An Introduction to Long-Term Care Insurance
What is Long-Term Care Insurance?
With age comes an increased chance of chronic illness, cognitive impairment, and other conditions that can make routine activities difficult to perform. When a situation like this becomes serious enough, long-term care (LTC) is needed. This could be as simple as having someone around to supervise you and make sure that everything is okay to having a nurse on-hand to help with taking medications, getting dressed, and other facets of day-to-day life.
Long-term care is becoming a bigger and bigger concern as more people live into advanced age. According to the U.S. Department of Health and Human Services, 70% of current 65-year-olds will use some form of long-term care in the future. With the likelihood of needing long-term care that high, it pays to plan ahead and start thinking about what type of care you may require, how long you will need it for, and how you are going to pay for it. Considering the possible costs of long-term care is an important part in any long-range financial plan, especially for those who are in their 50s or beyond.
This is where long-term care insurance comes in. This is a specialized form of insurance that helps those with chronic illnesses, disabilities, and conditions such as Alzheimer’s get through daily life. It helps to pay for many different forms of caregiving and assistance, including skilled care provided by nurses and therapists. Such care includes help with eating, bathing, getting dressed, doing chores and other household activities, and making sure that the patient takes all of his or her proper medications. Long-term care insurance can help cover the cost of the care that you or your loved one needs.
One major mistake that many people make when it comes to long-term care is thinking that Medicare or their existing health insurance will cover it. Most forms of health coverage do not cover this kind of daily, long-term care. Medicare does cover brief stays in nursing homes or limited amounts of at-home care for those in need of skilled nursing, but the conditions surrounding this are very strict. Medicare also does not cover custodial care, a non-medical service that offers supervision and help with day-to-day activities. Medicaid, the federal and state health insurance program for people with lower incomes, can offer some help, but this is also limited and is only offered to people who have already exhausted most of their savings. Because of this, those who are concerned about paying for future long-term care will often choose to buy long-term care insurance.
How do Long-Term Care Insurance Policies Work?
At its most basic, long-term care insurance has you pay premiums regularly while you are still healthy, and once you are in need of care, it reimburses you a daily amount to help pay for LTC services.
Once you have chosen a policy, been approved, and the policy has been issued, you begin paying premiums. The cost of these premiums will vary depending on how much coverage you chose to get, along with other factors that are covered in detail in another article. The money paid through these premiums will go towards the benefits that the policy pays out later in life.
Long-term care insurance policies are guaranteed renewable, meaning that they cannot be cancelled or terminated because of the policyholder’s age, physical condition, or mental health. This means that no matter what happens, you will be able to keep your policy as long as you pay your premiums. Additionally, the insurance company cannot change the wording in your policy after you’ve purchased it, nor can you be singled out for a rate increase.
Under most long-term care insurance policies, a person is eligible to receive benefits when they are unable to perform two of six common activities of daily living (ADLs) without assistance, or when they develop dementia or a similar form of cognitive impairment. The six ADLs that are typically used are:
- Toileting (getting on or off)
- Maintaining continence
- Getting into or out of bed, chairs, wheelchairs, etc.
Even after you have met the ADL requirement, most policies will have you pay for care out-of-pocket for a predetermined period of time. This is called an elimination period and commonly lasts for 30, 60, or 90 days. After you complete the elimination period, you will start receiving daily benefits up to a certain amount. You will continue receiving these benefits until you have reached your predetermined maximum.
Planning for long-term care and its related expenses can be complicated and confusing at times. Many people don’t fully understand the options that are available to them and what steps should be taken when making these kinds of decisions. Luckily, there are plenty of resources available to help you be as informed and prepared as possible. Take a look at our articles on the costs of long-term care, the pros and cons of LTC insurance, alternative strategies, and more. When you feel that you are ready, talk to an experienced long-term care insurance agent and see what type of plan will work best for your needs and budget.
Remember, it is never too early to start thinking about the future.
Services Covered by an LTC Insurance Policy
No matter who you are, it’s likely that you will need some form of care or assistance later in life, and buying long-term care insurance can help you prepare for when that time comes. The exact type of long-term care that a given person will need varies depending on what kind of condition they have and their own personal circumstances, such as whether they have friends or relatives who will can help provide care. In some cases, you may be able to predict ahead of time what kind of conditions will develop and the care that will be needed – for example, you may know that Alzheimer’s is prevalent in your family. In other cases, though, it is difficult to know the exact type and amount of care that will be needed. Either way, it is always good to keep one’s options as open as possible.
