Deficit Reduction Act Encourages Purchase of Long Term Care Insurance
Written By: Attorney Jeffrey A. Marshall, CELA*
The Deficit Reduction Act of 2005 (DRA) is a federal law intended to encourage middle class consumers to purchase long-term care insurance.
The DRA makes it harder to qualify for Medicaid. Medicaid is the primary source of public funding of nursing home costs. The DRA limits the financial security of married seniors and makes it harder to protect assets for children or other heirs.
Under the DRA, if you give assets away within 5 years of applying for Medicaid nursing home benefits, your eligibility will be delayed. The law requires Pennsylvania to reduce the amount of financial resources a low income community spouse can keep. And, it may force consumers with valuable homes to mortgage or sell their homes before qualifying for Medicaid nursing home benefits.
The DRA places a premium on planning early for long-term care. And it is specifically intended to encourage the purchase of long-term care insurance.
The Act expands Partnership for Long-Term Care Programs. Partnership programs allow states to disregard benefits paid under a long-term care policy when calculating an individual’s income and resources for purposes of Medicaid eligibility and estate recovery.
Prior to the DRA, partnership policies were sold in only four states -- California, Connecticut, Indiana, and New York.
The DRA gives all states the option to establish long-term care insurance partnership programs and sets forth requirements for partnership policies. Policies sold under the program must meet strict consumer protection conditions set by the National Association of Insurance Commissioners' (NAIC) long-term care model regulations.
If Pennsylvania decides to authorize a partnership program, policyholders who buy a designated private long-term care insurance policy which is used to pay for long-term care services will be allowed to protect additional resources from Medicaid spend-down requirements.
For example, let’s say standard Medicaid rules only allow you to have $8,000 in available resources. Under the partnership program, if you had exhausted your $100,000 in benefits under a partnership long term care insurance policy, you would be allowed to keep $108,000 in assets.
Unfortunately, there are some significant concerns with the DRA’s approach to partnership long-term care insurance. It appears that existing long-term care insurance policies are not grand-fathered in. Moreover, the DRA requires that partnership policies contain provisions, such as inflation riders, that will make them expensive and inappropriate for many middle class consumers. The experience of other states is that partnership policies have not been particularly successful. However, as a result of the harsh new penalties set forth in other provisions of the DRA, standard long-term care insurance policies are becoming more attractive to some consumers.
A major goal of many seniors is to limit the potential loss of their home and savings to the cost of long-term care and to protect those assets for their spouse and family. Long-term care insurance could help them attain that goal. But, they feel that the insurance is too expensive. That doesn’t necessarily have to be the case.
Consumers often over-insure when they buy long-term care insurance. By creating a comprehensive plan that includes both insurance and Medicaid, consumers may be able to protect their assets at a much reduced cost. Shifting some of the financial risk of the catastrophic cost of long-term care onto the Government Medicaid program can lower the cost of insurance to a level they feel they can afford.
Here is an example of how Medicaid planning and long-term care insurance can be combined to create a more affordable asset protection plan.
The DRA requires a 5 year look-back period for asset transfers. Transfers that occur more than 5 years prior to the Medicaid application are ignored. Thus, an individual whose major goal is asset protection and who is willing to transfer assets today, needs insurance protection for the next five years. They don't need permanent long-term care insurance - they need temporary coverage to get them through the look back period. A policy with a 3-5 year benefit period may be adequate. And the consumer probably doesn’t need expensive inflation riders. They only need to continue to pay the premiums for 5 years - the insurance is temporary.
To expand protection at a reasonable cost, a married couple may want to consider policies with shorter benefit periods especially if the policies offer a shared care benefit rider. Perhaps a 3 year shared care benefit, affording either spouse up to 6 years of maximum benefits, would provide adequate protection.
It is much less expensive to cover the long-term care risk for a consumer for the next five years than to cover it for their lifetime. The cost of the longer term risk is shifted from the insurance to Medicaid.
After the 5 year Medicaid look-back period has expired, the long-term care insurance purchaser can re-evaluate the policy. Does it still make sense? Perhaps it will, given changes in the consumer’s situation or government policies.
The concept of temporary insurance gives consumers an opportunity to purchase long term care insurance as part of appropriate and affordable planning. It can fully protect assets if combined with expert Medicaid planning. For some consumers, it might be a reasonable choice.
Attorney Marshall can be contacted at webmail@paelderlaw.com or at 1-800-401-4552
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