A $100,000 Long-Term Care Insurance Payment May Shield Another $100,000 in Assets When Medicaid Steps In

When a retired schoolteacher’s long-term care policy used up its benefits, Medicaid was poised to absorb what little money she had left. But a single word on the policy changed the outcome.

Imagine a retired schoolteacher who purchased a long-term care policy in her late 50s, when the premiums seemed like wasted money. Two decades later, a stroke leaves her in a nursing home. The policy pays $100,000 in covered benefits, but the funds eventually run out while she still needs full-time care.

That is when Medicaid enters the picture. For many families, this is where the spend-down problem begins, because Medicaid generally pays for nursing home care only after countable assets fall below a state-set limit. Her policy, however, includes one crucial label: Partnership. That designation may allow her to keep roughly another $100,000 in assets and still qualify.

How a $100,000 Benefit Can Create a $100,000 Asset Protection

Federal Medicaid law allows states to operate long-term care partnership programs on a dollar-for-dollar basis. When an eligible Partnership policy pays benefits to the policyholder or on her behalf, the state Medicaid agency excludes an equal amount of assets when deciding whether she qualifies.

In practical terms, the $100,000 paid by the insurer becomes a $100,000 asset disregard in addition to the normal resource limit. Medicaid totals her assets, sets the protected amount aside, and counts only what remains against the usual threshold.

That protection can also matter after death. The state must disregard up to the same protected amount when calculating Medicaid estate recovery, which can leave more for heirs instead of allowing the entire estate to be claimed for care costs.

It is also important not to confuse Medicaid with Medicare. Medicare covers people age 65 and older and pays for only limited periods of skilled nursing care. Medicaid is the program that serves people with limited resources and covers long-term custodial care once private funds are exhausted. Federal tax rules also prevent the two from simply covering the same expense: a tax-qualified long-term care policy generally cannot reimburse costs Medicare is already paying.

Only Partnership Policies Provide the Asset Shield

Many long-term care policies pay benefits but offer no Medicaid asset protection. To qualify for the exemption, a policy must satisfy several requirements under federal partnership rules:

• It must be a tax-qualified long-term care contract. Under the Internal Revenue Code, that means guaranteed renewable coverage limited to qualified long-term care services, 26 U.S.C. § 7702B(b)(1).
• It must be issued through a state partnership program that has been approved.
• The policyholder must have lived in that state when the coverage began.
• It must include the inflation protection required for the buyer’s age at purchase.

The inflation requirement is often where people get tripped up. Buyers under 61 need compound annual inflation protection. Buyers between 61 and 75 need some form of inflation protection. For buyers 76 and older, it is optional.

Because Medicaid is administered by the states, the details change across state lines. Each state decides whether to offer a partnership program, sets its own resource limit, and determines how benefits are verified. Two people with identical policies can end up with very different results depending on where they live.

The Same Retiree Can Face Two Very Different Outcomes

Without Partnership status, the scenario is straightforward. Once insurance benefits are exhausted, a single applicant must spend down to roughly the state’s standard resource limit before Medicaid pays. Anything above that threshold goes toward nursing home costs.

With the Partnership label, the picture changes. After $100,000 in qualifying benefits has been paid, the same woman may be allowed to keep an additional $100,000 above the usual limit and still qualify, depending on state rules. The care, the facility and the insurance benefits are the same; the difference is whether the family keeps a meaningful nest egg or loses nearly everything to the nursing home bill.

In effect, the policy continues to provide value even after its final benefit payment. Every dollar it pays out can translate into a dollar of asset protection.

That can be especially important for households caught in the middle. An Ask An Advisor segment on The Clark Howard Podcast described the challenge as “that muddy middle where you have decent assets but it’s too expensive to even buy long term care insurance.” For families in that position, a Partnership policy may protect part of the savings that would otherwise have to be spent down before Medicaid takes over.

Documents Families Should Gather Before Benefits Run Out

The protection only matters if the family can prove it. Before the policy runs dry, families that benefit from the exemption usually gather three key items:

• The policy’s Partnership certification, showing it was issued under an approved state program.
• A current insurer statement showing the total benefits paid, since that figure determines the size of the exemption.
• Guidance from the state Medicaid agency on how the exemption should be listed on the application and what proof it requires.

Handling these issues early is far easier than trying to track down records from a nursing home lobby while a deadline is approaching.

At the kitchen table, the key question is whether a loved one’s long-term care policy is a Partnership policy and how much asset protection it has accumulated so far. Each benefit payment increases that protection, so it is worth knowing the total before Medicaid begins counting assets.