Choosing Long-Term Care Insurance

By the time you attain 65 years, chances are about 50-50 that you’ll need paid long-term care (LTC) someday—yet you probably haven’t planned for that financial risk. And you’re not alone—only 7.2 million or so Americans carry long-term care insurance. Long-term care insurance should be a crucial cog in every family’s financial planning chain. You’d like to thing that you’ll never need long-term care, or that you could easily pay it out-of-pocket but statistics suggest otherwise:

• 70 percent of seniors over 65 years will need a type of long-term care service to prolong their life.
• The average duration of long-term care required per individual is 3 years
• The median annual cost of nursing home care is $85800.

Unfortunately, government and traditional medical insurance programs don’t offer sufficient help. Medicare doesn’t pay for most custodial or long-term care services—except a portion of the costs for a maximum of 100 days with a copayment kicking in after the 20th day. Medicaid pays for long-term care, but your income must be below a certain threshold and you meet state eligibility requirements. Long-term care expenses remain a largely unsolved problem for many people, and here’s what you need to know about long-term care insurance today.

What is Long-Term Care Insurance?

Long-term care insurance doles out money to pay the costs of at-home assistance, nursing-home care, or an assisted-living facility if you can no longer take care of yourself. It reimburses charges for any care you need if you’re chronically ill—that is, you need assistance with the everyday activities we typically take for granted, like bathing, dressing, and eating. It also covers care if you need supervision because of a cognitive impairment resulting from Parkinson’s disease. A long-term care insurance policy can also help pay for adult care, care coordination, and home modifications like grab bars for toilets or outdoor ramps. If you’re banking on Medicare, you’re out of luck—Medicare doesn’t extend coverage to long-term care. Medicaid extends long-term care coverage, but you must be a very low-income retiree, among other eligibility requirements. Many people often use long-term care insurance and long-term disability insurance interchangeably, but they’re different. Long-term disability coverage offers income protection to help offset daily expenses like food, utilities, and rent—it’s not supposed to cover your care if you’re in need of Long-Term Care. Also, long-term care insurance isn’t medical coverage—it won’t cover hospital costs, pharmacy costs, doctor visits, or any other costs associated with treating an illness or injury.

What Does Long-Term Care Insurance Cover?

A long-term care insurance policy typically gives you payouts if you wind up having cognitive impairment like dementia or Alzheimer’s disease, or if you physically can’t continue to perform some specific “activities of daily living” (ADLs) on your own. We’re talking about bathing yourself, feeding yourself and so on. The payouts from your policy will help cover the cost of assistance that helps you get through the basics of your daily life. Depending on the type of policy, long-term care insurance may cover any of the following care arrangements:

• Nursing home. A facility designated to provide a full range of skilled rehabilitation care, health care, personal care, and daily activities in a 24-hour setting. Check whether your policy covers more than room-and-board.
• Assisted living facility. A residence designed with apartment-style units that makes personal care and other individualized services like meal delivery available when needed.
• Home care. An agency or home health aides who offer services like grooming, bathing, and help with housework and chores.
• Adult day care services. An arrangement outside your permanent residence home that provides social, health, and other sustenance services in a supervised setting for seniors who require some level of help in the course of the day.
• Home modifications. Adaptations like installing grab bars or ramps to make your home safer and more accessible.
• Care coordination. Services provided by a licensed or trained professional who helps with locating services, determining needs, and arranging for care. Your policy could also cover the monitoring of care providers.

Some ltc insurance policies may also cover hospice care—which helps manage the physical pain, emotional, and spiritual needs of people battling a terminal illness. However, Medicare covers hospice care for people whose life expectancy is less than six months—which isn’t covered by long-term care insurance policies. You can expect to come across long-term care insurance policies labeled as follows:

• Home care only. These policies cover home health care, personal care, adult day care, respite care, and hospice services. Coverage exclusions for this type of policy include care in a nursing home or residential care facility for the elderly.
• Nursing facility only. Nursing facility-only policies cover intermediate, skilled, or custodial care in a nursing home and assisted living care in a residential care facility. Home care isn’t covered.
• Comprehensive long–term. Comprehensive long-term care policies cover assisted living care, nursing facility care, home care, and community care.

