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You may be on track with saving for retirement, but are you saving for long-term care? Long-term care provides assistance with health issues as well as activities of daily living, such as bathing, eating and getting dressed. The costs for these services can add up quickly. Long-term care insurance can help by paying for long-term care should you or your spouse eventually need it.
While long-term care insurance often falls far down on the list of expenses deemed necessary for some consumers, there may be reason to reconsider. The average 65-year-old has a 70% chance of needing long-term care at some point, and 20% will need it for more than five years, according to the U.S. Department of Health and Human Services. With the average monthly cost of a home health aide topping $4,500 and a semi-private room in a nursing home over $7,700, the cost of long-term care can quickly add up. If one spouse is healthy but the other needs care, paying for long-term care could drain retirement savings, leaving the healthy spouse little to live on. Long-term insurance can help mitigate those costs.
How Does Long-Term Care Insurance Work?
You might assume that Medicare or your health insurance will pay the cost of long-term care as you get older. However, both government and private insurance plans typically cover only skilled care—that is, care provided by a licensed health care professional, such as a nurse—not non-skilled assistance with activities of daily living. Even skilled care is only covered for a certain amount of time; for example, Medicare limits coverage to 100 days.
Long-term care insurance can fill the gap by paying for both medical and non-medical long-term care. There are two different types of long-term care insurance: traditional and hybrid.
Traditional long-term care insurance, also called stand-alone long-term care insurance, works similarly to health insurance: You pay a monthly or annual premium for coverage you can access should you ever need it. Stand-alone long-term care insurance costs less than hybrid long-term care insurance. However, premiums may rise, sometimes substantially. Insurers can't increase your premiums based on your health or age, but they can increase premiums for a "class" of people, such as a certain age group.
Premium increases on a stand-alone policy can make it difficult to keep up with the payments. If you can no longer afford the premiums—or if you never need long-term care—you may end up paying a lot of money for coverage you never use.
Hybrid long-term care insurance was developed in response to these issues and has become more popular in recent years. In 2018, just 16% of policies sold were traditional, while 84% were hybrid, according to the American Association for Long-Term Care Insurance (AALTCI). Hybrid policies, also called asset-based, combination or linked policies, combine long-term care insurance with permanent life insurance or an annuity. You can usually choose to make a lump-sum payment for the insurance or payments over time.
Hybrid long-term care insurance has some key advantages over the traditional kind. Premiums are guaranteed not to increase, and if you don't use up the entire long-term care benefit, your heirs will receive the remainder when you die.
The downside of hybrid plans is that they're much more expensive than traditional plans. According to the AALTCI, in 2020 the average premium for a single male, age 55, buying traditional long-term care insurance was $1,710 annually; for hybrid long-term care insurance, the average premium was $5,278.
What Does Long-Term Care Insurance Cover?
When long-term care insurance first became available in the 1980s, it was called nursing home insurance. However, today's long-term care insurance covers many other situations besides nursing home care. Depending on your policy, the insurance may cover:
- Care in assisted living facilities
- In-home care
- Board and care homes
- Adult day care centers
- Hospice facilities
- Respite care to relieve a family caregiver
Policies typically cover occupational, speech, physical and rehabilitation therapy in addition to personal care. Some may cover services beyond activities of daily living, such as having someone cook, clean house or run errands for you.
Long-term care insurance generally doesn't cover the following:
- Mental disorders aside from dementias such as Alzheimer's disease
- Alcoholism or drug addiction
- Illness or injury resulting from an act of war
- Illness or injury resulting from attempted suicide or self-harm
- Treatment that the government is already paying for or that's being performed in a government facility.
Typically, you become eligible for long-term care benefits when one of the following "triggers" occurs:
- You can no longer perform activities of daily living (bathing, continence, dressing, eating, toileting and transferring, such as getting from bed to chair).
- You're diagnosed with cognitive impairment such as Alzheimer's Disease or other dementias.
- Your doctor certifies that long-term care is medically necessary.
After your benefits trigger, most long-term care insurance policies have a waiting period of 20, 30, 60, 90 or 100 days, called the elimination period, before they will begin to pay benefits. Policies usually have a lifetime maximum benefit; there may also be a time limit, such as five years or 10 years, although some policies offer lifetime coverage. When shopping for long-term care insurance, make sure you clearly understand what types of care are covered, the settings where care can be covered, how benefits are paid and any limits on benefits.
