What is long-term care insurance good for

Long-term care refers to assistance with medical or personal needs over an extended amount of time.

Close to 70% of people turning 65 today will need long-term care at some point in their life,1 making it an issue that touches almost every household. And while many people will be affected by the need for long-term care, not everyone takes advantage of long-term care insurance to help with the costs.

However, long-term care is a considerable expense, and many people can’t afford to cover the entire costs out-of-pocket. Traditional employer-based health insurance won’t cover extended daily care, and in general, health insurance only pays for doctor and hospital bills. Long-term care insurance (LTCI) can help offset the expenses of long-term care needs.

These 7 factors can help you determine whether LTCI is something you should pursue as you plan your financial future.

1. Long-term care insurance covers care in a variety of settings.

When people think of long-term care, most think of nursing homes. However, 73% of people who receive long-term care are at home, not in assisted living facilities or nursing homes.2

Long-term care is needed when someone can’t perform daily activities such as dressing, eating, bathing, or transferring – and this help can often be provided in your own home through a home health aide. Though it’s not necessarily pleasant to think of scenarios where long-term care will be needed, LTCI can help cover the costs. It may offer a way for you to receive care in your own home instead of in an assisted living or nursing home.

2. Long-term care insurance can help fill in caregiving gaps.

It’s impossible to know for sure if your family would be able to care for you if long-term care becomes necessary. Caregiving can be a huge financial and emotional burden. And because of the high cost of long-term care, 66% of caregivers end up using their own retirement and savings funds to pay for care.3 Plus, the logistics of caregiving might not be feasible if your family members live far away or can’t square it with work or family obligations of their own. 

3. Long-term care insurance covers more healthcare costs than Medicare.

Medicare does not generally cover long-term care and will only pay for care at home under very limited circumstances.

Medicare does pay for skilled care in a nursing home only for short periods (up to 100 days) during which you are recuperating following a hospital stay for a related condition, but that’s not the same as long-term care. Once your care needs stabilize and you need personal or custodial care, Medicare will not pay those costs.

4. It’s likely you’ll need some form of long-term care.

A 65-year-old today has a 70% chance of needing long-term care services at some point during their lifetime.1 Because long-term care can be needed for many different reasons, it’s difficult to know if you’ll need it or not.

It’s better to purchase a LTCI policy when you’re still in good health — generally in your 50s — than to wait until you’re ill or older, when it may become unaffordable. The younger you are, the lower your premiums will be.

5. Your savings may not be enough to cover your long-term care needs.

There are various types of long-term care, from help with daily chores and activities to full care in a private nursing home room. The average assisted living facility costs $54,000 per year, and the average nursing home costs $94,900 per year for a semi-private room.4

With costs for long-term care on the rise, your retirement savings may not be big enough to cover these expenses.

6. The cost for long-term care insurance varies.

Pricing will depend on factors such as your age and the level of coverage the policy will pay out if you need to use it.

To give you an idea, the American Association for Long-term Care Insurance finds that a couple who opt for an initial policy benefit of $165,000, both age 55, will pay an annual premium of $2,080 combined. For a couple both age 65, the premium would rise to $3,750 per year.2

7. There are several type of long-term care insurance policies available.

A typical, traditional LTCI policy will pay a predetermined amount for each service — for instance, $100 a day for nursing home care. There generally will be a limit to the benefits you receive, either based on a number of years or a dollar amount. A plan that offers pooled benefits (meaning it covers more than one type of long-term care service) will set a total dollar amount for the various services you receive.

New types of LTCI policies are growing in popularity, extending beyond the traditional “use it or lose it” type, many of which have experienced premium increases.

One alternative is hybrid life and long-term care insurance. This type of policy combines long-term care insurance with permanent life insurance and provides more options:

• If you need long-term care, you can tap the policy benefit.
• If you die before needing long-term care, the policy has a life insurance benefit.
• If you decide you need the money for something else, you can typically receive a cash value that can be roughly equal to or less than the total premiums paid.
• Contract terms and premiums are guaranteed not to change.
   

Another alternative is a universal life insurance policy with a LTCI rider. This option might be right for you if you’re interested in a meaningful death benefit for your beneficiaries in the event LTCI isn’t needed.