Even if you’re not living with a pre-existing condition when you purchase your long-term care insurance policy, the insurance provider may impose a waiting/elimination period that you must satisfy before they’ll start paying out benefits.

Who Should Get Long-Term Care Insurance?

The question of who should get long-term care insurance ultimately comes down to their financial security. Envisioning yourself so vulnerable and frail that you must rely on a stranger’s help or live in a Long-Term Care facility is deeply unsettling. Don’t let your insurance agent map out the buying decision in those terms, otherwise you’ll purchase a policy in 10 seconds. Rather than freak out, focus on the future financial need. When determining how much you should save for retirement, you’ll want to put in enough money to pay for several months of long-term care. This way you’ll have some possessions standing between Medicaid and yourself—hence more options. Remember the more money you save, the effortless it’ll be to pay for ltc insurance if you want it when you’re already older. If you’re already in retirement or approaching it, ask yourself whether you have sufficient assets to bother protecting—and sufficient to live on in retirement. If you’re still scraping by, you may be so pinched that you’ll have to drop the long-term care policy even before you need to use it. Still feeling confused about whether you should buy long-term care insurance? Here are factors that should guide your decision making.

• Your age and health. Policies typically cost less if bought when you’re younger and in good health. If you’re a senior or are suffering from a serious health condition, getting coverage may be hard—and if you do, you may pay considerably more. But unless you have a family history of cognitive impairment or another chronic condition, you can wait until you’re about 60 to purchase—there’s still a good chance you’ll qualify for coverage.
• Your gross income. If you’re grappling to settle your bills now or are concerned about paying them in the years to come—when you might have fewer assets—spending thousands of dollars annually for long-term care policies may not make sense. If you’re a low-income retiree who has few assets when you need care, you may easily qualify for Medicaid. Unfortunately, you may have to first exhaust a large portion of your resources to satisfy other eligibility requirements.
• The premiums. Can you afford to pay long-term care insurance premiums—now and in the future—without straining your budget? Premiums will probably increase over time, but the same won’t necessarily apply to your income. If you’re struggling to afford the premiums, you could easily lose all the money you’ve put into a policy.
• Your savings and investments. A financial advisor may provide counsel on the ways you can save for future long-term care expenses as well as the advantages and disadvantages of getting into a long-term care insurance commitment.
• Your support system. You may still have family and friends who’ll cater for some of your long-term care needs should you need it. Think about whether or not you’d want their assistance and how much you can reasonably expect in return.
• Your taxes. The daily benefits paid out through your long-term care policy aren’t taxed as income. Even so, most policies sold today are “tax-qualified” by federal standards. This implies that if you itemize the deductions and have your medical costs exceeding 7.5 percent of your adjusted gross income, then you can deduct the value of your premiums from your federal income taxes. The amount of federal deduction will depend on your age, though most states also give limited tax deduction.

Ltc policies describe what kind of care they’ll cover, who can provide the care, and the conditions you must meet before an insurance company reimburses the cost of benefits. But where do you source these policies?

• Individual plans. You can buy long-term care insurance policies through an insurance broker or agent. You just need to confirm with your state’s insurance department that the person is licensed to sell insurance.
• Employer-sponsored plans. Some employers will offer group long-term care policies or avail individual policies at subsidized group rates. You may not have to satisfy any qualifying medical requirements.
• Plans offered by organizations. A service or professional organization you belong to might provide group-rate long-term care policies to its members. Study your options to understand what happens if coverage is terminated or you leave the organization.
• State partnership programs. Most states have a State Partnership Program through which you can buy a long-term care policy. Check with your insurance agent whether the policy you’re looking into qualifies under the State Partnership Program and how it works with Medicaid.

How Much Does a Long-Term Care Insurance Policy Cost?

Let’s face it; the amount you’ll pay for care in the future will be higher than it is today. The cost of a ltc insurance policy will depend on the coverage you choose. Premiums are based—in part—on your age, your health, the period of time you want to be covered for care, the elimination period, and how big a benefit you’ll be reimbursed for care. That said, you’ll have to continue paying the insurance premium when you’re retired and probably living on a lower income. You could lose your entire coverage if you stop paying your premiums. You can expect to pay a minimum of $2,000 per year in premiums for long-term care insurance. And according to the National Association of Insurance Commissioners (NAIC), you shouldn’t spend in excess of 7% of your income on premiums. Long-term care insurance policies may also include a 5% annual increase in the full benefit amount to keep up with inflation, also referred to as inflation protection. Such policies will typically cost considerably more initially.

