Updated November 22, 2022
Long-Term Care Insurance: Overview
What Is Long-Term Care Insurance?
lifetime benefits. Potential policyholders want to purchase a
Long-term care insurance (LTCI) is a type of insurance
policy that will sufficiently cover future risks; however
policy designed to cover the future costs of care associated
such risks are unknown at the time of purchase and vary
with a chronic condition or disability that requires extended
widely across the older population.
or long-term care. Long-term care, often referred to as long-
Waiting Period
term services and supports (LTSS), provides hands-on
assistance or supervision to individuals who have functional
In general, LTCI benefit eligibility depends on limitations
or cognitive impairments associated with basic activities of
in an individual’s ability to perform a certain number of
daily living (ADLs; e.g., bathing, dressing, eating, mobility,
ADLs. LTCI policies often have a waiting or elimination
toileting, and continence). If a policyholder becomes
period, which is the length of time between the onset of
eligible for long-term care, the LTCI policy provides a daily
qualifying impairments and commencement of payment for
cash amount (up to a maximum limit) that the policyholder
LTSS. The elimination period is selected by the
may use to cover services.
policyholder when he or she purchases the policy. This
elimination period is conceptually similar to a deductible in
Policy Features
a health care plan; the longer the elimination period, the
LTCI policies are complex insurance products. Individuals
lower the policy’s premium cost, all other things being
seeking to purchase a policy must make certain decisions
equal.
about the product’s features at the time of purchase. In
general, these purchase decisions are made several years,
Insurance Market
sometimes decades, prior to a potential need for LTSS,
LTCI policies can take different forms, from stand-alone or
which adds further complexity to the decisionmaking
traditional LTCI policies to linked benefit products that
process. These purchase decisions (described below)
combine life insurance or an annuity with long-term care
include
coverage. Generally, the types of services covered under an
LTCI policy are not covered under health insurance. And,
the type of services covered,
unlike most health insurance policies, LTCI policies are
the dollar amount of coverage and annual inflation
subject to underwriting, which means that individuals who
adjustments,
have preexisting conditions can be denied coverage or
offered a policy with a high premium. The premiums
the length or duration of coverage, and
charged by LTCI insurance carriers vary by age of
the waiting period (or elimination period).
purchaser. Those purchasing at older ages are charged
higher premiums because they are at higher risk of needing
Covered Services
LTSS. LTCI policies are guaranteed renewable; in other
Services covered under an LTCI policy may include care
words, they may be cancelled only for nonpayment of
provided in a variety of settings, such as nursing homes and
premiums.
assisted living facilities, or an individual’s private home
through home health services. Policies may cover respite
Traditional LTCI
care for caregivers, homemaker and chore services, and
Traditional LTCI policies may be sold by an insurance
medical equipment, among other services and supports.
carrier to an individual directly or to a group as part of an
employer-sponsored policy. Employer-sponsored LTCI is
Coverage Amount
distinct from employer-sponsored health insurance in that
Individuals must choose a daily benefit amount and whether
employers typically do not contribute to LTCI premiums.
to purchase inflation protection. The dollar amount of the
Unlike LTCI purchased in the individual market, employer-
daily benefit is often initially chosen based on the current
sponsored LTCI has the advantage of a larger risk pool and
cost of services. Deciding whether and how much this daily
generally lower premiums. Among employers offering
benefit should be adjusted over time to reflect the annual
LTCI, the federal government is the largest employer
inflation rate for LTSS can be difficult, because of
offering group LTCI.
uncertainty around the unknown future costs of LTSS.
Linked-Benefit LTCI
Coverage Length
Linked-benefit LTCI products, also known as combination
The length of coverage (in years) of an LTCI policy is
or hybrid products, combine a life insurance policy or an
called the duration of the benefit. Determining how much
annuity with a long-term care rider. These policies provide
coverage to purchase adds complexity to the
an individual with coverage for LTSS if needed; otherwise,
decisionmaking process. LTCI policies can cover two to
the policy will pay a death or annuity benefit to a
five years of services, and some policies can provide
designated beneficiary.
