New Transfer Rules Change Long-Term Care Insurance Purchasing Decisions

Last Updated: 8/15/2006

As the states implement the Deficit Reduction Act of 2005, which became law in February 2006, qualifying for Medicaid nursing home benefits will become more difficult. The proponents of the law hope that these changes will encourage more people to purchase long-term care insurance instead of relying on Medicaid to pay for nursing home care. According to Marilee Driscoll, founder of Long Term Care Planning Month (www.LTCmonth.com) and a national speaker on long-term care planning, “the stakes of not being insured are much higher now.”

The law extends Medicaid’s “lookback” period for all asset transfers from three to five years and changes the start of the penalty period for transferred assets from the date of transfer to the date when the individual transferring the assets enters a nursing home and would otherwise be eligible for Medicaid coverage. The law also makes any individual with home equity above $500,000 ineligible for Medicaid nursing home care, although states may raise this threshold as high as $750,000. For details on the law, click here.

All this means that fewer people will be able to qualify for Medicaid without careful planning. If Medicaid won’t cover your nursing home expenses, what will? Long-term care insurance is a good option for people who can afford the premiums and are insurable.

If you are considering purchasing long-term care insurance, here are some things you need to consider:

• Purchase the right amount of insurance. If you are buying insurance as part of a Medicaid planning strategy, you will need to purchase at least enough insurance to cover the five-year lookback period. That way you can transfer assets to your children or grandchildren before you enter the nursing home, and after those five years have passed, you can qualify for Medicaid to pay your nursing home costs (provided the assets remaining in your name do not exceed Medicaid’s limits). Driscoll says this is a good strategy, but warns that, as we have just learned, the lookback period can change. There is no way to know what the lookback period will be when you need to use the insurance, so buying five years of coverage does not guarantee you will be protected.
• Purchase a supplemental policy. If you bought a three-year policy when the lookback period was three years, you will no longer have enough insurance to cover the lookback period. If you are healthy, Driscoll recommends purchasing a supplemental two-year policy to cover the gap. According to Driscoll, many companies allow you to collect on both policies at once and bank the difference. You can use the extra money to pay for extended care. If you die before the money is used up, you can leave it to your heirs.
• Look into home care. Nursing home coverage can be expensive. If you cannot afford to purchase sufficient coverage to pay for nursing home care (including anticipated inflation), you may be able to buy enough insurance to cover the cost of home care or assisted living.
• See if your state has a partnership program. Some states sell “partnership policies,” which are special long-term care insurance policies that allow people to purchase insurance, protect some assets and still qualify for Medicaid when the insurance runs out. Currently four states have these policies—California, Connecticut, Indiana, and New York. But the new law lifted the limit on states that can implement these programs, so expect other states to start selling partnership policies.
• Watch out for rising insurance premiums. While most policies are “guaranteed renewable,” this just means that insurance companies cannot increase your long-term care premiums based on your health or your claims. It does not mean, however, that premiums will never increase. Premiums can be increased for a whole class of policyholders, and these increases can be significant. For more information, click here. Before purchasing insurance, consider whether you will be able to afford the premiums even if they increase more than 50 percent.

For more information on long-term care insurance, click here.