At the end of the day, caregiving can take such an emotional and financial toll on loved ones that it pays to plan for long-term care now. Consider working with a financial professional to understand how traditional or alternative LTCI policies might fit into your current retirement strategy.

Learn more about your long-term care insurance options.

Unlike traditional health insurance, long-term care insurance is designed to cover long-term services and supports, including personal and custodial care in a variety of settings such as your home, a community organization, or other facility.

Long-term care insurance policies reimburse policyholders a daily amount (up to a pre-selected limit) for services to assist them with activities of daily living such as bathing, dressing, or eating. You can select a range of care options and benefits that allow you to get the services you need, where you need them.

The cost of your long-term care policy is based on:

• How old you are when you buy the policy
• The maximum amount that a policy will pay per day
• The maximum number of days (years) that a policy will pay
• The maximum amount per day times the number of days determines the lifetime maximum amount that the policy will pay.
• Any optional benefits you choose, such as benefits that increase with inflation

If you are in poor health or already receiving long-term care services, you may not qualify for long-term care insurance as most individual policies require medical underwriting. In some cases, you may be able to buy a limited amount of coverage, or coverage at a higher "non-standard" rate. Some group policies do not require underwriting.

GOOD TO KNOW

Many long-term care insurance policies have limits on how long or how much they will pay. Some policies will pay the costs of your long-term care for two to five years, while other insurance companies offer policies that will pay your long-term care costs for as long as you live—no matter how much it costs. But there are very few that have no such limits.

BRIGHT IDEA

Before you buy a policy, be aware that the insurance company may raise the premium on your policy. It is a good idea to request information on the company's premium rate history.

Long-term care (LTC) for seniors can easily wipe out a lifetime of savings. Unfortunately, Medicare pays very little of long-term care, and Medicaid usually requires you to have very little assets and income before you can qualify. If you're looking for a way to cover the risk of needing long-term care later in life, long-term care insurance can offer an additional option in a landscape of limited options. However, it is expensive.

What Is Long-Term Care Insurance?

Long-term care insurance offers to cover part of your long-term care costs if you end up needing long-term care. There are two types, traditional (also known as standalone) LTC insurance and hybrid LTC insurance. With traditional LTC insurance policies, you'll pay a monthly premium for the coverage, which you may or may not actually end up needing. Hybrid LTC insurance policies combine coverage for long-term care with whole (permanent) life insurance. If you end up needing long-term care, those costs will come out of your death benefit (the payout to your loved ones under your life insurance policy). If you don't need long-term care, your death benefit will stay intact. While traditional LTC insurance follows a use-it-or-lose-it model, hybrid LTC insurance allows you to retain at least some of what you paid. However, hybrid LTC insurance tends to be more expensive.

Deciding Whether to Buy LTC Insurance

Is long-term care worth it? Before you decide you need long-term care insurance, it's important to understand several points:

1. You won't be on the street without it. If you do end up needing extensive long-term care—for example, several years in a nursing facility—and you spend most of your assets on that care, you'll then be able to qualify for Medicaid.
2. You might be paying premiums for decades. Even if you do end up needing long-term care—as many do—you might not need so much that it offsets the substantial amount you paid over many years.
3. Long-term care insurance policies have limits on the benefits they provide. For example, most policies cover only a certain amount of time, such as three years' worth long-term care. Some but not all cover at-home care or assisted living, in addition to a nursing facility. Be sure you understand the benefits and their limitations of each policy you're considering.
4. Hybrid LTC insurance makes sense only if you need whole life insurance. While hybrid LTC insurance can sound attractive—after all, you're not losing all of the money you paid in premiums if you don't end up needing long-term care—it is usually significantly more expensive than traditional LTC insurance. If you hadn't been considering whole life insurance in the first place, or if you have more use for money during your lifetime than at your death, you might want to think hard about whether hybrid LTC insurance really makes sense for you.

The Odds of a Long Nursing Facility Stay

While it is true that many people will need long-term care when they get older (and insurance agents tend to underscore this fact), the question you should really be asking when you're considering LTC insurance is: Will you need so much care that it will be worth the amount of money you spend on premiums over the years? And a related question: Would you be better off simply saving that money?

