State:

National
Long-term care (LTC) insurance provides financial aid for covered individuals who need medical, personal, custodial, and social services during long illnesses and disabilities. LTC includes an array of services ranging from nursing home care, skilled home health care, adult day care, unskilled home personal care, and respite care. Alternatives to group LTC insurance for paying or providing for these services include individual policies, personal savings, accelerated life insurance benefits, Medicare, Medicaid, and care by family members.
However, all these alternatives have drawbacks. For example, such alternatives may be expensive (individual policies and personal savings), provide limited coverage (Medicare), be open only to individuals with extremely limited financial resources (Medicaid), be available only to terminal individuals (accelerated life insurance), and be an extreme physical and psychological drain (family member assistance). Attempting to juggle these various alternatives puts a strain on active employees and results in indirect costs to employers because of reduced efficiency and absenteeism, increased healthcare costs, and higher turnover.
While almost all homeowners would never consider not having fire insurance, only a relatively small number of people have LTC insurance. However, although not very many people will have to deal with a house fire, the U.S. Department of Health and Human Services’ (HHS) National Clearinghouse for Long-Term Care Information website estimates that almost 70 percent of individuals over 65 will need long-term care. Additionally, the cost of long-term care can be astronomical.
So who pays for LTC? Medicare does not cover most LTC, and Medicaid is available only to the very poor. The traditional source of LTC has been family members, but modern family structures make this less and less practical with fewer and more dispersed children to care for elderly parents and the desire of many parents not to be a burden on their children.
The aging of the Baby-Boom generation has created a twofold incentive for employers to provide assistance in covering the costs of LTC. While many Baby Boomers are faced with the immediate problem of taking care of their own elderly parents, they are also realizing the need to plan for their own potential LTC issues 10 to 20 years down the road.
Employers are also becoming aware of the impact that employees' LTC challenges have on their businesses. Although employer-sponsored LTC insurance is more common among larger employers, it is among middle size and smaller businesses where the hidden or indirect costs resulting from employees struggling to care for elderly parents is most stark. These indirect costs include higher absentee rates, higher health insurance costs, and higher turnover costs. While LTC insurance was initially provided primarily through individual policies, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) provided tax-favored status for employer-sponsored group LTC insurance and made group LTC insurance a potentially popular and less expensive benefit option.
A simple and inexpensive way for employers to provide LTC insurance is to make individual policies available to employees. This is advantageous to employees because premiums are paid through payroll deductions, and the employer does the research needed to select an LTC insurance company. The employer benefits by adding a new benefit at little or no cost, but because individual policies are expensive, participation rates are usually low. Individual coverage is not necessarily more expensive than group coverage because it may not have to offer guaranteed enrollment and guaranteed renewability. In addition, individual coverage can more easily be tailored to each employee's specific needs. For certain high-risk individuals, however, individual coverage may be prohibitively expensive or unavailable.
Although employer-sponsored group LTC insurance is not always less expensive than individual coverage, it includes tax incentives if provided under a tax-qualified plan. Employer contributions (if any) are tax deductible to the employer and not taxed to the employee; employees may be able to deduct a portion of their contributions from their taxable income; and benefits received may be tax exempt. The big advantage of group plans, as opposed to individual insurance, is that group plans offer guaranteed enrollment and guaranteed renewability in most cases.
A number of factors have made employers hesitant to sponsor LTC insurance plans. Lack of interest is often the biggest obstacle because a particular workforce may just not be interested in LTC insurance, particularly if they are mainly young, transient, part-time, and/or low-income employees. For other employers, lack of knowledge and more pressing priorities are the biggest barrier. In addition, LTC insurance is a relatively new product, and many benefits managers are waiting for the concept to mature and to be tested in practice.
The first step in designing and implementing a group LTC plan is assessing and understanding the need for such coverage. Management and employees must become more educated about the rising cost of LTC, the limitations of government and other sources of assistance, and the direct and hidden costs of not having coverage. Personal experience, such as when an employee is confronted with caring for an elderly family member, provides the most dramatic evidence. Once all levels of the workforce are more aware of the issues involved in LTC, an analysis of the real potential interest in an LTC plan can be performed. This may be done through surveys or focus groups. In addition, what competitors are doing about LTC should be determined. This information will allow an organization to determine whether to implement an LTC insurance plan. Employee education is crucial in generating interest in an LTC insurance program, and support from top management for a new LTC plan is also critical for the success of the program.