How does LTC Insurance Differ from Medicare or Medicaid?
As discussed in our introductory article on long-term care insurance, Medicare can cover nursing home stays or even in-home care, but this coverage is highly limited in both scope and duration. Medicaid, a welfare program that provides medically necessary services for people with limited incomes, can also help with long-term care. However, like Medicare, the care available through this is very basic and limited, and one must meet specific financial requirements to qualify for it.
When planning for their future care needs, many people choose to buy a long-term care insurance policy. Unlike Medicare or Medicaid, these policies can come with a wide variety of coverage options. Below is a list of care arrangements that a long-term care insurance policy may cover. How many of these are available on your specific plan will vary depending on how much coverage you buy and the specifics of the plan itself. Of course, plans offering more coverage and a wider variety of services will cost more than plans that are more limited, so you will need to carefully consider what kind of care you want and how this will play into your budget.
What Types of Services Can My LTC Insurance Policy Cover?
- Nursing homes: these facilities provide daily activities and a full range of skilled health, rehabilitation, and personal care services that are available 24/7. Note: if you are interested in nursing home-based care, look into whether the policy you are considering covers more than just room and board.
- Assisted living residences: these facilities have apartment-style units. Services such as personal care and meal delivery are close at hand and available as needed.
- Adult day care services: these programs take place outside the home and provide attendees with health and support services. They also provide valuable opportunities for socialization in a supervised setting.
- Home care: this can take many forms, but as the name suggests, this is care given in the individual’s own home. Home care may be provided by an individual or agency. Home care coverage helps pay for a visiting or live-in caregiver, companion, housekeeper, therapist, or a private duty nurse. These professionals offer help with daily activities that those in need of long-term care may be unable to do on their own, such as bathing, grooming, and helping with chores and other tasks around the house. These caregivers may stop by only a few days a week, or they can be available 24/7.
- Certain home modifications: this includes things such as installing ramps for easy access or grab-bars to help give an individual support and ease of movement.
- Hospice care, specialized facilities (such as those for people with Alzheimer’s) and more
- Care coordination: these are services provided by a trained or licensed professional. This person will help determine their client’s needs, locate services to help fill those needs, and arrange for care as necessary.
- Future services: this is a type of option seen in some long-term care policies. This will allow the policy to adapt and extend coverage to new forms of care services as they are developed. If this is something that interests you, check whether the policy you are interested in offers a “future service” option.
If you have the funds and want to make sure that you are prepared for any eventuality, you may want to opt for a plan with flexible options. As stated earlier, in many cases it can be difficult to predict the occurrence and progression of conditions that will require long-term care, and a plan like this will allow you to adapt to unforeseen developments and ensure that you receive the kind of care you need. Plans with flexible coverage will cost more than those with more rigid terms, but it is a valuable option that is worth considering if your budget will allow it.
Why is This Important?
A recent survey by Consumer Reports showed that many long-term care insurance policyholders don’t know what benefits their policies offer aside from covering the most basic kinds of care. When deciding on a policy, pay attention to what is covered and what is not – after all, no one wants to pay for services that they never use, much less for services that they don’t even know are available!
The Cost of Long-Term Care Insurance
One of the primary concerns regarding long-term care insurance is its cost. As we will discuss below, the cost of a long-term care insurance policy is impacted by a variety of factors, some of which are more obvious than others.
How Much can I Expect to Pay?
Those who opt to pay for long-term care entirely out-of-pocket will, on average, end up paying a total of $138,000-$140,000. According to Genworth’s 2016 Cost of Care Survey, the median cost of care in a semi-private nursing home room is upwards of $80,000 per year, with a private room costing more than $10,000 more. Even cheaper options such as a home health aide will likely cost $45,000 or more. That’s no small amount of money, and many people don’t have the planning or savings to be able to afford such things.
Long-term care insurance is by no means cheap either, but because of the way it is set up, the cost is spread out over a longer period of time. According to a 2016 price index from the American Association for Long-Term Care Insurance, a single, 55-year-old man in good health who buys a new plan can expect to pay about $1,015 per year for a policy that will pay out $150 per day for up to three years. The same plan for a single woman of the same age would cost $1,490 per year, and the combined cost for a 60-year-old couple each buying the same coverage would be about $2,010 per year.
