When the Social Security Act was signed into law in 1935, life expectancy was just 63 years, making Social Security a reasonable financial undertaking for the financial government. Today, however, the population is living longer than ever before. Plus, the majority of baby boomers are either in or nearing retirement, and current workers barely outnumber individuals collecting Social Security. Meanwhile, Social Security is the primary source of income for 66% of retirees.[1] Therein lies a huge problem. Social Security was not designed to be the primary source of income but rather a supplement to retirement income.

A few decades ago, the average worker planning for retirement owned their home outright, had a pension, and was using the supplemental Social Security benefit as intended. Today, however, many of them have had multiple jobs at different companies and are still paying off their mortgage, while attempting to save for retirement. Some are also paying for their children’s college educations and even bearing the expense of their parents’ care needs. Unfortunately, these additional burdens often cause physical, emotional, and financial suffering for the individual as well as their loved ones.

These added costs as well as caring for aging parents have prompted many to consider their own future care. After all, the probability of needing long-term care for individuals turning 65 is approximately 56%.[2] Fortunately, clients seeking guidance in this area can turn to long-term care insurance.

The History of Long-Term Care Insurance and State Partnership in the United States

Under the Social Security Act (SSA), which was signed into law in 1935, the Old Age Assistance program provided federal funds for states to provide financial assistance for medical care to seniors with limited income and resources. The law specifically forbade making payments to individuals who reside in public institutions, thus initiating the creation of private nursing homes.

With an amendment to the SSA in 1950, these medical payments were required to be made directly to nursing homes rather than to the care recipients. Additionally, nursing homes were required to be licensed in order to participate in a state’s Old Age Assistance program.

In 1965, the Medicare and Medicaid programs were added as amendments to the SSA. Medicare provides coverage for acute care rather than long-term care, while Medicaid provides coverage for long-term care in institutions but not in the home. With this legislation, the federal and state governments became the largest payers for long-term care, and more people than ever before moved into nursing homes.

Additional amendments to the SSA in 1974 enforced compliance with certain standards for facilities to participate in Medicare and Medicare, including staffing levels, staff qualifications, fire safety, and delivery of services. With this change, several insurance companies launched private long-term care insurance (LTCI), which gave individuals the option to purchase an insurance policy rather than rely on the public welfare system for these necessary services. Eventually, LTCI coverage was expanded from only nursing homes to include home health care, assisted living facilities, memory care, and other types of care.

In 1992, California, Connecticut, Indiana, and New York implemented qualified LTCI partnership programs for their citizens. The following year, Congress ratified the Omnibus Budget Reconciliation Act (OBRA-93), which prevented the expansion of these programs to other states. In terms of long-term care insurance, OBRA-93 established minimum standards with the intention of improving the quality of private LTCI as well as tax incentives to encourage individuals to purchase policies.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) created tax qualified plans and the ability to deduct premiums paid based on age for individual and group policies that cover the cost of medical care. These plans include health, dental, vision, and prescription drugs, as well as health maintenance organizations (HMOs), Medicare, Medicaid, Medicare Choice and Medicare supplement plans, and long-term care insurance (excluding nursing home fixed-indemnity policies).

The Deficit Reduction Act of 2005 (DRA) provided federal funding to states to expand community-based care; allowed states to add an optional Medicaid benefit for home- and community-based services; and permitted states to offer self-direction of personal care services. The DRA eliminated a portion of federal funding from state administered Medicaid programs but also allowed all states the option to enact their own LTCI partnership programs, thus encouraging individuals to purchase LTCI while still allowing them to qualify for Medicaid should their care needs extend beyond their policy.

The State of LTCI Today

Today, even with the help of federal funding, Medicaid is often the largest line item for state budgets. The unfortunate reality is many states struggle with this expense due to the ever-growing need for long-term care. If the baby boomer generation requires the level of long-term care that is anticipated, without private long term care insurance, this expense could very well break the Medicaid bank.

In an effort to prevent this disaster, Congress has passed legislation intended to encourage the purchase of private LTCI. In addition to introducing and expanding state partnership programs, individuals can take advantage of various tax benefits through LTCI, including deducting premiums.

Additionally, some states are taking action to avoid this looming catastrophe. In 2021, Washington State launched the Washington Cares Fund,[3] which initiated a 0.58% income tax on all W-2 employees aged 18 years and older. Individuals could opt out of the public program by purchasing private LTCI, which prompted the purchase of approximately 470,000 traditional and non-traditional long term care policies.[4] While Washington State generated about 3% of national LTCI sales in 2020, this surge brought them 60% of national sales in 2021.[5] Currently, 10 other states are in various stages of considering similar programs for their own citizens.

