Financial Education Resource
Long Term Care Insurance Industry Paid $8.65 Billion in Claims Reports AALTCI
Los Angeles, CA, February 12, 2017 - The nation's long term care insurance companies paid $8.65 Billion in claim benefits to some 280,000 individuals in 2016 according to the American Association for Long-Term Care Insurance.
“The total of all benefits paid increased by over six percent and the number of long term care insurance policyholders on claim grew by roughly 20,000,” reports Jesse Slome, director of the American Association for Long Term Care Insurance (AALTCI), the national trade group that reports annual claims data. In 2015, AALTCI reported total claims amounted to $8.15 Billion paid to some 260,000 individuals.
“The number of individuals are being paid benefits because they purchased a traditional long-term care insurance policy increased by nearly eight (7.7) percent,” Slome explains. Without insurance to pay some or all of the the cost, Slome acknowledges the caregiving responsibility often falls on elderly spouses or adult children of aging parents.
This is an incredible 3 min 54 sec video anyone who is 40 years an older should see. It shows the wonderful bond of family and the hardship of getting older gracefully. Time to get prepared!
Regardless of the state there are only two criteria: assets and income.
Assets are divided into two categories: countable (also referred to as non-exempt), and non-countable (referred to as exempt in some states) assets.
Countable asset (also referred to as non-exempt) are just that; Medicaid considers all assets in this category to be available to pay for care. They include:
• All investments
• Annuities unless they have been annuitized. Then the annuity is considered income.
• Cash value in life insurance if the death benefit exceeds $1,500.
• All cash in CDs, money market, checking and other liquid funds.
Non-countable (also referred to as exempt) generally include:
• A primary residence, although most states will place a lien on it if there is no spouse living there
• A pre-paid burial account.
• Term life insurance.
• A small sum of cash usually about $2,000 depending on the state.
Medicaid planning is simply protecting countable assets by either giving them. When transferring assets consideration has to be given to the so-called look-back period.
Understanding the look-back period
The look-back period is a time span used by Medicaid to review gifts during the previous five years from date of application. Any gifts create a period of ineligibility that begins on the date an application is submitted not the dates the transfers were made. The more gifts the greater the disqualification. States use the following formula:
• All gifts made during a 5-year period are aggregated. Let’s assume that total is $100,000.
• The total amount is divided by what your state considers the average monthly cost of a semi-private room. Let’s assume your state sets that figure at $5,000.
• The total period of ineligibility would be 20 months ($100,000 / $5,000)
One option then is to simply give away all your assets and wait 5 years. If that is what a client wants to do you may want to educate him about…
• Immediate taxes on the transfer of qualified funds.
• Delayed taxes vs. no taxes on appreciated assets. Assets with a capital gain (defined as the difference between what they bought for and subsequently sold for a profit) are not taxed if in the individual’s estate at death. However there is a tax when the recipients of a gift sell.
• What Medicaid pays for: If the goal of the plan is stay at home, Medicaid by definition cannot be a viable funding source.
Medicaid treatment of couples’ assets
All countable assets in a marriage are considered jointly held and available to be spent on the institutionalized spouse, subject to certain spousal allowance limits.
A provision called the spousal impoverishment rule allows the community spouse to retain a certain amount of assets and income.
Beyond this allowance, all of the couple’s assets, earned by and held in the name of either spouse or jointly, are generally considered countable and available to fund the institutionalized spouse’s care.
The community spouse’s assets are considered countable even if:
• There is a premarital agreement that they belong to the community spouse and shall not be claimed by the other.
• The institutionalized spouse never contributed to them.
A snapshot is taken of the couple’s assets, as defined above, on the day the spouse goes into a medical institution or nursing home where he is expected to stay more than 30 days. The community spouse gets to keep a certain amount of those assets:
• No less than a minimum (called the floor), which in 2013 is $22,728.
• And no more than a maximum (the ceiling), which in 2013 is $115,920.
States have the option of raising the floor; New York, Florida, California and Massachusetts are examples of states that have raised it from $22,728 to $115,920. In those states, the community spouse gets to keep the first $115,920 in combined assets.
All income, regardless of how earned or when received, is considered available to be spent on the Medicaid beneficiary’s care, with three exceptions:
1. A personal monthly needs allowance, usually between $30 and $70 per month.
2. The applicant’s Medicare Part B premium.
3. Medicare supplement insurance premiums.
States employ a so-called spend-down program in which the applicant’s monthly income goes to the nursing home, with Medicaid making up any difference at their rate. The only condition is that, in the aggregate, the monthly income must be less than the private cost of a room.