Who Needs Long-Term Care Insurance?
It's easier to qualify for long-term care insurance when you're healthy. When considering your application, insurers may have you fill out a health questionnaire, share your medical records or undergo a medical examination. Generally, you won't qualify for long-term care insurance if you already have dementia, AIDS, a progressive neurological disorder, metastatic cancer or have recently had a stroke. Health conditions such as high blood pressure or diabetes, which may lead to needing care in the future, won't necessarily disqualify you, but you might have to pay higher premiums. Keep in mind that different insurers may have different standards; even if one company denies your application, you might be able to get insurance from another company.
If you buy long-term care insurance too early, you'll end up paying premiums for a longer time period. However, if you wait too long to buy the insurance, you increase the odds of developing health problems that may exclude you from eligibility. According to the National Association of Insurance Commissioners (NAIC), the average age at which people buy long-term care insurance is 59.
Long-term care insurance is expensive, and it's not for everyone. Ultra-high-net-worth individuals can generally pay for care out of their own assets. People with low incomes may not be able to afford long-term care insurance. How do you determine whether it might be right for you? The NAIC recommends you buy long-term care insurance only if the premiums will be less than 7% of your income and if you could afford a premium increase of 25%.
How Much Does Long-Term Care Insurance Cost?
The cost of long-term care insurance can vary greatly. The AALTCI reports that in 2020 the average annual premium for a couple, both age 55, buying traditional long-term care insurance ranged from $3,000 to $6,300. Factors that determine your long-term care insurance rates include:
- Age: As you age, you're more likely to suffer from chronic illnesses or disability, so the older you are, the higher your premiums are likely to be.
- Health: Health problems are likely to raise your long-term care insurance rates.
- Gender: Women generally pay more for long-term care insurance because they live longer than men on average, so they are more likely to need care for longer.
- Amount of coverage: The more benefits your policy pays out, the higher your premiums will be.
- Type of policy: Premiums for hybrid policies generally cost more than those for stand-alone policies.
- Elimination period: A shorter elimination period generally means higher premiums.
- Inflation protection: Policies that guarantee your benefits will rise to keep pace with inflation cost more.
- Nonforfeiture benefit: If you can no longer pay your premiums, a nonforfeiture benefit provides some type of return on what you've already paid. This might be a partial refund or allowing you to keep the policy, but with reduced benefits.
- Your insurance company: Different insurance companies set premiums differently.
Some long-term care insurance policies are tax-qualified. Buying this type of policy may allow you to deduct part or all of your premium costs on your federal income taxes. In addition, benefits from a tax-qualified policy generally aren't considered income, while benefits from a non-qualified plan are. Talk to your tax advisor to see if a tax-qualified policy makes sense for you.
How to Buy Long-Term Care Insurance
You can purchase long-term care insurance directly from insurance agents, insurance brokers or financial planners. If you already have a financial planner, they may be your best resource for finding a long-term care insurance plan that fits your needs and finances. Your state department of insurance may also provide guidance to help you buy long-term care insurance, including information about which insurers in your state sell the coverage.
You may have other options as well. Some employers offer group long-term care insurance as an employee benefit, for example. Associations may also make group long-term care insurance available to their members. Employers and associations can often negotiate a lower rate for insurance than individuals. In addition, medical requirements for getting group long-term care insurance are often more lenient than for individual policies. Before purchasing this type of insurance, find out what happens if your employer or organizations stops offering the policy or if you leave your job or the association. Can you still keep the insurance?
Long-term care insurance can be a complex purchase. Be sure to shop around with a variety of insurance companies, and ask each company for an outline of coverage—a document that explains the benefits and key features of the insurance policy. Before paying any money, check the financial stability of the insurance company by looking at ratings such as those from AM Best and Standard & Poor's. A Shopper's Guide to Long-Term Care Insurance, available from the NAIC, offers comprehensive advice on buying long-term care insurance that can help you navigate the process.
Planning for Your Future With Long-Term Care Insurance
There's a lot to consider as you plan for retirement and old age. When you're no longer able to live independently, long-term care insurance can help you get the care you need to enjoy your remaining years. It can also help protect your assets to provide for your spouse or leave an inheritance to your family. Developing a long-term financial plan can help you assess your resources, decide whether you need long-term care insurance, and budget to pay for it.