Alternative to LTC: Short-Term Care Insurance
The high costs associated with long-term care insurance have led many people to look into alternative options when it comes to funding long-term care. Even if you are planning on purchasing a long-term care insurance policy, it is still worth reviewing the other options available to you, especially since not all of them have to be mutually exclusive with long-term care insurance.
In part one of this series, we looked at hybrid life insurance/long-term care insurance policies. Here, we will explore short-term care insurance and the idea of paying for care expenses out-of-pocket.
Short-Term Care Insurance
If long-term care insurance isn’t right for you, one alternative you may consider is a short-term care insurance policy. This is a more modest approach to the issue of care-related expenses and is an increasingly popular option. These policies typically cover the same types of care that a long-term care insurance policy would, but last for a shorter period of time. The typical duration for an STC insurance policy is three months to a year. You get to choose how long you want your policy to last when you purchase it.
Why opt for a short-term care insurance policy? First, they are not always underwritten, meaning that you may not be required to answer any medical questions and will be more likely to qualify. The premiums for these types of policies are far lower than those for long-term care insurance, too. According to the American Association for Long-Term Care Insurance (AALTCI), a 65-year-old may pay just $928 per year for a one-year policy with a $150-per-day benefit. If you do not spend the entirety of your daily allotment, some policies will even let you save that money for later and stretch the policy past the typical 360-day maximum. The fact that the benefit period is so short also means that these policies tend to have much more stable, predictable rates than long-term policies.
Because of their limited duration, short-term care insurance policies also generally do not have waiting or elimination periods, so they will start paying out as soon as you require care. This can make them useful for filling in the gap caused by the elimination period of long-term care policies. If you are purchasing an LTC insurance policy and are wondering how you will get through your elimination period, an STC policy might be just the thing you’re looking for.
The primary concern with short-term care insurance is whether it will be enough to cover all of your care needs. You may very well require care for under a year. The AALTCI reports that 41% of LTC insurance claims stop after a year or less. However, that means that 59% of policyholders need more than a year. 14% of today’s 65-year-olds will require more than five years of long-term care. If you choose to purchase a short-term care policy but nothing else, you will be on your own after at most one year. While that could still cover your needs just fine, you will still be taking a risk.
Additionally, while most short-term care insurance policies will cover the same types of care as long-term policies, some do not offer coverage for all care options and may have stricter requirements. For example, not all short-term policies will pay for assisted living or in-home care. Thus, it may not always be worthwhile to invest in this kind of policy. Depending on your situation, it may be preferable to simply save up enough money for several months’ worth of care rather than buying STC insurance.
The quality of these policies is also a cause for concern. States do not regulate short-term care insurance policies as closely as they do long-term policies, meaning that such policies are often not held to the same standards regarding consumer protection. While most are, not all STC insurance policies are guaranteed renewable, either. This means that there is a chance that the insurance company can refuse to renew your policy for the following year even if you have paid all of your premiums and have never made a claim. Because of this, you should be cautious when purchasing a short-term care insurance policy. Make sure that you read the wording of the policy thoroughly, and it may help to go over it with a trusted financial advisor just to be safe.
The simplest way to deal with the cost of long-term care is simply to save up money and hope that it will be enough to cover all of your expenses. As mentioned in the above section on short-term care insurance, many people will require care for 12 months or less. If your savings are good enough and your annual living expenses cost less than 4% of your savings, you may not have to get long-term care insurance at all. Doing things this way ensures that you will only be paying for care that you absolutely need, with no worries about overspending on coverage that will never be used.
The downsides to handling things in this manner are most prominent in situations where care is required for a long period of time. A few years of care could put a notable dent in your savings and leave less for your heirs. You could even be at risk of exhausting your savings entirely. You can still fall back on Medicaid if this does happen, but as discussed in our other articles, the care options available through it are very limited. You will also need to have almost completely exhausted your assets in order to qualify.
Overall, while there are upsides to this strategy and something that you can fall back on should things go wrong, it is very risky, especially if you don’t have much in terms of savings. If you do decide to pursue this option, be sure to set up a plan for what will happen if certain necessary expenses do crop up.
More Useful Links:
Alternative to LTC: Medicare, Medicaid