These kinds of prices are still out of reach for many people, though smart planning can help you get more for your dollar. Some money-saving tips and techniques, as well as alternatives to long-term care insurance, will be covered in later articles.
What Influences The Price of a Long-Term Care Insurance Policy?
While average prices are listed above, the cost of long term-care insurance is impacted by several factors and can vary greatly from plan to plan and person to person. How much you pay will change depending on the amount of coverage you select, the maximum amount of benefit the policy will pay per day, the maximum number of years (typically measured in days) that the policy will pay, and the total amount that will be available through the policy. Other aspects of the plan that influence costs are the length of the elimination period and how many restrictions are put on the types of care that are covered. Optional extras, such as inflation riders, will also impact the cost. We have a separate article on inflation protection and other notable options and features for those who want to learn more.
The factors listed above may be the most obvious and straightforward things impacting the cost of a long-term care insurance policy, but there are numerous other things at play that can also impact the size of the premiums you pay. Here are some important points to keep in mind when buying long-term care insurance, as they could greatly change the cost of your policy:
Your current age and health are important. Most individual long-term care insurance policies require medical underwriting. Because of this, a policy purchased when you are younger and in better health will cost less than a policy purchased later on or after your health has started to decline. Those who are older and already have serious medical conditions, including those who are already paying for long-term care services, may have difficulty acquiring coverage. Even if you are able to buy a plan in a situation such as this, you will often have to buy a more limited amount of coverage or pay a significantly higher rate.
Getting coverage can be difficult for people with preexisting conditions. Many people are turned down for long-term care insurance because of such conditions. Even if you are given a policy, payment may be withheld for a certain period of time. If this is going to be the case with your plan, make sure that you can afford to pay for care out-of-pocket through this period. While it may seem tempting, omitting a preexisting condition when applying for LTC insurance isn’t a good idea. If you don’t tell the insurance company about your condition, they may refuse to pay for the care it requires.
Location matters. Make sure that the types of facilities and programs that you will need exist in your area. If they do not, moving elsewhere could make a big difference in the coverage you receive and the types of services you will have access to. It is also important to note that the average cost of long-term care insurance can vary wildly from state to state. Do some research and find out how your state ranks, and whether it may be beneficial to move elsewhere.
Marital status can influence costs. Long-term care insurance premiums are often lower for those who are married versus those who are single. Many companies also offer deals for couples who both want long-term care insurance.
Gender plays a role. Women tend to live longer than men and have a greater chance of making LTC insurance claims. This means that they also tend to have more costly premiums. This can be seen in the average yearly premiums listed above – the same plan costs more than $400 more per year for a woman than it does for a man.
Not all insurance companies are the same. In a 2016 price comparison, the American Association for Long-Term Care Insurance found that rates could vary as much as 94% between different insurers. This massive discrepancy is the result of a few different things. First, every company sets its own rates, and each one designs things a little bit differently. For example, the company selling the best rate for someone buying LTC insurance at age 55 may not have good rates for someone buying at 65. Rates are also liable to change as companies modify or discontinue older plans and introduce new ones. This is why it is crucial to shop around and compare your options before deciding on an LTC insurance plan.
Friends and family can be of great help to those in need of long-term care. While in most cases it is not reasonable to expect a friend or family member to provide all of the long-term care you need, they can still help out. Think about whether you will be able to rely on someone this way and discuss it with them. Even if they only help you with some things or on certain days of the week, those are still services that no longer need to be paid for or covered by long-term care insurance.
What Else Should I Know When Budgeting for LTC Insurance?
Last but certainly not least, when budgeting for a long-term care insurance policy, it is important to note that the price of your policy may go up after you buy it, leading to higher premiums. While this is no longer as big a problem as it once was, it is still a major concern for many people looking into LTC insurance policies. It is recommended that you budget for your premium to increase by as much as 50% at some point down the line.