Consider this example: Naomi buys a traditional LTC insurance policy at the age of 55. The policy provides benefits of $200 per day for nursing home care and $100 per day of home care, for up to three years. Naomi pays $300 a month for this policy. Naomi ends up needing significant long-term care: one year of home care, beginning at age 75, followed by one year of nursing home care. This means she paid $72,000 in premiums (over 20 years) and got $108,000 ($36,000 for one year of home care plus $72,000 for one year of nursing home care) in benefits. This seems to be a good trade-off for Mary, but consider whether she could have done better by just putting her $300 per month premiums in secure investments over those 20 years. Assuming an investment return of 5%, she would have been better off "self-insuring"—that is, setting aside money to use in the event of needing long-term care.

(For simplicity, this example ignores rising costs of care as well as rising premiums.)

For some people—typically those with high income and significant assets—long-term care insurance may be a sound idea. This is particularly true if LTC insurance is viewed as a safety net rather than as a financial investment. But even those who can afford it should be aware of the wide variation between policies and their offerings.

The 5% of Income Guideline

Given the large variation in policies, there really isn't a one-size-fits-all rule for when LTC insurance makes sense. But some consumer and financial experts recommend that you stay away from LTCI unless you can pay the monthly premium with no more than 5% of your income. When calculating this 5% figure for future years, bear in mind that your premiums are likely to rise at least a little over the life of the policy, while at some point—for many people, when they formally "retire"—your income will probably drop.

Past Performance of Long-Term Care Insurance

It's helpful to be aware of the history of long-term care insurance. Historically, the performance of LTC insurance policies (such as the ones sold in the 1990s) has been quite poor:

• About half of all LTC policies lapsed before any benefits were paid; policy holders were unable or unwilling to continue paying their premiums.
• Of those people who bought insurance and later entered a nursing facility, about half never collected a dollar from their LTC policies.
• No benefits were ever paid to the many people who bought nursing facility coverage but instead received home care or entered a residential facility not covered by the insurance.
• By the time LTC benefits were paid, they were usually far below the actual cost of care (which rose astronomically over the last few decades).
• For many of the longest-term residents, benefits were used up before the nursing facility stay ended.

In these situations, LTC insurance failed to live up to its promise to help people avoid using up their savings or relying on Medicaid to pay for long-term care. In other words, it was a lousy investment.

Improvements in LTC Insurance

In response to pressure from consumer groups, embarrassing media exposure, and increased competition from other insurers joining the market, LTC policies have improved somewhat in recent years. These improvements include clearer terms and conditions, which give consumers a better idea of what to expect for their money. Many policies now offer extended coverage to include some types of assisted living residences in addition to regular nursing facilities. A number of policies permit elders to use a pool of benefit funds for either home care or residential long-term care, rather than only for one or the other. Requirements to qualify for benefits have also loosened somewhat, and policies now routinely permit the policy holder to "step down" to lower levels of coverage, for a lower premium, if continuing to pay for the higher benefits becomes too financially burdensome.

What to Look For in an LTC Insurance Policy

If you do decide that LTC insurance is worth it for you, look closely at the available options. In particular, ask the following:

• Does it cover the various types of care you might need? In addition to covering nursing facilities, does it also cover at-home care and assisted living?
• What is the benefit amount? Benefits can range from $50 to $500 a day, and can also vary depending on whether you need care in a nursing facility or at home.
• What kind of inflation protection is offered? LTC policies often don't pay out for many decades, so it's crucial to get inflation protection, which adjusts the benefit amount to account for inflation.
• What is the length of coverage? Nearly all policies provide benefits only for a certain period of time—for example, two or three years' worth of long-term care.
• What triggers the benefits? Most policies require a physician to certify that you become unable to perform a certain number of ADLs (activities of daily living), such as bathing, eating, dressing, toileting, getting in and out of bed or a chair, taking medication, and continence. Some policies are more restrictive than others, and how benefits are triggered can make a big difference in when you can begin to receive benefits.
• What is the elimination (waiting) period? Even after you qualify for benefits, most policies have an initial waiting period before you can file a claim for benefits.

With LTC insurance policies, which offer a large range of terms and benefits, it pays to comparison shop. For more detailed help in evaluating long-term care insurance, as well as understanding your long-term care options at large, Long-Term Care: How to Plan & Pay for It, by Joseph Matthews (Nolo), is a comprehensive guide.