ill person is one certified within the past 12 months by a licensed practitioner as unable to perform at least 2 of the activities of daily living for at least 90 days, or as needing substantial supervision because of severe cognitive impairment. The test must consider at least 5 of the 6 activities.

The tax treatment has two sides. Premiums are treated as medical expense payments, deductible only within an age-based cap and only to the extent total medical expenses are deductible. Benefits are generally not income. A per-day limit applies to per diem and indemnity payments, which the Treasury adjusts each year. Suppose the limit is $250 a day (an invented amount) and a policy pays $300 a day on an indemnity basis. If the insured’s actual qualified care costs $240 a day, the limit is the greater of $250 and $240, which is $250, so $50 of the $300 is taxable income. If care costs $320, the greater amount is $320, and the whole $300 is excluded. A policy that is not tax-qualified gets neither treatment, and its benefits are generally counted as income. A life insurance policy or annuity with a long-term care rider can qualify, but a payment for qualified coverage charged against the cash value does not qualify for the deduction. Some states add their own tax or partnership rules, so a producer confirms how a form is labeled and what the state currently provides.

Underwriting

An insurer medically underwrites long-term care insurance, which means it looks at current and past health before issuing. Underwriting keeps the premium affordable, because without it most people would wait to buy until they needed care. Companies differ in how much they do:

• Short-form underwriting asks only a few health questions, such as whether the applicant has been in a nursing home or received care at home in the past 12 months.
• Fuller underwriting adds more questions, reviews medical records and asks the physician for a statement.
• A group may use relaxed underwriting or none.

An applicant with a condition likely to lead soon to long-term care, such as Parkinson’s disease, probably cannot buy from a company that underwrites fully. Many states bar post-claims underwriting, in which an insurer investigates the applicant’s health for the first time after a claim and uses what it finds to deny it. Michigan bars rescinding a policy for a condition when the application listed a medication that the insurer knew, or should have known, was directly related to a condition it would otherwise have denied (MCL 500.3921(3)). The applicant must answer every application question accurately, because the insurer relies on the answers and an incorrect answer can later affect a claim.

Suitability is part of underwriting the sale. A policy is not suited to a person who cannot afford the premium, including increases; whose only income is Social Security or Supplemental Security Income; who is already on Medicaid; or who has few assets. It may suit a person with substantial assets and income who does not want to spend most of them on care. A producer asked whether an applicant can keep the premium for life should use the personal worksheet and the rate-increase information that Michigan requires an insurer to give an applicant (MCL 500.3925(3), (7)).

Partnership Policies and Medicaid

Medicaid pays for long-term care only after a person’s resources fall to the state’s limit, so a person without insurance generally spends down. A long-term care insurance partnership program changes that. Under a qualified state partnership, the state disregards assets in an amount equal to the benefits the policy paid (42 U.S.C. 1396p(b)(1)(C)(iii)). If Gerald’s partnership policy pays $150,000 in benefits and he later needs Medicaid, he may keep $150,000 more than the state’s limit would otherwise allow.

To qualify for a partnership, a policy must:

• Be issued to a resident of the state.
• Be a tax-qualified policy issued after the state’s partnership amendment takes effect.
• Meet the model regulation and Act.
• Carry inflation protection that depends on the buyer’s age: compound annual protection for a buyer under 61, some level of protection from age 61 through 75, and optional protection from age 76.

A partnership policy is not a different kind of policy. It is a policy that carries a status, and the insurer reports benefit payments to the federal government. Michigan’s long-term care chapter refers to partnership program policies (MCL 500.3908), and a producer confirms with the insurer whether a given form carries the status before telling a buyer that it does.

Lesson summary

• Policies define levels of care by skill, nature and setting: skilled, intermediate, custodial, home health, assisted living, adult day care and respite. A claim fails when the care or the facility is not one the policy recognizes.
• Benefit triggers are a loss of activities of daily living, cognitive impairment or, in policies that are not tax-qualified, medical necessity. A tax-qualified policy requires inability to perform 2 of 6 activities for 90 days, or severe cognitive impairment.
• An expense-incurred policy pays the lesser of the cost or the daily maximum after the elimination period. In a worked claim with a 90-day period, a $220 maximum and $260 a day in charges, the insured pays $25,400 of $36,400.
• Counting an elimination period by service days instead of calendar days made a home care claimant pay $3,750 more before benefits began.
• A 3 percent compound benefit covers 56.2 percent of care that rises 5 percent over 30 years, and 3 percent simple covers 44.0 percent.
• Guarantee of insurability lets the insured buy more coverage without proving health, and declining an offer can cost the option later. Nonforfeiture and return of premium give value when premiums stop, and return of premium costs the most.
• A tax-qualified policy is guaranteed renewable, has no cash value, and covers only qualified services for a chronically ill person under a plan of care. Indemnity payments above the per-day limit and the actual cost are taxable.
• Underwriting reviews health and keeps premiums affordable. A partnership policy lets a person keep assets equal to the benefits paid when applying for Medicaid.