Long-term care insurance: The basics
Planning out how to care for yourself and your loved ones years down the road from now might not be the most pleasant thing to think about, but laying out plans for long-term care could pay dividends both in terms of costs saved and peace of mind.
Long-term care refers to the different kinds of daily care and assistance that you might need when living with a chronic illness, condition or disability. One option to pay for this future care is to purchase long-term care insurance. The US Department of Health and Human Services estimates that someone turning 65 today will have a 70 percent chance of needing long-term care in their lifetime, and 20 percent will need it for longer than five years. Women need care for an average of 3.7 years, while men need it for an average of 2.2 years.
Laying out a clear-eyed contingency plan can not only make sure you get the best care and medical attention possible, it can also relieve physical, emotional and financial burdens on your spouse or family. Here’s what you need to know about this type of insurance.
What is long-term care insurance?
Simply put, long-term care insurance pays for your care, either at home or in a facility, if you were no longer able to care for yourself. In general, long-term care insurance policies reimburse policy holders a specified daily amount to help cover care ranging from help with bathing and grooming to skilled nursing care. Right now, long-term care insurance is uncommon—fewer than 8 percent of Americans possess it.
Why consider long-term care insurance?
Long-term care — either being cared for at home or spending time in a nursing home or an assisted living facility — is expensive. According to the Genworth 2017 Cost of Care Study, the national median cost for a home health aide is $4,099 a month, a stay at an assisted living facility costs $3,715 a month, and a semi-private room in a nursing home costs $7,148 a month. Those costs can be much higher depending on where you live.
Meanwhile, according to the Economic Policy Institute, the median amount of savings a family close to retirement has is just $17,000. Do the math, and you can see why so many people go bankrupt paying nursing home or medical bills. Even worse, long-term care can cause financial hardship for family members—according to an AARP survey, family caregivers spend an average of 20 percent of their income on caring for loved ones.
And while many people assume that Medicare would cover long-term care expenses, this isn’t the case. For people 65 and older and certain people under 65 who have disabilities, Medicare covers expenses related to medical needs, including acute stays, rehabilitation, or hospice. But it doesn’t cover most types of long-term care that aren’t directly medical in nature, like personal care and assisted living.
Even though these statistics are sobering, long-term care insurance isn’t right for everyone. In fact, a 2014 study by the Center for Retirement Research at Boston College estimated only 20 to 30 percent of people would benefit from a policy. This is because while many people do need long-term care, they may not need it for an extended period of time and may be able to cover their care with their own savings. Others spend down their assets to qualify for Medicaid, which will then pay for long-term care.
Long-term care insurance options
There are several different types of long-term care insurance products:
- Comprehensive long-term care policy. This type of policy offers inflation-adjusted coverage for qualified expenses. While this product will provide tax-free reimbursement for long-term care costs if needed, these policies are not paid out to beneficiaries if long-term care is not needed. In other words, if you never need the policy, the money you’ve spent on premiums disappears. Premiums may also rise depending on the policy.
- Combination policies. Combination policies (also known as hybrid or linked-benefit policies) have a long-term care rider attached to a traditional life insurance policy. These policies tend to be pricey—think a one-time premium of $75,000 or more—but will pay up to six times the premium in long-term care coverage. If the long-term care insurance is never used, your heirs receive a death benefit. Combination policies differ, and an insurance broker can walk you through what-if scenarios, but typically, if the long-term care benefit were never used, the death benefit might be roughly 30 percent more than the premium, so a policy with a $75,000 premium could pay a death benefit of around $115,000.
- A rider to your current life insurance policy. An alphabet soup of acronyms exist to help augment long-term care coverage. An insurance broker can walk you through options, but some common ones include an Accelerated Benefit Rider (ABR), Extension of Benefits Rider (EBR), Critical Illness Rider (CIR), or Chronic Illness Rider (CHR). An ABR, for example, allows you to draw on a portion of your policy’s death benefit for long-term care, reducing the death benefit accordingly. These riders have exclusions and you may only qualify for benefits if you meet certain criteria or have a certain diagnosis, including heart attack, stroke, or certain cancers, and not if you, for example, experience cognitive decline but are otherwise “healthy.”
How to get long-term care insurance
It can be helpful to walk through long-term care insurance options with a financial planner or insurance broker. While long-term care insurance can provide peace of mind, you may also be able to cover any future needs with your current investment strategy.
If you do decide to purchase long-term care insurance, be aware that the medical underwriting for long-term care insurance can be extensive. People who apply for long-term care insurance have to undergo a medical exam, and may be denied coverage based on current medical conditions or past health history. That’s why it’s best to purchase long-term care insurance well before you may need it. According to the American Association for Long Term Care Insurance, the best age to buy long-term care insurance is in your mid-50s, and if you’re in good health, you may be able to access a discount on premiums.
Cost is a major concern: It’s not uncommon for long-term care insurance premiums to be well north of $2,000 a year, and they can and do increase. Because long-term care policies are so expensive, some people who have significant savings choose a policy with less expensive premiums knowing that they will eventually have to shoulder some expenses of long-term care if the worst were to happen.
Accessing long-term care insurance benefits
Usually you qualify for long-term care insurance benefits when you can no longer do two out of six activities of daily living, or ADLs. These ADLs tend to be standard across policies, and include eating, bathing, walking, using the bathroom, dressing independently, and issues related to incontinence. Long-term care insurance also covers people who suffer from dementia or other cognitive impairments.
Long-term care insurance reimburses some or all of the bills related to your care, depending on your policy, but many have a certain period of time, called the elimination period, during which you’ll be paying out of pocket. And be aware some policies have a lifetime cap and will only pay long-term care expenses for a fixed number of years. Others have a maximum payout depending on the benefit you purchased, so, as with any insurance product you purchase, it’s important to know exactly what is and isn’t covered.
Is long-term care insurance worth it?
Again, it pays to discuss long-term care insurance as an option with a professional. For many, peace of mind is the ultimate benefit. Knowing exactly how long-term care will be paid for—and how much will be paid based on the policy you choose—can help in your financial planning and ensure that your retirement savings and assets are protected.
Written by Anna Davies