Enrollment procedure. A plan with a simple enrollment procedure will often make it easier for employees to make the decision to take part. On the other hand, a more complex offering with a variety of options may encourage participation by letting employees choose a program that more closely meets their particular needs. When designing an LTC plan, it is important to strike the proper balance between these competing needs.
Selecting an insurer. Because LTC coverage may not be needed until many years in the future, it is important to select an insurer that is experienced in the long-term care area, financially stable, and likely to be around when benefits are needed.
Almost all LTC plans are currently paid for fully by employees. This results in relatively low participation rates. In addition, the employees who are most likely to participate are those who anticipate needing benefits. This phenomenon is known as “adverse selection.” The claims experience of a group where adverse selection influences who participates will be worse than would be expected from an “average” group of employees, and premiums will inevitably increase. Increased premiums will aggravate adverse selection leading to still higher premiums. Employer contributions are the easiest solution to adverse selection. Initially, however, most employers have been very cautious about becoming involved with funding LTC insurance plans. As employees become more educated about the need for LTC coverage, employer contributions will have a bigger impact and should be considered.
Most LTC plans cover nursing home care, home health care, and adult daycare. Degrees of care include skilled care provided 24 hours per day by a registered nurse under a physician's supervision, intermediate care (similar to skilled care but provided for shorter periods rather than all the time), and custodial care that involves assistance with eating, bathing, dressing, and similar activities.
Although home health care is less expensive than nursing home care, inclusion of such coverage may result in increased premiums because insured individuals are more likely to substitute paid home health care for informal unpaid care by family members when insurance is available. This happens because most individuals prefer staying at home rather than entering a nursing home. As a result, if home health coverage is not provided, no benefit claim will be made. Covering home health care may encourage lower-risk individuals to participate, which should reduce adverse selection.
An optional benefit in LTC plans is respite care that provides care for an individual to relieve, for a period of time, the burden on family members. Respite care benefit levels are usually expressed as a percentage of the nursing home benefit.
Note: Plans that cover skilled nursing and home care generally have higher participation rates than plans without those benefits.
LTC plans will generally provide a maximum daily benefit for nursing home care and other services, a maximum duration for benefit payments, and an elimination period that must expire before benefits will be paid. Elimination periods that are based on calendar days as opposed to days of service are a more attractive feature, especially for home care and adult daycare benefits. Plans may also provide that daily benefits and benefit maximums be indexed against inflation. Employers can specify one or more of these design features to simplify what employees must decide before enrolling. Plans may either reimburse for services or provide a per diem benefit. The varying needs of employees may be accommodated by leaving the extent of certain coverage up to individual employees.
Practice tip: A longer elimination period (such as 90 days as opposed to 30 or 60 days) will result in lower premiums and may encourage younger employees to participate and result in lower premiums in the long run.
Plans generally cover the employee and spouse, but may also cover parents, parents-in-law, children, and even grandparents up to a maximum age limit. Employers may decide to give employees the option of covering parents and in-laws only when they elect employee and spouse coverage. This is an excellent way to get younger employees to take interest and enroll in a LTC plan.
Because LTC is a tough sell, communication is crucial to a successful program. While many employers that offer LTC have done a good job communicating with their employees when an LTC program is first offered, experience has shown that this is not enough. For example, one large company rolled out an LTC plan with great fanfare and got a modest initial enrollment. But five years later, the enrollment figures had not changed. It will take a persistent communication plan plus time for employees to both understand their own need for LTC coverage and to make the decision to buy coverage.
Employer contributions to pay premiums for qualified LTC group insurance plans are deductible by the employer and are not included in the employee's income. Employees may be entitled to take a portion of the premium they pay themselves as a medical expense tax deduction. The value of benefits received from a qualified LTC plan are generally not taxed to the recipient. The law provides a limit on tax-free benefits provided on a per diem basis, which is adjusted annually for inflation.
Note: Contributions for LTC coverage made through a flexible spending account or similar arrangement are taxable income to the employee.