Notable Riders, Options, and Features for LTC Insurance Plans
Most people will require at least some form of long-term care (LTC) later in life. To help them prepare for this, many will choose to purchase a long-term care insurance plan. In other articles on this website, we have discussed the various forms of care and services that this type of insurance can cover. However, there is more to selecting an LTC insurance plan than just deciding how much coverage you will need and what types of care you want the plan to cover. Long-term care insurance plans also offer a wide range of features, options, and riders. Sometimes these are included within the plan, and sometimes they are offered as extras available at additional cost. A selection of common and noteworthy examples are listed below.
- Future service options: this type of option is seen in some long-term care policies. It will allow the policy to adapt and extend coverage to new forms of care services as they are developed. If you are uncertain about what kind of care you will need in the future and want to keep things open and adaptable, it may be worthwhile to look into plans that offer future service options.
- Inflation protection: Many people buy long-term care insurance 10-30 years before receiving their benefits. Having this long stretch of time between making payments and receiving benefits means that inflation is a major concern. Luckily, most plans will offer an inflation protection rider to help counteract this effect. Inflation protection will increase your benefit by a specific percent, with 3-5% being a commonly recommended amount. You can choose to get either simple inflation protection (which increases the benefit only one time) or compound inflation protection (which increases the benefit annually). If you are under 70 when you make the purchase, compound is generally considered the best choice, as simple generally can’t keep up with inflation rates and rising costs of care over longer periods of time. The younger you are when you first purchase your plan, the more important inflation protection becomes, as it means a longer period between the time you start making payments and the time when you start receiving benefits.
- Future-purchase or guaranteed-purchase options: If you select an option like this, you will start out paying a low premium and receiving only a limited amount of coverage. You can then choose to buy more extensive coverage later on in exchange for a significantly higher premium. This can be great if you aren’t certain that you’ll need a lot of coverage at the moment but still want to keep your options open in case something changes. Just be aware that if you turn down the offer of extending your coverage too many times, you may lose the ability to do so going forward.
- Nonforfeiture options: If you fail to pay one of your premiums or if you drop your benefit, nonforfeiture options allow you to receive a reduced amount of benefit based on the amount that you have already paid into the plan. Some states require plans to have such options, but others do not. Check and see what the situation is in your state before deciding to drop. If your policy does not include this type of option, all payments made before you stop paying premiums will be forfeit.
- Pooled benefits: Some plans will pay out different amounts for different services, such as at-home care versus nursing home care. With pooled benefits, you have a total dollar amount available that can be used towards different types of care, allowing you to choose and combine services in whatever way best suits your needs and budget.
- Return of premium riders: Policies with such riders will pay a death benefit to a beneficiary if the insured person dies before he or she has received benefits equal to the amount of premiums that had been paid. This ensures that, should something happen to you before your LTC insurance policy has fully paid out, the money will not be lost and will instead go to your heirs.
- Restoration of benefits: This feature gives you the ability to have benefits you exhaust restored if you no longer need them for a certain period of time (commonly 180 days). Put in simple terms, if you make a large claim but then recover and need no further care for a time, you can get back the money that was lost in that first claim and thus ensure that you have plenty available for future claims. The restoration of benefits feature can significantly increase the total amount of care that your policy will pay for and can help prevent you from exhausting all of your funds in a short period of time. This option is included in some policies and offered as an additional option in others. Some insurance companies will place a limit on how many times your benefits can be fully restored, while others will not.
- Spousal survivorship: This is a rider that couples can choose to add when they purchase a policy together. With this, when one spouse dies, the remaining spouse will no longer have to pay their LTC insurance premium. It may help to think of it as a kind of death benefit. These types of riders are offered in some form by most companies selling long-term care insurance. People who buy this type of rider are usually required to keep it for ten years without filing any claims before it will kick in. If you purchase an LTC insurance policy as a couple, this is one of the main riders that agents will try to sell to you. While it does have its benefits, it is worth noting that in many cases it is unnecessary and can even end up costing more in added premiums than the value of the benefit it would ultimately pay out. There are definitely situations where it should be considered, though, such as a case where one spouse has annuitized income that will stop once they have passed away, such as Social Security, a pension, or a private annuity. It may also be worth looking into for couples with a significant age gap between them.
If you want to learn more about long-term care insurance, including information on costs, benefits and drawbacks of buying an LTC insurance plan, the types of care it can cover, and what alternatives are out there, take a look at our other articles.
