As life expectancy increases, more and more seniors will reach their 80s and 90s. And the longer they live, the more likely they will need help with everyday custodial care. However, all such care leading up to the need for skilled nursing care in skilled nursing facilities or home health care is not covered by Medicare or other health care insurance plans.
That gap in care – called “long-term care” (sometimes referred to as LTC) – is paid for either with personal savings or by long-term care insurance. And the high price tag of such care is why over 10 million Americans have invested in long-term care insurance.1
Long-term care insurance policies can be traditional policies or hybrid policies (that combine a life insurance policy or qualifying annuity with a long-term care rider). Here the focus is on traditional, standalone policies.
- Most seniors believe any long-term care needs will be covered by Medicare, Medicare supplement plans, or medical or disability insurance. However, that is not the case, so other measures should be implemented to prepare for those costly needs.
- Long-term care covers specific activities a patient cannot handle independently (such as mobility, eating and bathing). Care is provided in specific venues (in home care or in assisted living, nursing homes, or adult daycare centers). Depending on the type of care needed, theses costs often range from $2,000 – $9,000 per year
- Long-term care insurance costs vary by age, gender, plan type, and insurer but typical costs can run anywhere from $2,200 to $7,150 per year. Delaying the purchase of a policy increases costs, and premiums are higher for women than men. Plans can be customized in countless ways, and insurers are free to charge what they wish. As a result, shopping around is recommended.
- Not everyone is eligible for long-term care. Eligibility depends on age and health status, so policies are ideally purchased in the mid-50s before the onset of many age-related diseases.
What Do Long-term Care Insurance Plans Cover?
Each insurance company makes its own rules about the timing, triggers and duration of coverage on long-term care insurance policies. That makes it vital to understand precisely what a policy provides. However, some general guidelines do apply.
Long-term care policies are generally triggered by the policyholder’s inability to perform two of six basic self-care routines, called Activities of Daily Living (ADLs) These include:
- Transferring (from one surface to another)
Help with Activities of Daily Living is often referred to as custodial care.
A policy can also be triggered by the policyholder’s cognitive impairment (such as Alzheimer’s disease). Here the individual requires substantial supervision with the more complex skill sets needed to protect against threats to health and safety.
Long-term care insurance may not cover specialized, skilled nursing care, which Medicare typically covers. Policies should also be examined for temporary exclusions for pre-existing conditions or permanent exclusions for certain conditions (including mental or nervous disorders, alcohol or drug use, intentional self-harm, or anything related to an act of war).
How Much Coverage Do You Need?
Most seniors look at the aging process and assume they will be able to make do with the help of their family and friends. But they underestimate the need for care.
According to the U.S. Department of Health & Human Services, some 70% of 65-year-old seniors will use some form of long-term care during their lives. On average, women will need care for longer than men (3.7 years versus 2.2 years) because women live longer.2
Nearly one-half of seniors will need paid care, including for short episodes. However, only one-quarter of those seniors will receive more than two years of paid care, with 15% spending more than two years in a nursing home.3
These periods of care may not seem that long. However, the average monthly long-term care costs in 2021 are high, according to Genworth Financial (who has tracked such costs for nearly 20 years):4
- At home: homemaker services ($4,957) and home health aide ($5,148).
- In community and assisted living: adult day health care ($1,690) and assisted living facility ($4,500).
- In a nursing home facility: semi-private room ($7,908) and private room ($9,034).
The cost of long-term care depends on the type of care needed, the duration, the type of provider, and geography. But in all cases, the cost can be devastating to retirement planning if ignored. Planning for propper long-term care coverage will help with long-term care expenses down the road.
Related: How Much Does Assisted Living Cost?
How Does Long-term Care Insurance Work?
The cost of long-term care insurance – its monthly premium – depends on how the policy will be implemented. Here are several of the main aspects to consider:
The premium is the amount the policyholder will pay each month (or year, if preferred) once the policy is purchased. The premium charged by different insurers for the same coverage can vary considerably. It is also important to note that premiums are rarely fixed and can increase substantially with time.
The elimination period functions much like a deductible does in a health care insurance plan. Here, it is the number of days between when the policyholder becomes eligible according to the policy and when that policy begins to pay. Meanwhile, the policyholder must cover the cost of care out of pocket.
Eligibility will be triggered by the inability to handle ADLs or confirmation of cognitive impairment. The period typically lasts 30-90-180 days, with the cost of the premium dropping the longer the policyholder is willing to wait.
Care Allowance (Benefit Amount)
The care allowance is the amount the policy will pay daily or monthly. Daily amounts are often $100-500 and should be selected based on how inflation could affect costs in the future, understanding that health care costs usually rise faster than inflation. An alternative to a care allowance is a policy that pays for actual expenses incurred.
Care Allowance vs. Expenses Incurred
“Indemnity policies” provide a care allowance that the policyholder can spend as desired. “Reimbursement policies” require the policyholder to submit receipts for expenses incurred to be reimbursed the exact amount spent on approved long-term care services. A reimbursement policy may be a safer alternative as it removes the risk of inflation increasing costs beyond a care allowance set a decade or more earlier.
Payout / Benefit Duration
The payout duration is the amount of time the policy pays after being triggered by the policyholder completing the elimination period. Durations typically range from 1 to 5 years. Previously insurance companies offered plans with unlimited benefit duration but these have largely been long discontinued due to longer life expectancies and rising care costs.
Alternatively, the policy may specify a maximum amount it pays in benefits over the policy’s life. The benefit is then paid out until the period is ended or the maximum is reached, whichever comes first.
How Much Does Long-term Care Insurance Cost?
The cost of long-term care insurance will depend on several factors, including the policyholder’s gender, age at application, health condition, the amount of coverage chosen, riders such as inflation protection, and marital status.
As an example, the American Association of Long-Term Care Insurance has calculated that in 2022, a policy with initial benefits of $165,000 that grow by 3% yearly will cost a 55-year-old single man $2,220 a year; a 55-year-old single woman $3,700; and a 55-year-old couple $5,025 combined.
But if those same people wait until age 65 to purchase the same policy, their premiums will be $3,135, $5,265 and $7,150, respectively. [Source: American Association of Long-Term Care Insurance.1
Related: Does Long-term Care Insurance Cover Assisted Living?
Factors That Influence Your Premiums
Long-term insurance carriers are free to charge what they want for policies and to apply their own underwriting standards. But, in general, premiums are affected by the applicant’s health status, with conditions such as dementia and muscular dystrophy even leading to disqualification. Premiums are higher the older the applicant is. Married couples benefit from combining policies. And women pay more than men because they live longer and make more frequent claims.
Tax Savings With Long-term Care Insurance
If a long-term care insurance policy is considered “tax-qualified” (as most are), some or all of the premiums paid may be deductible from federal and state taxes. However, as part of the Schedule A medical expense deduction, it requires spending more out-of-pocket than 7.5% of adjusted gross income (AGI).
The tax deduction has limits, which increase with age. In 2022, the limits range from $450 (for age 40 or less) to $5,640 (for age 71 or more) per person.
How to Pick a Carrier For Your Policy
Whether a long-term care policy is purchased directly from an insurance company or through an insurance agent or broker, certain factors can be used to qualify that insurer. Insurers should be assessed for their:
- Level of customer satisfaction as rated by J.D. Power’s U.S. Life Insurance Study, for example.
- Available discounts, such as for couples sharing a policy.
- Financial stability as measured by a credit-rating agency such as A.M. Best.
- Available riders, such as inflation protection.
Resources & References