Conclusion & Takeaway

Smart shopping is the key to getting the right policy. Seek out an independent broker who sells policies from multiple carriers—they’ll help you sift through the carrier and benefit choices. When comparing policies, review the insurer’s history of premium hikes—you could find yourself entangled in a ticking time bomb. Since you’ll probably live with the policy you buy for decades, be sure to choose a financially strong insurance company. Ultimately, an insurance agent will help you understand what your policy will and won’t cover but much of the decision making will revolve around your age, health status, and financial stability.

Frequently Asked Questions About Long-Term Care Insurance

What is the best age to buy Long-Term Care insurance?

If you want long-term care insurance, start keeping an eye out in your 50s or early 60s—before premiums skyrocket or worsening health rules out robust coverage. Every year you delay, your insurance will be more expensive.

When can I use the policy?

Your long-term care policy will typically state the conditions that should be met to use it. These include:

• Your inability to perform two or three specific “activities of daily living,” also referred to as ADLs without assistance. The activities include bathing, eating, toileting, dressing, and transferring (being able to move from place to place).
• Medical necessity or certification by a doctor that long-term care is needed.
• Cognitive impairment—most long-term care policies will cover stroke, Parkinson’s disease, and Alzheimer’s.

What are the alternatives to long-term care insurance?

There’s no doubt that long-term care is an expensive idea and if you need it, it’ll probably be a far-reaching retirement expense. Besides, the cost of coverage will probably increase each year, unlike term life insurance premiums that remain constant for as long as the policy remains effective. This high cost is the reason many people always keep an eye out for alternatives. Here are a few possibilities you’ll want to explore:

• Medicaid. Medicaid—the federal health insurance program for low-income citizens—pays for long-term care, but only in specific circumstances. It will pick up the tab for nursing home care and not care in your own home. Remember, you may only tap into Medicaid after exhausting the majority of your assets.
• Life insurance. While life insurance policies are supposed to protect your loved ones from the financial hardship that follows your death, some policies provide an accelerated death benefit. This death benefit lets policyholders suffering from a chronic illness or terminal diagnosis receive their death benefit while they’re still alive. You can tap between 25 and 95 percent of your death benefit through the accelerated death benefits program.
• Health savings account. A HSA lets you make tax-deductible contributions to cover health care expenses up to a limit of $7,000 for families and $3,500 for individuals. Any money that remains unused in a given year could continue to grow tax-free, giving you a pool of funds to cover your Long-Term Care costs.
• Reverse mortgage. A reverse mortgage can help you age in your home. Unlike a traditional mortgage, a reverse mortgage allows you to tap a fraction of your home equity without repaying it until you leave the home or fail to comply with the loan terms. You’re still responsible for homeowner’s insurance, home maintenance expenses, and property taxes. You must have attained 62 years of age, live in the home as your primary residence and have sufficient home equity to qualify.
• Annuities. Annuities come in two types; deferred and immediate. A deferred annuity invests your money for a period of time until you’re ready to start making withdrawals. With an immediate annuity, you can start receiving payments as soon as you make your initial investment. The type of annuity you choose will come down to your age and how you view your short and long-term health prospects. If you’re in poor health, you can qualify for a medically-underwritten—which gives you a higher payout because of your reduced life expectancy.
• Veteran’s benefits. Individuals living with service-related disabilities may get long-term care services through the U.S. Department of Veterans Administration.
• Your own savings. If you haven’t made plans for long-term care with life insurance, an annuity, reverse mortgage proceeds, or other alternatives, you’ll need to dip into your own savings.

Whatever option you choose, begin planning as soon as possible so that you can accord yourself and your family the most flexibility and care for as long as you need.

Are premiums for long-term care insurance tax deductible?

If you carry a tax-qualified ltc policy, you should consider a portion of your premium as tax-deductible. Medical expenses are deductible in the event they exceed 7.5 percent of your adjusted gross income. Most of the long-term care policies issued by carriers will satisfy the requirements—but you should ask your insurance provider about yours.