Things to Look out for When Choosing a Policy
In other articles on this site we discuss the types of care that can be covered by a long-term care insurance policy as well as some of the most common features, options, and riders that are available. However, there are other items that anyone looking into LTC insurance should be aware of, some of which can make big differences in terms of both the amount you pay and how easy it is to receive benefits.
Tax-Qualified vs. Non-Tax-Qualified Plans
Most long-term care insurance policies are tax-qualified. By law, tax-qualified (TQ) policies have specific restrictions on when the policyholder can start receiving their benefits. Such policies require a person to expect to need care for at least 90 days and be unable to perform two or more activities of daily living (ADLs) or have some sort of severe cognitive impairment. A doctor must also provide a plan of care. Benefits received under this type of policy are non-taxable. If you want to learn more about tax-qualified plans and the advantages they offer, check out our article on the benefits of buying LTC insurance.
Non-tax qualified (NTQ) plans typically feature a medical necessity trigger, where the patient’s doctor or a doctor working with the insurance company can declare that the patient needs care for any medical reason and the policy will start paying out. The benefits received under a plan like this may or may not be taxable. Overall, because of their more relaxed requirements, NTQ plans will start paying out sooner than TQ plans, but they also come with a lot of tax-related complications and the potential for large bills come tax season. Many people are not aware of the differences between these types of plans, with one survey revealing that as many as 65% of people who had purchased a long-term care insurance policy didn’t know which category their plan fit into. When picking out your own plan, consult an expert who will be able to identify which type of plan you’re looking at and what kind of impact it may have on your taxes.
State Partnership Programs
These are partnerships between the state and insurance companies meant to encourage people to plan for long-term care. In these programs, insurers agree to offer policies that meet certain standards of quality. This could include things like providing cost-of-living adjustments that help protect against inflation. If the policy you purchase is part of this program, you can qualify for Medicaid (something that normally requires you to have more or less exhausted your savings) while still hanging on to a specific amount of assets.
In most states, it works like this: if your plan has finished paying out benefits and you still need care, you will be able to qualify for Medicaid with assets equal to the normal Medicaid requirement (typically $2,000) plus the total amount that your policy paid out. So if you would need to have $2,000 in assets to qualify for Medicaid without the partnership program, and your policy paid out $164,000 in total, you would now be able to qualify for Medicaid with $166,000 in assets. In short, this allows you to receive further care without having to spend all your savings. To see if your state offers this program, check with the state insurance department or go to this link:http://www.aaltci.org/long-term-care-insurance/learning-center/long-term-care-insurance-partnership-plans.php#approved . Ask your agent whether the policy you’re looking at qualifies under this program and how it works with Medicaid.
Exclusions & Requirements
Below is a list of additional things to look for in the policies that you are considering. These points may not apply to all LTC insurance policies, but are good to be aware of nonetheless. If you are having trouble choosing between policies, finding potentially problematic areas such as these may help you reach a decision more easily.
- Exclusions: Every long-term care insurance policy will have some conditions that are excluded from coverage. Common exclusions include those for substance abuse, mental disorders, and self-inflicted injuries. When reviewing your policy, make sure that common problems such as Alzheimer’s, heart disease, diabetes, and certain forms of cancer are non-excludable. Your agent can help with this process.
- Required time in a hospital or nursing home: While many states have rules against it, some plans require you to have been in a hospital or nursing facility for a certain number of days before qualifying for benefits. This requirement can block policyholders from receiving benefits for long periods of time and is definitely something to watch out for.
- Multiple elimination periods: Many policies will only require that you go through one elimination period before you start receiving benefits. However, there are policies out there that require you to undergo a new elimination period each time a new medical issue arises or a new form of care is needed. If possible, select one of the policies that only makes you wait once before receiving your benefits.
- Proof of care: Some policies will require that you prove you have paid for care throughout the elimination period before they will start paying any benefits. If the plan you choose has such a requirement, make sure that you keep all care-related expenditures well-documented and will be able to provide proof of payment if and when it is needed.
- Care outside of the US: Most policies will only cover care given within the continental United States. Plans that do cover care in foreign countries typically offer limited coverage and charge an increased rate for it.
If you want to learn more about long-term care insurance, including information on costs, benefits and drawbacks of buying an LTC insurance plan, the types of care it can cover, and what alternatives are out there, take a look at our other articles.
