The growing national movement towards aging in place is challenging many families. As noted recently in the New York Times, "Aging in community is important for preserving the quality of life for older adults and providing stability to neighborhoods."
If your loved ones are healthy enough to remain in their homes but need assistance with Activities of Daily Living (ADLs) such as dressing, toileting and transfers or Instrumental Activities of Daily Living (IADLs) which are tasks that enable a person to live independently at home, such as meal preparation, driving, or light housework, how do you pay for the senior caregiver to support your Mom or Dad?
Many families are surprised to learn that their parents’ Long-Term Care Insurance may actually help pay for these non-medical homecare services. According to The American Association For Long-Term Care Insurance approximately 8.1 Million individuals were covered by a long-term care insurance policy in 2012 and of all claims paid 51% of them were paid for in-home care services.
Understanding long-term care insurance and how it works can be critical to managing the care of your parents.
Where to start?
The first step is to determine what type of long-term care policy it is, the benefits paid under that policy, the elimination period on the policy and what the benefits and cap to the policy are. While you should be able to obtain a copy of the policy, figuring this information out generally just requires a phone call to the insurance company who in most cases has an individual who can walk you through the policy.
Types of Long Term Care Insurance
There are two basic different types of Long Term Care Insurance, Tax qualified (TQ) policies and Non-Tax Qualified (NTQ) policies or sometimes called "traditional" long-term care insurance policies. TQ policies require that a person not be able to perform 2 of 6 ADLs (dressing, eating, bathing, toileting, transferring, continence) or have a severe cognitive disorder, such as dementia that requires care for more than 90 days. In either case a physician must make the determination and you will need to have the physician submit this determination to the insurance company that holds the policy. Most importantly the benefits paid to a recipient of a TQ policy are exempt from taxable income.
A NTQ policy does not have to adhere to the rigid guidelines of meeting two ADLS or a severe cognitive disorder. Instead, a NTQ policy usually only requires that one ADL be met and extends the ADL provisions to activities such as walking. While the policy tends to payout for less severe causes of care the IRS and U.S. Treasury Department has not made an official ruling or determination on the tax status of benefits received through NTQs. This is important because it could mean that there is a hefty tax bill associated with the payout on these types of policies. This is why it is important to understand whether the policy is a TQ policy or a NTQ policy. In any case it is suggested that you consult a tax professional to determine whether the benefits for care for your parents’ policy may trigger a substantial tax bill. Even if it doesn’t, reporting the 1099LTC you will receive from the long-term insurance company correctly can be tricky.
Most Long-term care policies are reimbursement policies, which means you pay out-of-pocket for the care and submit claims to the insurance provider; however, increasing in popularity over the past few years are cash policies. Cash policies pay a cash benefit to the policy holder and from that cash benefit the policy holder can pay for care. These policies are typically more expensive than a cash reimbursement policy, but they offer unique flexibility and ease to pay for care. Often with reimbursement policies it can take time to be reimbursed and it can make paying caregivers and putting money on the table for them harder as you are forced to pay out-of-pocket and submit a receipt for the care.
If paying for the care out-pocket is a concern there are companies such as FHS who you can assign the benefits of the policy to and they will pay for the care on your behalf for a small fee. They can even assist you in determining what the benefits of the policy are and can ensure you get the full benefit from the policy.
Once you have determined what type of policy you have it is critical to understand what benefit the policy pays out. Generally a policy will payout up to a certain amount monthly for a specific type of care and up to a total amount for that given care type over the course of the entire policy. For example if a policy pays out $2,000 a month for in home care up to $240,000 the care recipient has 20 years of in-home care service at $2,000 a month. If the cost of care is $2,200 you may be out $200 a month, but if the cost of care is $1,800 the policy will generally let you keep that additional $200 and put it in a pool for additional services in the future, including but not limited to in-home care.
Privately Hired Senior Caregivers
If you are privately hiring a caregiver it is important that you take into consideration not only the caregiver’s salary, but employer taxes as well. These are generally about 10% of the caregiver’s gross wage, depending on the state you live in. See our tax calculator for more specifics.
Long-term care insurance is often the answer to how families pay for care; however, it is critical you understand the specifics of your policy and the cost of care.