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Long-Term Care Insurance: Overview
The LTCI market has changed significantly over the past
Linked-benefit LTCI policies with a separately identifiable
two decades. Overall, the market has become more
premium component can offer a tax deduction.
concentrated, with fewer companies selling traditional
HIPAA tax-qualified LTCI products are required to have
LTCI. Linked-benefit products have become more popular,
defined benefit triggers for when the policy begins to pay
with annual sales outpacing traditional LTCI in 2021.
benefits. These triggers require policyholders to meet the
Figure 1 shows that since 2014, the number of individuals
with an active or “in
definition of a “chronically ill” individual who has been
-force” stand-alone LTCI policy has
certified by a licensed health care practitioner as
declined (see section “Addressing Market Stability”).
being unable to perform (without substantial assistance)
Figure 1. Long-Term Care Insured Lives
at least two ADLs for a period of at least 90 days due to a
loss of functional capacity;
having a level of disability similar (as determined by the
Secretary of the Treasury in consultation with the
Secretary of Health and Humans Services) to the level of
disability described above; or
requiring substantial supervision to protect such
individual from threats to health and safety due to severe
cognitive impairment.
Federal law provides tax advantages for some aspects of
private LTCI. Benefits from a “qualified” LTCI policy are
excluded from the gross income of the taxpayer (i.e., they
are exempt from federal taxation). LTCI premiums are
Source: National Association of Insurance Commissioners, Long-
allowed as itemized deductions to the extent they and other
Term Care Insurance Experience Reports, 2006-2021). Data elements
unreimbursed medical expenses exceed 10% of adjusted
used to prepare these reports are extracted from exhibits filed with
gross income. LTCI premium deductions, however, are
the NAIC; however, the NAIC cannot guarantee their accuracy.
subject to age-adjusted annual maximum amounts. In 2021,
these amounts ranged from $450 for those aged 40 and
The Federal Long-Term Care Insurance Program
younger to $5,640 for those aged 71 and older.
The Long-Term Care Security Act (P.L. 106-265)
Under current law, employer contributions toward the cost
authorized the Office of Personnel Management (OPM) to
of tax-qualified LTCI, while not typical, are excluded from
offer a federal long-term care insurance program (FLTCIP)
the gross income of an employee. Self-employed
which was established in 2002. Under the FLTCIP, active
individuals may include LTCI premiums in calculating their
and retired federal workers and eligible family members
deductions along with other health insurance premiums.
who are approved for coverage may voluntarily purchase a
Only amounts less than or equal to the age-adjusted limits
LTCI policy. FLTCIP premiums may be deducted from an
can be deducted or excluded from taxable income.
individual’s salary or pension benefit, but they are not
pretax contributions, and workers pay 100% of the
Addressing Market Stability
premiums. Eligible workers receive no premium assistance
Over the past two decades, annual LTCI premiums in the
from the federal government. Since enactment, amendments
stand-alone market have increased significantly for both
to this legislation have primarily addressed eligibility.
current and new policyholders. Higher average premiums
reflect increased demand for more comprehensive benefit
Regulation
packages (including inflation protection) and higher daily
State governments have primary jurisdiction for regulating
benefit amounts. Premium increases have also been driven
the private LTCI market. In this capacity, states have
by inadequate medical underwriting, premiums that were
established laws and regulations for LTCI carriers and the
initially set too low, and insufficient growth in investment
products they sell. States also play an active role in
funding or reserves to cover future claims. LTCI market
verifying carriers’ and products’ compliance with these
stability depends largely on the ability of insurers to
requirements. To help guide states in their oversight efforts,
adequately predict future claims. Most policies issued
the National Association of Insurance Commissioners
before the mid-2000s had incorrectly predicted claims,
(NAIC) has developed a number of “Model Laws” and
necessitating changes to key pricing assumptions. For
“Model Regulations,” which provide recommended
example, rising claims, lower mortality rates, lower-than-
guidelines for state regulators to adopt.
predicted voluntary termination (lapse) rates, and lower-
than-predicted rates of return on investments have been
Tax Benefits and Consumer Protections
cited as key reasons for premium increases. Such increases
Federal law provides tax benefits and minimum consumer
may continue to affect consumer confidence, possibly
protection standards for purchasers of “tax-qualified” LTCI
leading to further reductions in demand for stand-alone
policies, as authorized by the Health Insurance Portability
LTCI and shifts in demand toward linked-benefit products
and Accountability Act of 1996 (HIPAA, P.L. 104-191).
that offer a fixed premium.
These provisions are established in the Internal Revenue
Code (42 U.S.C. §7702B). Most traditional LTCI policies
Kirsten J. Colello, Specialist in Health and Aging Policy
sold after enactment of HIPAA are tax-qualified policies.
IF11614
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Long-Term Care Insurance: Overview
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