Medicaid’s Financial Requirements

Despite the increase in the popularity of LTCI, Medicaid continues to be an essential resource for seniors who require long-term care. In order to qualify for Medicaid, however, an applicant must have assets and income below specific limitations. In most states, the institutionalized person can only keep $2,000 in countable assets. This does not include exempt assets, such as the home, one vehicle, and personal effects. Applicants must spend down any assets exceeding this limit in order to financially qualify for Medicaid. If the applicant is married, their spouse can keep a separate allowance, which varies by state but is currently no more than $148,620.

In most states, Medicaid also enforces a lookback period of five years. During this period, the applicant may be penalized if they or their spouse made any divestments, or gifts. If Medicaid determines divestments were made, the applicant will be penalized based on the dollar amount that was gifted. This penalty is calculated using a state-specific divisor that is determined based on the average monthly cost of a nursing home in that state.

How a State Partnership LTCI Policy Works with Medicaid

Rather than relying fully on Medicaid assistance, individuals can purchase a state partnership long-term care insurance policy for expanded coverage. Partnership policies essentially form a collaboration between private insurers and the public government. The main goal of these policies is to encourage individuals to purchase LTCI to help cover the costs of long-term care and lessen the burden on the states to fully cover these costs.

Although LTCI already serves as an excellent estate planning and asset preservation tool, a state partnership policy offers dollar-for-dollar protection in the event the policyholder requires care beyond the benefits provided by their LTCI policy. Owners of partnership qualified LTCI plans can protect some or all of their estates, depending on the type of policy and size of the estate as well as the duration and extent of care they need.

If the policyholder exhausts their LTCI benefits and applies for Medicaid, the amount of assets that was protected by their partnership qualified LTCI policy is also safe from Medicaid, allowing them to retain assets above the typical Medicaid restrictions. This ensures their assets will provide an inheritance to their loved ones rather than be recovered by the Medicaid program upon their passing.

The biggest advantage of purchasing partnership qualified LTCI is being able to protect additional funds, dollar-for-dollar, based on the amount of benefits paid out by the plan and subsequently qualify for Medicaid coverage. For most people, the largest asset that they possess is the family home. With a state partnership LTCI policy, the policyholder can declare their home as a protected asset, thus protecting it from Medicaid estate recovery and allowing it to remain with the family as an inheritance.

Requirements for an LTCI Policy to Be Eligible for State Partnership

In addition to being able to protect more assets than normally allowed for Medicaid, a state partnership long-term care insurance policy offers beneficial tax treatment. However, these policies require inflation protection designed to shield policyholders from increased expenses caused by inflation.

For most people, the benefits of a partnership policy will likely cover all the care they need. However, due to the unique asset protection feature, they can avoid impoverishment should they exhaust their LTCI benefit coverage and still need care. The individual plans must follow the federal guidelines in terms of tax qualification, benefit triggers, and other defined conditions. Additionally, partnership policies are transferable and may be used in any state as long as both states have partnership programs and mutual reciprocity agreements.

Several insurance carriers offer different types of long-term care insurance plans, including state partnership policies. Carrier and product availability for LTCI varies by state, so it’s vital that consumers work with an LTCI specialist who has the proper training and licensing to find a policy that’s suitable for them.

State partnership LTCI emphasizes the main reason people have purchased LTCI for nearly fifty years: to avoid becoming a burden in their family. Not to mention, long-term care insurance allows them to maintain independence for longer, safeguard their assets, and preserve their personal dignity. LTCI also prevents individuals from relying fully on the government for welfare assistance.

Which States Have Approved LTCI Partnership?[6]