The community spouse’s monthly income is never used in determining eligibility for her institutionalized spouse. For purposes of this section, the wife will be assumed to be the community spouse. The same rules apply if the husband were the community spouse.)
Minimum monthly maintenance needs allowance
Since most couples applying for assistance have minimal income, both the state and federal government (again Medicaid is funded by both entities) have taken steps to leave those in the community with a livable allowance. The community spouse is allowed to keep a Minimum Monthly Maintenance Needs Allowance (MMMNA) of no less than a floor of $1,891.00 in 2013.
Each state has a right to raise the floor. The maximum, known as the ceiling, is $2,841 in 2013.
Here’s an example:
Susan and Francis McCormack are in a second marriage. They have the following assets and income:
• Susan has a $150,000 IRA; Francis has an IRA converted from a 403b worth $100,000.
• Susan has stocks worth $100,000; Francis has stocks and bonds worth $165,920.
• Total assets: $517,920.
• Susan receives $20,000 from her IRA and Social Security; Francis has a school pension of $52,000 and investment income (including a draw-down of the IRA) of $15,000 per year.
• Total income: $87,000.
They have a standard premarital agreement stating that in case of a divorce or at death assets go to their children not each other.
Francis is diagnosed with early onset dementia in 2008. After keeping him home for 4 years Susan decides she has no choice but to make a nursing home placement. Here is what happens to their assets and income in Massachusetts, and by extension all other states.
• Medicaid takes a snapshot of the assets when Francis is admitted to a nursing home. Susan gets to keep one-half but no more than a federal and state ceiling of $115,920. Massachusetts lets Francis keep $2,000 in cash but the state allows her to keep it for a total of $117,920
• Medicaid disregards premarital agreements. The excess of $400,000, which includes her assets, must be spent on her husband’s care.
• Once the couple is down to $115,640, Francis will qualify for benefits.
• By law Susan can keep no less than $1,891.00 or $22,692 (The MMMNA of $1891x12) per year. She therefore keeps her income of $20,000 but only $2,692 of her husband’s income. The balance of his income including the pension (remember he has no assets), $49,308 ($52,000 - $2,692) goes to the facility.
Here is the result of relying on Medicaid:
• The couple started with $517,920; Susan is left with $117,920.
• The couple started with $87,000 per year in income; Susan is left with $22,692.
Annuitizing a spend-down may not be the answer
Many states give Susan the option of annuitizing the spend-down of $400,000 into an income stream based on her age. Most states allow funds that otherwise would be spent on nursing-home care, to be transferred to the community spouse. They can then be annuitized into an income stream under the following conditions. The annuity must be:
• Actuarially sound based on her life expectancy at the date of purchase.
• Issued on a period-certain basis; it must amortize 100% during that period.
A number of issues to be considered:
• Transferring his IRA to Susan’s name creates serious ordinary income tax issues.
• Liquidating his IRA and stocks create capital gains issues.
• What if the funds are sold in a down market?
• Many states including Alabama, Arkansas, Idaho, Colorado, Connecticut, New Jersey, Nevada and Wisconsin do not allow their use.
Medicaid Planning: transferring assets
Giving assets away
Here is a re-cap of the tax consequence of giving assets away:
• Transfers from tax-qualified retirement plans create an immediate income-tax liability of up to 35% plus your state income.
• If you have stock or other assets with a low cost basis, gifting them away will create a future tax when the children decide to sell. If, however, these assets remain in the client’s name and are part of his estate at death, they receive a free step-up to current market value. The sale of the assets entails little or no capital-gains tax liability.
Transferring assets to a trust
The second option used to make countable assets inaccessible is the use of trusts. There are two basic types of trusts: revocable and irrevocable.
These instruments allow the donor to maintain control of the assets. He may modify or terminate the trust and is always able to receive the benefits of the assets held in it. They are of no value in protecting assets. Both the federal and state governments take the position that if the applicant is the donor, assets in the trust are considered his and must be spent on care.
An irrevocable trust bears many of the same characteristics as a revocable trust. The one notable difference involves the donor’s control over it. As the title suggests, an irrevocable trust, once established, may not be revoked or changed in any manner by the donor. The donor has no control of, or interest in, the assets.
Because of this characteristic, irrevocable trusts were widely used in Medicaid planning. To understand the issues involved in transfers to irrevocable trusts, it is helpful to review the history of their use.
The use of trusts in Medicaid planning
Irrevocable discretionary trusts before 1986
Prior to the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA ’85), which took effect in June of 1986, the most popular type of trust was commonly called an irrevocable discretionary trust. It typically worked like this:
• The donors created an irrevocable instrument and placed assets in it.
