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Using Long Term Care Insurance to Cover the Medicaid Disqualification Period

March 29, 2010

Buying Insurance for Temporary Reasons Can Keep a Disqualifying Transfer from Becoming a Problem

Many persons do not become aware of long-term care financing issues (including Medicaid transfer restrictions and the lack of coverage of long-term health care by Medicare and other health insurance) until it is too late to engage in anything other than choosing among bad options. Some persons, however, have the foresight to engage in advance planning, but cannot afford long-term care insurance, so that need to resort to Medicaid planning. They typically are middle-class persons who own a home and limited funds that they need to live on, so their primary concern in engaging in Medicaid planning is to preserve their home for eventual inheritance by their children without losing the right to occupy their home.

Long-term care insurance is often the best solution to the long-term care problem, but if it cannot be afforded on a long-term basis, the only way to preserve the home is to transfer it. If the home is not transferred, it can still be deemed exempt upon a Medicaid application, but only during the applicant’s lifetime. After the death of a Medicaid recipient who was a homeowner, however, an estate recovery claim for reimbursement can be made by the state Medicaid program.

No matter how the transfer is structured, unless it is made to one of the limited number of permissible transfers under federal Medicaid law and state Medicaid regulations, a 5-year (or, in some cases, greater) period of Medicaid disqualification will result, beginning in the month of the transfer.

For example, suppose an unmarried person transfers a home worth $630,000.00 in a state where the average nursing home cost is $7,000.00. If a Medicaid application is made within 5 years of the transfer, the disqualification period would be 90 months, beginning at the time of the application. If the application is made more than 5 years after the transfer, under federal Medicaid law no disqualification period would exist.

If the need for a nursing home stay became necessary during the Medicaid disqualification period, private payment of nursing home costs will be necessary, unless the transaction is undone at that point; this process is known in Medicaid parlance as a “cure.” Since a cure will sometimes result in gift tax complications, it may not be advisable from a tax standpoint. Further, unless a cure is made, the spouse of an institutionalized person may end up spending more than he or she would have had to in the absence of the transfer, and thereby become impoverished.

For example, suppose an unmarried person transfers a home worth $270,000.00 in a state where the average nursing home cost is $9,000.00. Medicaid law would then provide for a maximum disqualification period of 30 months if a Medicaid application were filed within 5 years of the transfer. If the transferor needs nursing home care after 5 years have passed, the transferor will be eligible for Medicaid. If the transferor required a nursing home stay after 50 months had passed, he or she would be disqualified for the remaining 10 months of the lookback period. The transferor’s monthly income would pay for part of each month’s cost during the lookback period, but the transferees would have to either undo the transaction or pay for the remaining 10 months, an amount of $50,000.00 in this example.

If the transferees in this example were at all able to pay for the remaining disqualification period, they have a great deal to gain. If they were unable or unwilling to cover nursing home costs during this time and were required to make a full cure of the disqualifying transfer, the transferor would be revested with the $270,000.00 home, and a new plan would be needed to attempt to save something.

One way around these problems would be for the person to purchase long-term care insurance at the time of the transfer. While insurance premiums can be very expensive for people in their 70’s and 80’s, the policy could merely be purchased to eliminate the downside risk discussed above. Thus, the person would purchase the policy with short-term interests in mind, and obtain the smallest benefit necessary to cover nursing home care during the disqualification period.

The transferor’s income and other assets would factor into the determination of the amount of insurance to be purchased. As time went on, the transferor could drop the daily amount of the policy to fit his or her needs, and may even choose to get rid of the policy before the disqualification period expires. Once the disqualification period expires, however, the policy would likely be dropped (unless Medicaid laws had changed and it would be advisable to maintain the policy).

Many persons reject long-term care insurance as a long-term planning measure because the premiums are very expensive, and many persons reject the insurance as a short-term measure for the same reason. If someone is balking at the cost of the insurance, or if they are so concerned about the Medicaid disqualification period that they do not wish to make any transfer, it would perhaps be advisable to involve the transferees in the discussion, as it is their eventual inheritance that is at stake here. When the transferees learn how the Medicaid disqualification period works, they may find it is in their best interests to pay the premiums for the transferor. The transferor may not like the idea of others paying the premiums, but since without this insurance the purpose of the transfer can end up being frustrated by fate, transferee payment should at least be considered.

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