Federal tax law sets out specific requirements that qualified LTC insurance contracts must meet. Such contracts may only provide coverage of qualified long-term care services and may not pay for or reimburse for services reimbursed by Medicare except when Medicare is a secondary payer.
Qualified LTC services. Qualified services are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services and maintenance and personal care services required by a chronically ill individual as prescribed by a licensed healthcare practitioner. There are two tests for determining if an individual is chronically ill: (1) the activities of daily living (ADL) test; and (2) the cognitive impairment (CI) test.
ADL test. An individual is chronically ill under this test if a licensed healthcare practitioner certifies that he or she is unable to perform, without substantial assistance, two of a possible six ADLs for at least 90 days due to a loss of functional capacity. The ADLs are eating, toileting, transferring, bathing, dressing, and continence.
CI test. An individual is chronically ill under this test if a licensed healthcare practitioner certifies that he or she requires substantial supervision to be protected from threats to health and safety due to a severe cognitive impairment, such as Alzheimer's disease and similar forms of irreversible dementia. A qualified LTC insurance contract is not required to take any ADL into account for purposes of this test.
Certification. The certification required by these tests must have been made within the previous 12 months.
Practice tip: Chronically ill individuals often lose the ability to bathe first. Therefore, to provide the broadest coverage, employers should be sure that bathing is one of the ADLs that will trigger coverage.
LTC insurance remains a tough sell both in getting employers to sponsor plans and employees to participate. The biggest barrier is the immediate high cost and the not-so-immediate need for benefits. While premiums for LTC insurance are eligible for tax deduction as a medical expense, the vast majority of employees cannot take advantage of the deduction because they do not itemize deductions on their federal income tax return. Employees who do itemize may also not be able to take advantage of the tax deductions because they can deduct only the amount by which their total medical care expenses for the year exceeds a certain percentage of their adjusted gross income. In addition, there are limits, based on the policyholder's age, on the total premium amount that can be applied toward the threshold. Proposals to make LTC insurance more affordable include making LTC premiums 100 percent deductible for all taxpayers or providing a tax credit. Advocates of these proposals claim that tax revenue losses will be more than offset by Medicare and Medicaid savings.
Last reviewed on February 22, 2017.
Related Topics:
National
Long-term care (LTC) insurance provides financial aid for covered individuals who need medical, personal, custodial, and social services during long illnesses and disabilities. LTC includes an array of services ranging from nursing home care, skilled home health care, adult day care, unskilled home personal care, and respite care. Alternatives to group LTC insurance for paying or providing for these services include individual policies, personal savings, accelerated life insurance benefits, Medicare, Medicaid, and care by family members.
However, all these alternatives have drawbacks. For example, such alternatives may be expensive (individual policies and personal savings), provide limited coverage (Medicare), be open only to individuals with extremely limited financial resources (Medicaid), be available only to terminal individuals (accelerated life insurance), and be an extreme physical and psychological drain (family member assistance). Attempting to juggle these various alternatives puts a strain on active employees and results in indirect costs to employers because of reduced efficiency and absenteeism, increased healthcare costs, and higher turnover.
While almost all homeowners would never consider not having fire insurance, only a relatively small number of people have LTC insurance. However, although not very many people will have to deal with a house fire, the U.S. Department of Health and Human Services’ (HHS) National Clearinghouse for Long-Term Care Information website estimates that almost 70 percent of individuals over 65 will need long-term care. Additionally, the cost of long-term care can be astronomical.
So who pays for LTC? Medicare does not cover most LTC, and Medicaid is available only to the very poor. The traditional source of LTC has been family members, but modern family structures make this less and less practical with fewer and more dispersed children to care for elderly parents and the desire of many parents not to be a burden on their children.
The aging of the Baby-Boom generation has created a twofold incentive for employers to provide assistance in covering the costs of LTC. While many Baby Boomers are faced with the immediate problem of taking care of their own elderly parents, they are also realizing the need to plan for their own potential LTC issues 10 to 20 years down the road.
Employers are also becoming aware of the impact that employees' LTC challenges have on their businesses. Although employer-sponsored LTC insurance is more common among larger employers, it is among middle size and smaller businesses where the hidden or indirect costs resulting from employees struggling to care for elderly parents is most stark. These indirect costs include higher absentee rates, higher health insurance costs, and higher turnover costs. While LTC insurance was initially provided primarily through individual policies, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) provided tax-favored status for employer-sponsored group LTC insurance and made group LTC insurance a potentially popular and less expensive benefit option.
