Earlier this year, Congress passed the Pension Protection Act of 2006.Included in that legislation are some features that encourage preparation and spending for long-term care. In particular, the act allows the transfer of excess pension benefits to fund estimated retiree medical costs, and it permits annuity and life insurance contracts to expand their coverage to include long-term-care costs, including skilled care from medical professionals and custodial care (such as assistance with bathing, eating, dressing, walking, etc.).

Under the new legislation, deferred annuity contracts and life insurance policies that include a long-term-care rider can pay out amounts for long-term care, and those amounts represent non-taxable income. This new feature is effective beginning in 2010, but applies to annuity and life insurance contracts that were issued after Dec. 31, 1996.

Insurance companies are positioning themselves to offer dual plans that incorporate the new rules, even though the tax benefits don't become effective for a few more years. Policies have already appeared on the market providing dual protection, with LTC coverage that includes home health care services by non-medical persons, including family members.

To date, acquisition of LTC policies has been lackluster, with estimates of less than 10 percent of the population over age 45 owning such coverage, according to the Long-Term Care Financing Strategy Group, a Washington-based non-partisan think tank.

So why is this legislation so important?

The triple threat of the Baby Boom generation's approaching retirement age, longer life expectancies and increasing medical costs is expected to lead to an overload on the health care system and a tidal wave of unanticipated and unbudgeted costs for those who find themselves in need of the care.

Provisions in last year's Deficit Reduction Act might also encourage higher participation in LTC insurance plans. The DRA increased restrictions on eligibility for Medicaid by extending the three-year look-back period for assets to five years. People eligible for Medicaid coverage must hold only a minimum level of assets. To prevent people from divesting themselves of assets in order to claim Medicaid eligibility, Congress established the original look-back period of three years. Divestitures of assets within that period disqualify a person for Medicaid coverage. Now, under the terms of the DRA, the look-back period has been increased to five years, making it more difficult to qualify for Medicaid and, as a result, making LTC insurance an even more attractive option.

Short-term thinkers

Nevertheless, people are slow to get on the LTC insurance bandwagon. Big Four firm PricewaterhouseCoopers started offering LTC insurance as a benefit three years ago. "Among the staff, we had, from an industry-standard perspective, normal enrollment," said Marjorie Mayerson, PwC's managing director of benefits.

What's normal? "That would be about 5 percent of our staff," Mayerson said. Participation is somewhat higher among partners, but Mayerson reported that any increase in participation over the years has been minimal. "It's been very minimal, we haven't done a tremendous amount to promote it," she said. The benefit is a post-tax-dollars option, paid for 100 percent by employees. So far, Mayerson doesn't think anyone has actually used the benefit.

Andrew Pfau, a CPA in Jericho, N.Y., said that LTC insurance is best suited to the people he likes to call the "in-between wealthy."

He described them as "the person with $1 million to $3 million in assets that would like to know that they're going to be able to provide care for themselves when they're older, and they would like to know that, down the road, they're going to be able to leave some assets to their heirs."

Pfau particularly likes the way LTC insurance plays out for married couples where one spouse needs long-term care and there is a nice nest egg. To qualify for Medicaid, the healthy spouse would have to spend down all of the family assets. "So what happens is you force the healthy spouse to have to go bankrupt before they can get the coverage," he said. "Purchasing LTC insurance protects the family assets, so the medical costs can be paid for without depleting everything the healthy spouse has left to live on."

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