State	Effective Date[7]	Policy Reciprocity[8]
Alabama	03/01/2009	Yes
Alaska	Not Filed	—
Arizona	07/01/2008	Yes
Arkansas	07/01/2008	Yes
California	Original Partnership	No
Colorado	01/01/2008	Yes
Connecticut	Original Partnership	Yes
Delaware	11/01/2011	Yes
District of Columbia	Not Filed	—
Florida	01/01/2007	Yes
Georgia	01/01/2007	Yes
Hawaii	Pending	—
Idaho	11/01/2006	Yes
Illinois	Pending	—
Indiana	Original Partnership	Yes
Iowa	01/01/2010	Yes
Kansas	04/01/2007	Yes
Kentucky	06/16/2008	Yes
Louisiana	10/01/2009	Yes
Maine	07/01/2009	Yes
Maryland	01/01/2009	Yes
Massachusetts	Proposed	—
Michigan	Work stopped	—
Minnesota	07/01/2006	Yes
Mississippi	Not Filed	—
Missouri	08/01/2008	Yes
Montana	07/01/2009	Yes
Nebraska	07/01/2006	Yes
Nevada	01/01/2007	Yes
New Hampshire	02/16/2010	Yes
New Jersey	07/01/2008	Yes
New Mexico	Not Filed	—
New York	Original Partnership	Yes
North Carolina	03/07/2011	Yes
North Dakota	01/01/2007	Yes
Ohio	09/10/2007	Yes
Oklahoma	07/01/2008	Yes
Oregon	01/01/2008	Yes
Pennsylvania	09/15/2007	Yes
Rhode Island	07/01/2008	Yes
South Carolina	01/01/2009	Yes
South Dakota	07/01/2007	Yes
Tennessee	10/01/2008	Yes
Texas	03/01/2008	Yes
Utah	Not Filed	—
Vermont	Not Filed	—
Virginia	09/01/2007	Yes
Washington	01/01/2012	Yes
West Virginia	17/01/2010	Yes
Wisconsin	01/01/2009	Yes
Wyoming	06/29/2009	Yes

Alternative LTCI Policy Design Options

Traditional long-term care insurance saw its peak in 2002 with over $1.024 billion in policy sales.[9] Since then, traditional LTCI sales have fallen (with only an occasional bump), and more consumers and producers are flocking to asset-based (also known as hybrid or combination) LTCI products. These policies typically consist of a life insurance or annuity contract with a long-term care rider.

Asset-based policies are especially appealing to people who fear they won’t use the policy and want to avoid wasting the premium dollars. If they do require long-term care, the policy will provide benefits to cover their care. If they don’t use the policy, their beneficiaries can collect the death benefit upon their passing. Plus, if they change their mind about the policy down the road, they can recover their invested principal.

Conclusion

As the population lives longer, more Americans require long-term care, and Medicaid continues to be the largest payer of these costs, a financial disaster looms over state governments. Long-term care insurance, particularly policies with state partnership protection, will have a major impact on the lives of individuals, their families, and society as a whole.

The growing need for LTCI and the wide array of available products presents a valuable opportunity for estate planning and elder law attorneys to offer essential coverage to their clients. State partnership has proven to be a vital addition, allowing individuals to safeguard their assets, establish and protect their financial legacy, and take ownership of the care they will likely need as they age.

Private long term care insurance is an efficient way for individuals and couples to protect their life savings and make the most of their long-term care. LTCI allows them to receive much-needed care without exhausting their retirement assets and choose where they want to receive care. Even further, a state partnership LTCI policy allows them to safeguard a portion of their estate equal to the amount of LTCI benefits paid on their behalf should they require additional care and pursue Medicaid.

Don Levin, J.D., MPA, CLF, CSA, LTCP, CLTC, is the Strategic Relations Director for Krause Financial Services—an attorney-led firm that provides asset preservation solutions for estate planning and elder law attorneys and their clients planning for long-term care.

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[1] A Precarious Existence: How Today’s Retirees Are Financially Faring in Retirement, TransAmerica Center for Retirement Studies, December 2018, https://www.transamericacenter.org/docs/default-source/retirees-survey/tcrs2018_sr_retirees_survey_financially_faring.pdf

[2] Projections of Risk of Needing Long-Term Services and Supports at Ages 65 and Older, U.S. Department of Health and Human Services, January 2021, https://aspe.hhs.gov/sites/default/files/private/pdf/265136/LTSSRisk.pdf

[3] WA Cares Fund, 2021, https://wacaresfund.wa.gov/about-the-wa-cares-fund/

[4] Washington State Retools First-in-the-Nation Long-Term Care Benefit, Kaiser Health News, April 2022, https://khn.org/news/article/washington-state-retools-first-in-the-nation-long-term-care-benefit/

[5] 2022 Milliman Long Term Care Insurance Survey, Broker World Magazine, July 2022, https://brokerworldmag.com/2022-milliman-long-term-care-insurance-survey/

[6] American Association for Long-Term Care Insurance, March 2014, https://www.aaltci.org/long-term-care-insurance/learning-center/long-term-care-insurance-partnership-plans.php

[7] The Effective Date is the date the U.S. Department of Health & Human Services approved the state plan amendment. Original Partnership indicates one of the four original partnership states.

[8] Policy Reciprocity indicates whether the state will honor partnership policies from other DRA partnership states when it comes to allowing asset disregard when filing for Medicaid. All DRA states plus New York, Indiana, and Connecticut have reciprocity. California does not.

[9] LTC Insurance and Medicare Supplement Executive Summary, Annual 2002, LIMRA International