A simple and inexpensive way for employers to provide LTC insurance is to make individual policies available to employees. This is advantageous to employees because premiums are paid through payroll deductions, and the employer does the research needed to select an LTC insurance company. The employer benefits by adding a new benefit at little or no cost, but because individual policies are expensive, participation rates are usually low. Individual coverage is not necessarily more expensive than group coverage because it may not have to offer guaranteed enrollment and guaranteed renewability. In addition, individual coverage can more easily be tailored to each employee's specific needs. For certain high-risk individuals, however, individual coverage may be prohibitively expensive or unavailable.
Although employer-sponsored group LTC insurance is not always less expensive than individual coverage, it includes tax incentives if provided under a tax-qualified plan. Employer contributions (if any) are tax deductible to the employer and not taxed to the employee; employees may be able to deduct a portion of their contributions from their taxable income; and benefits received may be tax exempt. The big advantage of group plans, as opposed to individual insurance, is that group plans offer guaranteed enrollment and guaranteed renewability in most cases.
A number of factors have made employers hesitant to sponsor LTC insurance plans. Lack of interest is often the biggest obstacle because a particular workforce may just not be interested in LTC insurance, particularly if they are mainly young, transient, part-time, and/or low-income employees. For other employers, lack of knowledge and more pressing priorities are the biggest barrier. In addition, LTC insurance is a relatively new product, and many benefits managers are waiting for the concept to mature and to be tested in practice.
The first step in designing and implementing a group LTC plan is assessing and understanding the need for such coverage. Management and employees must become more educated about the rising cost of LTC, the limitations of government and other sources of assistance, and the direct and hidden costs of not having coverage. Personal experience, such as when an employee is confronted with caring for an elderly family member, provides the most dramatic evidence. Once all levels of the workforce are more aware of the issues involved in LTC, an analysis of the real potential interest in an LTC plan can be performed. This may be done through surveys or focus groups. In addition, what competitors are doing about LTC should be determined. This information will allow an organization to determine whether to implement an LTC insurance plan. Employee education is crucial in generating interest in an LTC insurance program, and support from top management for a new LTC plan is also critical for the success of the program.
Enrollment procedure. A plan with a simple enrollment procedure will often make it easier for employees to make the decision to take part. On the other hand, a more complex offering with a variety of options may encourage participation by letting employees choose a program that more closely meets their particular needs. When designing an LTC plan, it is important to strike the proper balance between these competing needs.
Selecting an insurer. Because LTC coverage may not be needed until many years in the future, it is important to select an insurer that is experienced in the long-term care area, financially stable, and likely to be around when benefits are needed.
Almost all LTC plans are currently paid for fully by employees. This results in relatively low participation rates. In addition, the employees who are most likely to participate are those who anticipate needing benefits. This phenomenon is known as “adverse selection.” The claims experience of a group where adverse selection influences who participates will be worse than would be expected from an “average” group of employees, and premiums will inevitably increase. Increased premiums will aggravate adverse selection leading to still higher premiums. Employer contributions are the easiest solution to adverse selection. Initially, however, most employers have been very cautious about becoming involved with funding LTC insurance plans. As employees become more educated about the need for LTC coverage, employer contributions will have a bigger impact and should be considered.
Most LTC plans cover nursing home care, home health care, and adult daycare. Degrees of care include skilled care provided 24 hours per day by a registered nurse under a physician's supervision, intermediate care (similar to skilled care but provided for shorter periods rather than all the time), and custodial care that involves assistance with eating, bathing, dressing, and similar activities.
Although home health care is less expensive than nursing home care, inclusion of such coverage may result in increased premiums because insured individuals are more likely to substitute paid home health care for informal unpaid care by family members when insurance is available. This happens because most individuals prefer staying at home rather than entering a nursing home. As a result, if home health coverage is not provided, no benefit claim will be made. Covering home health care may encourage lower-risk individuals to participate, which should reduce adverse selection.
An optional benefit in LTC plans is respite care that provides care for an individual to relieve, for a period of time, the burden on family members. Respite care benefit levels are usually expressed as a percentage of the nursing home benefit.