The Benefits of Long-Term Care Insurance
Most people will require some form of care or assistance later in life, and buying long-term care insurance (LTC) can help prepare for that eventuality. LTC insurance policies are private policies that cover at least some of the costs of in-home, assisted living, or nursing home care. As mentioned in our introductory article on the subject, long-term care insurance helps pay for services that Medicare and employer-provided health insurance do not cover. While it can be expensive, having long-term care insurance can be greatly beneficial and can help take some of the worry out of an already difficult situation.
Protecting One’s Savings
Those who choose to purchase LTC insurance typically do so for two main reasons. The first is to help protect their savings, as paying for long-term care entirely out of pocket can quickly deplete a retirement nest egg. Most people who need long-term care will require it for less than two years. However, one in seven of today’s 65-year-olds will require more than five years of long-term care. If you end up falling into the latter group and do not have long-term care insurance to help cover the costs, the results can be financially devastating. Having long-term care insurance lets you rest easy knowing that no matter how long you need care or how much it may end up costing, you will have money available to help cover at least part of the bill. While long-term care insurance is itself expensive, its cost is spread out over a period of many years, which helps to soften its financial impact.
The other reason many people opt to buy long-term care insurance is that it gives them a wider range of choices when it comes to care and services compared to what they’d see with Medicare or Medicaid. Those with LTC insurance will also typically have access to higher quality care than they would through one of those two programs. If you are interested in learning more about the range of services that can be covered by a long-term care insurance plan, see our article on the subject.
Another positive aspect of long-term care insurance is that the benefits that these policies pay out are typically excluded from income, which means that they aren’t subject to income taxes. However, there are exceptions to this, including plans that pay a set dollar amount per day. Such plans can become taxable if these per-day benefits exceed a certain threshold.
Premiums paid for LTC insurance may also be eligible for tax deductions as a form of medical expense. In order to qualify for this kind of deduction, your LTC insurance premiums and other unreimbursed medical expenses must exceed 10% of your adjusted gross income.
You will also need to itemize your deductions. The maximum amount of premiums that you can deduct for a given year depends on your age and will increase over time. In 2017, the limit on how much could be deducted ranged from $410 for those 40 or younger all the way up to $5,110 for people 71 and older.
It should be noted that these deductions are only possible with LTC insurance plans that are tax-qualified (TQ). Such plans must meet certain federal standards and are required to be labeled as such when they are offered. The majority of LTC insurance plans on the market today are tax-qualified. If you are unsure whether the plan you are looking at is a TQ plan, contact your agent or the insurance company. Tax-qualified versus non-tax-qualified plans are discussed in further detail in our article “Things to Look out for When Choosing a Policy”.
Most long-term care insurance plans also offer riders that protect against inflation. These can be greatly beneficial, as most people buy LTC insurance 10-30 years before receiving their benefits, and that long stretch of time makes inflation a major concern. Inflation protection will increase your benefit by a specific percent, with 3-5% being a commonly recommended amount. You can choose to get either simple inflation protection (which increases the benefit only one time) or compound inflation protection (which increases the benefit annually). If you are under 70 when you make the purchase, compound is generally considered the best choice, as simple generally can’t keep up with inflation rates and rising costs of care over longer periods of time. Having a long-term care policy with inflation protection helps to ensure that the money you put aside for long-term care when you’re young retains its value when the time comes for you to finally use it.
The long-term care insurance industry has had its share of problems over the years, with insurers making poor predictions that led to massive increases in premiums later on and ended up forcing many companies to drop out of the LTC insurance market entirely. It isn’t all bad, though – these issues have forced the industry to adapt and offer new choices and more reliable rates. Today, LTC insurance premiums are more stable than they have ever been before. While this is hopefully a sign that the companies providing these policies have learned from the past and will not need to do any major price hikes in the future, increases are still possible and it is recommended that you budget for your premium to go up by as much as 50% at some point down the line.
While getting long-term care insurance can certainly have its advantages, it also comes with some disadvantages that are worth noting, including the aforementioned potential for increased premiums. To learn more, see our article on “The Drawbacks of Long-Term Care Insurance”, and if you want to learn even more about long-term care insurance, check out our other articles on costs, where it can be purchased, how it works, and more.