• They named themselves beneficiaries.
• They named a family member as the trustee.
• They gave the trustee authority to distribute all or none of the principal and interest at his discretion.
COBRA’85 now restricts the use of these types of trusts. A trust will be classified as a Medicaid Qualifying Trust, which means assets are not protected if:
• The trust is established by the applicant or his or her spouse other than by will and provides that either or both are beneficiaries.
• The trustee has been given discretion to distribute income or assets to either or both beneficiaries; Medicaid will presume that the trustee will do so.
Medicaid counts those assets as countable, which means they must be spent on care.
This legislation is retroactive.
Attorneys shifted their planning strategies away from income-and-principal discretionary trusts and came up with an income only instrument.
The 1993 Omnibus Budget Reconciliation Act (OBRA ’93) again attempted to correct the perceived weaknesses of the 1985 & 1993 laws. Undoubtedly, the most far-reaching provision of OBRA ’93 is the law mandating the states to implement estate recovery. The statute allows the states to place liens on the taxable estate of an individual who received benefits.
Medicaid planning may be able to protect assets, but never income
Things to consider when the client suggests that his attorney told him Medicaid would pay for his care: Those attorneys likely focus on:
• Protecting assets, not income, which is essential to support lifestyle.
• Shifting assets. Would they do so if those assets were tied up in qualified tax-deferred investments and low cost–based assets?
• Medicaid paying for nursing home care, not services in the community.
• The quality of care the client will receive in a facility, not the impact that providing quality care will have on his family while he is in the community.
Overcoming the objection, My attorney told me Medicaid will pay for my care.
With few exceptions, the objection you are likely to hear, if any, is:
My lawyer told me Medicaid will pay for my care in a good nursing home.
Answer: It will but it is not a viable funding source for the plan because it pays nothing for care at home. Medicaid is also expensive. Shifting assets causes unnecessary taxes and exposes your income.
Extended care funding solutions as the only viable resource for a plan
Now that every objection as to what will pay for care has been addressed it leaves only one viable funding source: products that provide income to fund the plan created to protect the emotional, physical and financial wellbeing of those the client loves. Let’s start with a reminder of how traditional long-term care insurance has been positioned: It pays for the insured’s care.
The fatal flaw as discussed in Chapter 2 is that clients believe that they will not need care, unless, of course they already do which, in today’s world of stricter underwriting, means they are uninsurable.
Extended care funding products do exactly what life insurance does
People buy these products for the same reasons they purchase life and disability income insurance, not for themselves but because they love someone other than themselves.
Here is the sequence:
• Because you want to protect your family based on being educated about the severe consequences of providing care.
• The protection is in the form of a plan the goal of which is to keep you safe at home while mitigating the two sets of consequences endemic to providing care.
• What do you think will fund it?
Here is how these products works. They…
• Provides a predictable stream of income in the form of a daily or monthly benefit. That income is used to…
• Fund the plan, that is, it is used to pay for care. By doing so it mitigates the two sets of consequences providing care has on the family:
Emotional and physical impact mitigated
Paying for someone to provide care allows your loved ones to supervise it. This has a direct and positive impact on…
• The emotional and physical wellbeing of the caregiver. In turn it makes it far more likely that the primary caregiver can keep his or her spouse home longer.
• Children, who seeing that a caregiving parent is not collapsing from the stress can continue with their life. If a child is the primary caregiver having someone else provide the care becomes a second gift of life to her or him.
Having a product that pays for care therefore protects the emotional and physical wellbeing of those the client loves thereby mitigating the first set of consequences.
Financial impact mitigated
By providing a stream of income to pay for care, there is no need to reallocate income from the portfolio, pension, and or social security. This allows the client to keep financial obligations because cash flow is preserved. Since little or no money has to be allocated to pay for care it obviates the need to use capital, which means the retirement plan, executes for the purpose it was intended.
Having a policy in place therefore mitigates the second set of consequences: It protects the financial integrity of the client therefore allowing him or her to keep financial commitments.
In the final analysis products that pay for care do not protect assets directly they guarantee income
Take a close look at how these products mitigate the two sets of consequences: They all provide a stream of income to pay for care. By doing so your primary source of income generated by the portfolio, social security, pension etc. never has to be used.
It does protect assets (capital) but, as with disability income and medical insurance does so only derivatively: If income is guaranteed during working years assets need not be used. The same logic is applied to extended care funding products. If income is guaranteed, assets from the portfolio do not have to be used.