Chapter 3 Summary

All long-term care insurance policies function in essentially the same way, but there is also a great deal of variation in product design. Most policies are designed to meet the requirements for federal tax-qualified (TQ) status; a few are not. Some policies meet the requirements of state long-term care partnership programs, and others do not.

The benefit triggers of tax-qualified policies must adhere to HIPAA rules, resulting in a high degree of standardization. Benefit eligibility is based on a physical impairment (the inability to perform a certain number of ADLs without assistance) or a severe cognitive impairment.

LTCI policies may cover only facility care or only home care, but most cover care in a variety of settings. Policies may provide benefits for such items as homemaker services, transportation, informal caregiving, respite care, bed reservations, and care coordination.

Under a reimbursement policy (the most common type), the insured is reimbursed for actual covered expenses up to a daily or monthly benefit amount. Under indemnity and disability policies, the full daily or monthly benefit is paid regardless of the actual amount of covered expenses. Each payment model has advantages and disadvantages for both the insured and the insurer.

An LTCI policy must be either guaranteed renewable or noncancellable. The NAIC models, adopted in whole or in part by most states, mandate other policy provisions designed to protect the consumer.

When an individual purchases an LTCI policy, she must select benefit amounts and decide whether she wants any optional features.

The purchaser sets the length of the elimination period by choosing from options offered by the insurer. A long elimination period makes a policy cheaper, but it means the insured must pay for care out of her own pocket for an extended time before benefits begin. Elimination periods vary in when they start, how days are counted, whether they must be satisfied more than once, and whether there is an accumulation period.

The buyer selects a daily or monthly benefit amount — and sometimes the percentage of the facility benefit paid for home care. This amount has a direct proportional impact on the premium and should be based on the cost of long-term care services in the area where the insured expects to receive care.

Most policies limit the total amount of benefits through a lifetime maximum benefit (pool of money). The insured receives benefits until the total amount received for all types of care reaches this maximum, regardless of how long it takes. Some older policies use a benefit period instead.

As long-term care costs rise, fixed benefit amounts become inadequate. Inflation protection options address this problem — either by automatically increasing benefit amounts each year at a set rate, or by allowing the insured to purchase additional benefit amounts at set intervals. These options add to the cost of a policy but are especially important for those who expect to need care many years after purchase.

A nonforfeiture option adds to the price but allows an insured to receive something if she lets the policy lapse. Other options — shared care, the dual waiver of premium, and a survivor benefit — can be advantageous to couples. A limited pay option may be attractive to those who prefer not to pay premiums during retirement.

The premium of an LTCI policy is based on product design, the benefit amounts selected, and any options chosen. It also depends on the purchaser’s age, in some cases her health, and any discounts she may qualify for.

A premium is not increased automatically as the insured ages, but it is based on the insured’s age when she applied. It is generally advantageous to purchase coverage earlier in life rather than later.

Some insurers adjust the premium of an individual policy according to the health of the applicant. Most people pay a standard rate, but the healthiest may be offered a discount and the less healthy may be charged more. Most commonly, group LTCI coverage is offered on a guaranteed issue basis, without underwriting of individual participants. In some cases modified guaranteed issue, simplified, or full underwriting is conducted.

Premium discounts may be offered to those who meet certain health criteria, as well as to married people or members of the same family. Discounts normally apply to group coverage and may be offered to members of groups buying individual policies.

HIPAA established requirements for an LTCI policy to have federal tax-qualified (TQ) status and granted TQ policies favorable tax treatment. Most policies today are tax qualified; a few are not. Some older policies are grandfathered — they do not meet all HIPAA requirements but receive favorable tax treatment because they were already in force when HIPAA became effective.

To be federally tax-qualified, a policy must include certain information on its cover page indicating TQ status. Benefits must generally be paid only for “qualified long-term care services” provided to a “chronically ill individual” under “a plan of care prescribed by a licensed healthcare practitioner,” as these terms are defined by HIPAA. Certain consumer protection provisions relating to renewability, inflation protection, nonforfeiture, and exclusions must also be included.

Benefits from TQ reimbursement policies are not subject to federal income tax. Benefits from TQ indemnity and disability policies may be taxed only to the extent they exceed a certain limit ($430/day in 2026). Premiums paid by individuals on TQ policies are not generally tax-deductible, but taxpayers with large deductible medical expenses may be able to deduct premiums to some extent, subject to age-based limits and the 7.5% AGI threshold. Premiums paid by employers on behalf of employees are generally deductible by the employer and not included in employees’ taxable income.