Traditional Long-Term Care Insurance

Traditional (also called stand-alone) tax qualified long-term care (LTC) is not an investment but rather a type of insurance policy that pays a tax-free benefit when the insured is unable to perform two of six activities of daily living (ADLs) or is cognitively impaired (often Alzheimer’s). This type of care is considered custodial as opposed to medical, and as such is not covered by most medical (health) insurance policies and there is no treatment to cure the ailment or restore the individual back to a prior healthy state. Some people buy coverage to ensure they receive quality treatment in their home before entering a facility, while others buy coverage to ensure they leave a legacy to heirs that won’t be reduced by the cost of care in their latter years. Medicare only covers a temporary transition of the insured to a custodial care facility if they also experience medically related ailments, and Medicaid (Medi-Cal in California) only pays for care of those who are deemed indigent (having almost no liquid assets remaining). Depending on Medicaid or governmental assistance is not usually a good strategy as studies show many facilities that accept Medicaid payments can provide less than a bare minimum standard of care.

Traditional LTC policy benefits offer reimbursement of qualified care expenses and are usually calculated with a daily maximum for a set number of days (ex. $310 per day for 3 years). The benefit may or may not increase over time to protect against inflation. Such increases are valuable and may be necessary to afford the increasing cost of care over time. Some policies are offered as ‘Partnership Plans’ where the state Medicaid program guarantees not to recover funds from the estate on a dollar for dollar basis to the extent the same benefit was received in LTC reimbursement of qualified costs of care. This feature can allow an insured to leave inheritance to heirs even if they later become indigent, having used up their full LTC coverage amount and then received LTC benefits from a Medicaid program. Traditional LTC is the cheapest of all LTC types because if the insured never triggers a benefit, the premiums are retained by the carrier (much like Term life insurance). Unlike linked benefit LTC, traditional LTC premiums are not guaranteed to remain level and consumers have been subject to substantial rate increases since these products became available. Married couples can choose to share policy benefit amounts which can reduce premium, but also means less benefit for the second spouse should both need coverage. Some states offer a limited tax deduction for LTC premiums. Consumers often appreciate a multi-pronged approach to procuring coverage, obtaining traditional LTC along with other types of benefit, such as linked benefit products

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