How a $100,000 Long-Term Care Insurance Benefit Can Preserve Another $100,000 in Assets When Medicaid Begins

Consider a retired schoolteacher who bought a long-term care policy in her late 50s, when the premiums seemed like money down the drain. Two decades later, a stroke sends her to a nursing home. The policy pays $100,000 in covered benefits, but those payments eventually stop while she still needs around-the-clock care.

At that point, Medicaid enters the picture. For many families, that is when the spend-down concern begins, because Medicaid generally pays for nursing home care only after a person's countable savings fall below a state-set limit. Her policy, however, carries one important label: Partnership. That designation can allow her to keep roughly another $100,000 in assets and still qualify.

How a $100,000 Payment Creates a $100,000 Asset Protection

Federal Medicaid rules let states operate long-term care partnership programs using a dollar-for-dollar arrangement. When a qualifying Partnership policy pays benefits to the policyholder or on her behalf, the state Medicaid agency ignores an equal amount of assets when deciding whether she qualifies.

In practical terms, the $100,000 her insurer paid becomes a $100,000 buffer in addition to the standard resource limit. Medicaid totals up her assets, sets the protected amount aside, and then applies the usual limit to whatever remains.

The protection can also carry over after death. The state must disregard up to the same protected amount when calculating Medicaid estate recovery, which can help preserve property for heirs rather than exposing the full estate to repayment for care costs.

Why Medicare Does Not Close the Gap

Medicare cannot fill this need, so it helps to keep the two programs separate. Medicare serves people age 65 and older and pays only for limited periods of skilled nursing care. Medicaid is designed for people with limited means and covers long-term custodial care after private funds are exhausted. Federal tax rules also prevent the two from covering the same bill in the same way: a tax-qualified long-term care policy generally cannot reimburse expenses that Medicare is already paying.

Only Partnership Policies Offer the Asset Shield

Many long-term care policies pay benefits without offering any Medicaid asset protection. To receive the exemption, a policy must meet several requirements under federal partnership law:

• 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 under an approved state partnership program.

• The policyholder should 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 rule often causes confusion. Buyers under 61 need compound annual inflation protection. Those between 61 and 75 need some form of inflation protection. For buyers 76 or older, it is optional.

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

The Same Care, Two Very Different Spend-Down Results

Without Partnership status, the same retiree would generally have to spend down to her state's normal resource limit before Medicaid pays anything. Any amount above that threshold would go to the nursing home.

With the Partnership label, and with $100,000 in qualifying benefits paid, she may be allowed to keep an extra $100,000 above the limit and still qualify, depending on state rules. The care is the same, the facility is the same, and the insurance checks are the same. In one version, the family preserves a meaningful nest egg. In the other, nearly everything is consumed by the nursing home bill.

That is why the policy can still be valuable after the final benefit check has been issued. Every dollar it paid out can translate into a dollar of protection for whatever assets remain.

This is especially important for families in the middle-income range. An Ask An Advisor segment of The Clark Howard Podcast described the squeeze as “that muddy middle where you have decent assets but it’s too expensive to even buy long term care insurance.” For households in that position, a Partnership policy can protect part of the savings they might otherwise have to spend before Medicaid steps in.

What Families Should Gather Before Benefits End

The protection only matters if the family can prove it. Before the policy runs out, families that want to use the exemption usually should collect three items:

• The policy's Partnership certification, showing that it was issued under an approved state program.

• A statement from the insurer showing total benefits paid, since that figure determines the size of the exemption.

• Guidance from the state Medicaid agency on how the exemption is recorded on the application and what documentation it requires.

It is far easier to address those questions early than to hunt for records while a nursing home deadline is closing in.

The real question for many families 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 amount, so it helps to know the total before Medicaid begins counting assets.