Things to Look out for When Choosing a Long Term Care Policy
In other articles on this site we discuss the types of care that can be covered by a long-term care insurance policy as well as some of the most common features, options, and riders that are available. However, there are other items that anyone looking into LTC insurance should be aware of, some of which can make big differences in terms of both the amount you pay and how easy it is to receive benefits.
Tax-Qualified vs. Non-Tax-Qualified Plans
Most long term care insurance policies are tax-qualified. By law, tax-qualified (TQ) policies have specific restrictions on when the policyholder can start receiving their benefits. Such policies require a person to expect to need care for at least 90 days and be unable to perform two or more activities of daily living (ADLs) or have some sort of severe cognitive impairment. A doctor must also provide a plan of care. Benefits received under this type of policy are non-taxable. If you want to learn more about tax-qualified plans and the advantages they offer, check out our article on the benefits of buying LTC insurance.
Non-tax qualified (NTQ) plans typically feature a medical necessity trigger, where the patient’s doctor or a doctor working with the insurance company can declare that the patient needs care for any medical reason and the policy will start paying out. The benefits received under a plan like this may or may not be taxable. Overall, because of their more relaxed requirements, NTQ plans will start paying out sooner than TQ plans, but they also come with a lot of tax-related complications and the potential for large bills come tax season. Many people are not aware of the differences between these types of plans, with one survey revealing that as many as 65% of people who had purchased a long term care insurance policy didn’t know which category their plan fit into. When picking out your own plan, consult an expert who will be able to identify which type of plan you’re looking at and what kind of impact it may have on your taxes.
State Partnership Programs
These are partnerships between the state and long term care insurance companies meant to encourage people to plan for long-term care. In these programs, insurers agree to offer policies that meet certain standards of quality. This could include things like providing cost-of-living adjustments that help protect against inflation. If the policy you purchase is part of this program, you can qualify for Medicaid (something that normally requires you to have more or less exhausted your savings) while still hanging on to a specific amount of assets.
In most states, it works like this: if your plan has finished paying out benefits and you still need care, you will be able to qualify for Medicaid with assets equal to the normal Medicaid requirement (typically $2,000) plus the total amount that your policy paid out. So if you would need to have $2,000 in assets to qualify for Medicaid without the partnership program, and your policy paid out $164,000 in total, you would now be able to qualify for Medicaid with $166,000 in assets. In short, this allows you to receive further care without having to spend all your savings. To see if your state offers this program, check with the state insurance department or go to this link:http://www.aaltci.org/long-term-care-insurance/learning-center/long-term-care-insurance-partnership-plans.php#approved . Ask your agent whether the policy you’re looking at qualifies under this program and how it works with Medicaid.
Exclusions & Requirements
Below is a list of additional things to look for in the policies that you are considering. These points may not apply to all LTC insurance policies, but are good to be aware of nonetheless. If you are having trouble choosing between policies, finding potentially problematic areas such as these may help you reach a decision more easily.
- Exclusions: Every long-term care insurance policy will have some conditions that are excluded from coverage. Common exclusions include those for substance abuse, mental disorders, and self-inflicted injuries. When reviewing your policy, make sure that common problems such as Alzheimer’s, heart disease, diabetes, and certain forms of cancer are non-excludable. Your agent can help with this process.
- Required time in a hospital or nursing home: While many states have rules against it, some plans require you to have been in a hospital or nursing facility for a certain number of days before qualifying for long term care insurance benefits. This requirement can block policyholders from receiving benefits for long periods of time and is definitely something to watch out for.
- Multiple elimination periods: Many policies will only require that you go through one elimination period before you start receiving benefits. However, there are policies out there that require you to undergo a new elimination period each time a new medical issue arises or a new form of care is needed. If possible, select one of the policies that only makes you wait once before receiving your benefits.
- Proof of care: Some policies will require that you prove you have paid for care throughout the elimination period before they will start paying any benefits. If the plan you choose has such a requirement, make sure that you keep all care-related expenditures well-documented and will be able to provide proof of payment if and when it is needed.
- Care outside of the US: Most policies will only cover care given within the continental United States. Plans that do cover care in foreign countries typically offer limited coverage and charge an increased rate for it.
If you want to learn more about long-term care insurance, including information on costs, benefits and drawbacks of buying an LTC insurance plan, the types of care it can cover, and what alternatives are out there, take a look at our other articles.
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Choosing and Purchasing Your LTC Insurance Policy