How the new deficit reduction act affects long term care insurance

In 1985, the House Committee on Energy and Commerce issued the following statement:

"Medicaid is, and always has been, a program to provide basic health coverage to people who do not have sufficient income or resources to provide for themselves. When affluent individuals use Medicaid qualifying trusts and similar techniques to qualify for the program, they are diverting scarce federal and state resources from low-income elderly and disabled individuals, and poor woman and children. This is unacceptable to the Committee."

This serves as the basis for the recently enacted The Deficit Reduction Act of 2005. After 20 years, it signed into law on February 8, 2006, and it includes some major changes in Medicaid's eligibility rules. This could have a pronounced effect on the need for long term care insurance.

Significant changes to the eligibility rules include:

Look-back period - The look-back period has changed from 3 years to 5 years. If assets were transferred in the 5 years prior to applying for Medicaid, those assets will still be considered as the applicant's assets and will be included in the equation to pay for care.

Change in the start of the penalty period - Previously, the penalty period for someone transferring assets started on the date the transfer was made. The law now states that the waiting period begins on the date the applicant files for Medicaid. For example, if assets were gifted away two years ago and a person then applied for Medicaid, the penalty period would start from the date the money was gifted, and the person would have to wait only one year before Medicaid eligibility. Today, the penalty period begins when the application for Medicaid is made, which means in this example, the penalty period would end five years after the gift was made.

Annuities - States may now require a Medicaid recipient to name the state as a beneficiary on annuities owned by recipient or the recipient's spouse, for an amount up to the cost of Medicaid assistance paid.

Income first rule - The new law mandates the income-first approach. This rule can devastate to the community spouse (the spouse of the person receiving Medicaid assistance) who has little income and modest assets, because that spouse will have to spend down their assets to a maximum of $95,100 before they can receive the Medicaid recipient's monthly income.

Primary residences - The law mandates that Medicaid deny benefits for applicants that have a home with greater than $500,000 in equity, and states will have the leeway to raise this limit to $750,000. Equity in excess of the established limit will have to be used before Medicaid benefits can be received.

Long term care partnership programs - Congress has given states the right to create partnership programs. The partnership plan allows individuals who purchase certain kinds of long term care insurance to protect more of their assets in case the eventually need nursing home care under Medicaid. The partnership plan currently exists in four states: California, Connecticut, Indiana, and New York. The partnership program is intended to encourage persons to purchase LTC insurance who would not otherwise do so, reduce incentives for people to rely on Medicaid for their care, and preserve Medicaid dollars for the truly needy.

This portion of the Deficit Reduction Act is a strong incentive for people to consider purchasing LTC insurance if they want to protect their assets. These changes, including increasing the look-back period to five years, make it difficult to engage in Medicaid planning for families looking to protect assets, and children looking to protect inheritances. Using Annuities to qualify applicants for benefits is now non-existent. LTC insurance is clearly one of the most effective tools for protecting the assets of an individual.

Eugene Woznicki is president of Frisco, Texas-based Southwestern Life Plans, Inc. He can be reached at genewoz@comcast.net.

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