Note: Plans that cover skilled nursing and home care generally have higher participation rates than plans without those benefits.
LTC plans will generally provide a maximum daily benefit for nursing home care and other services, a maximum duration for benefit payments, and an elimination period that must expire before benefits will be paid. Elimination periods that are based on calendar days as opposed to days of service are a more attractive feature, especially for home care and adult daycare benefits. Plans may also provide that daily benefits and benefit maximums be indexed against inflation. Employers can specify one or more of these design features to simplify what employees must decide before enrolling. Plans may either reimburse for services or provide a per diem benefit. The varying needs of employees may be accommodated by leaving the extent of certain coverage up to individual employees.
Practice tip: A longer elimination period (such as 90 days as opposed to 30 or 60 days) will result in lower premiums and may encourage younger employees to participate and result in lower premiums in the long run.
Plans generally cover the employee and spouse, but may also cover parents, parents-in-law, children, and even grandparents up to a maximum age limit. Employers may decide to give employees the option of covering parents and in-laws only when they elect employee and spouse coverage. This is an excellent way to get younger employees to take interest and enroll in a LTC plan.
Because LTC is a tough sell, communication is crucial to a successful program. While many employers that offer LTC have done a good job communicating with their employees when an LTC program is first offered, experience has shown that this is not enough. For example, one large company rolled out an LTC plan with great fanfare and got a modest initial enrollment. But five years later, the enrollment figures had not changed. It will take a persistent communication plan plus time for employees to both understand their own need for LTC coverage and to make the decision to buy coverage.
Employer contributions to pay premiums for qualified LTC group insurance plans are deductible by the employer and are not included in the employee's income. Employees may be entitled to take a portion of the premium they pay themselves as a medical expense tax deduction. The value of benefits received from a qualified LTC plan are generally not taxed to the recipient. The law provides a limit on tax-free benefits provided on a per diem basis, which is adjusted annually for inflation.
Note: Contributions for LTC coverage made through a flexible spending account or similar arrangement are taxable income to the employee.
Federal tax law sets out specific requirements that qualified LTC insurance contracts must meet. Such contracts may only provide coverage of qualified long-term care services and may not pay for or reimburse for services reimbursed by Medicare except when Medicare is a secondary payer.
Qualified LTC services. Qualified services are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services and maintenance and personal care services required by a chronically ill individual as prescribed by a licensed healthcare practitioner. There are two tests for determining if an individual is chronically ill: (1) the activities of daily living (ADL) test; and (2) the cognitive impairment (CI) test.
ADL test. An individual is chronically ill under this test if a licensed healthcare practitioner certifies that he or she is unable to perform, without substantial assistance, two of a possible six ADLs for at least 90 days due to a loss of functional capacity. The ADLs are eating, toileting, transferring, bathing, dressing, and continence.
CI test. An individual is chronically ill under this test if a licensed healthcare practitioner certifies that he or she requires substantial supervision to be protected from threats to health and safety due to a severe cognitive impairment, such as Alzheimer's disease and similar forms of irreversible dementia. A qualified LTC insurance contract is not required to take any ADL into account for purposes of this test.
Certification. The certification required by these tests must have been made within the previous 12 months.
Practice tip: Chronically ill individuals often lose the ability to bathe first. Therefore, to provide the broadest coverage, employers should be sure that bathing is one of the ADLs that will trigger coverage.
LTC insurance remains a tough sell both in getting employers to sponsor plans and employees to participate. The biggest barrier is the immediate high cost and the not-so-immediate need for benefits. While premiums for LTC insurance are eligible for tax deduction as a medical expense, the vast majority of employees cannot take advantage of the deduction because they do not itemize deductions on their federal income tax return. Employees who do itemize may also not be able to take advantage of the tax deductions because they can deduct only the amount by which their total medical care expenses for the year exceeds a certain percentage of their adjusted gross income. In addition, there are limits, based on the policyholder's age, on the total premium amount that can be applied toward the threshold. Proposals to make LTC insurance more affordable include making LTC premiums 100 percent deductible for all taxpayers or providing a tax credit. Advocates of these proposals claim that tax revenue losses will be more than offset by Medicare and Medicaid savings.
Last reviewed on February 22, 2017.
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