Key Care Variables in a Long-Term Care Insurance Policy

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Key Care Variables in a Long-Term Care Insurance Policy

Long-term care insurance policies issued prior to 1997 were "grandfathered" by the Health Insurance Portability and Accountability Act (HIPAA); they qualify for favorable tax treatment under HIPAA even if they include a "medical necessity" benefit trigger. If you have a pre-1997 LTC insurance contract, it very likely provides this feature that might not be easily replaced if you were shopping for coverage today. Don’t cancel or change such a policy without careful consideration and advice.

Now let’s look at important care variables.

Benefits for Home Care and Community-Based Care

This is an option worth having for most people. In almost every situation, experience has shown us all that home care is preferred over residential care, if practical. This is especially so when a home health aide could do what is necessary in just a short visit each day.

Some people feel comfortable counting on children or other family for daily visits to provide care for an extended period if needed. Whether or not this is a reasonable expectation is a question that deserves more thought than it sometimes gets. Despite a child’s devotion, sons or daughters might be unable to arrange the required visits at the time they are needed each and every day without serious financial strain or conflict within their own families.

For that reason, coverage for home and community-based care can make an enormous difference in quality of life even when family members are available to contribute to the care effort as well. An adult daycare center during the workweek, for example, might offer social and recreational activities for you, while allowing your children to avoid time off the job.

Having the flexibility and options in life that home and community-based care offer should be a major objective of your planning, with or without long-term care (LTC) insurance.

The cost of a home health aide for lengthy periods of service each day on a long-term basis can be just as or more expensive than a nursing home, depending on the local market. That is why it is important to note whether the policies you are considering will pay 100% of the maximum daily benefit for home care as well as a nursing home.

Many companies do not. Their policies pay a reduced amount of the daily maximum in reimbursement of home care costs, relative to the payment for nursing home care. Seventy-five percent is common; a policy with a maximum daily benefit of $100 for nursing home costs would pay only $75 for home or community-based care. Some companies let you decide the percentage payable for home care coverage.

Having your full benefit available for home care is obviously better than three quarters of it. But this feature surely costs the insurer more. So it is a factor tending to increase the premium compared to a policy that pays only a portion of the maximum for home care.

For many people, however, a policy paying the full contract benefit for care at home can be affordable. If so, for many people it is a good thing to have.

On the other hand, those without family or others to assist at all might be able to predict that remaining at home will not be feasible if they become unable to get in and out of bed and walk to the bathroom, for example. For them, taking advantage of a home care benefit is unlikely. A "residential facilities only" policy would be considerably cheaper while providing the benefit most likely to be used.

Restrictions on Caregivers

Some LTC insurance contracts limit coverage to services provided by registered nurses or licensed practical nurses—not personal care rendered by aides. Some others require that home care aides be hired through a Medicare-certified home healthcare agency or provider. In many situations, these requirements pose no obstacle to finding good caregivers.

But policy restrictions on caregivers have the potential to create a problem, especially in places where home healthcare agencies or individual providers are scarce. Someone located and hired directly through a newspaper ad, for example, might not qualify even with proper individual state credentials or license.

A few policies, however, will pay benefits even for services delivered by a family member or other caregiver who is not licensed at all. This can be very important when a daughter, for example, would otherwise sacrifice a big part of her income missing work to be her father’s caregiver.

Even in policies that cover them, there are restrictions and limitations on benefits for services provided by family caregivers. If coverage of family caregiver services is likely to be important, be sure your reimbursement policy will pay a sufficient benefit—or buy indemnity insurance instead.

Restrictive Benefit Triggers

Is bathing on the list of activities of daily living? Under the 1996 Health Insurance Portability and Accountability Act (HIPAA), an insurer may choose five activities of daily living (ADLs) from a list of six to offer as a basis for the certification of need that is necessary for benefit eligibility. Most policies sold today include all six ADLs. But a few policies—especially older ones—use a list of five ADLs that does not include bathing. That means that a need for substantial assistance in bathing would not be considered in triggering policy benefits. There would have to be a need for substantial assistance in two of the other ADLs.

This is of concern because experience has shown that bathing is very frequently the first ADL with which the elderly need help. If a policy does not include bathing in its list of ADLs, the policyholder’s condition would have to deteriorate further until substantial assistance were required for two ADLs in addition to bathing.

"Medical Necessity" as a Benefit Trigger

"Medical necessity" is loosely defined and essentially requires only a certification from a policyholder’s physician that LTC services are medically necessary for his or her health or safety. Many policies sold before HIPAA included this feature. "Medical necessity" is a catch-all trigger to policy benefits. It is found only in non-tax-qualified policies.

Eligibility due to medical necessity makes another (presumably easier) path available to benefits that is not found in tax-qualified policies—which are limited to the cognitive impairment and ADL triggers.

For example, one might have a long list of mental health limitations, but not a severe-enough cognitive impairment to trigger benefits when that factor is examined alone. Likewise, one might have great difficulty with all the ADLs, but be totally unable to perform only one of them, not the required two.

In circumstances like those, a doctor’s certification of "medical necessity" would come to the rescue under a non-tax-qualified policy, say proponents.

The Downside to "Medical Necessity"

In creating a tax deduction for LTC insurance premiums, HIPAA excluded "medical necessity" policies from those that are eligible for the break—beginning in 1997. Today, most companies do not offer policies with this benefit trigger; they sell only tax-qualified products.

Critics argue that the easy access to benefits provided by the "medical necessity" trigger is not as good as it appears. First, they feel that "medical necessity" makes non-tax-qualified policies more expensive than comparable tax-qualified contracts. If it is easier to collect benefits, that would make sense.