The Basics of Long Term Care Insurance

Can you imagine a future where you’re unable to go about your daily routine and need assistance to carry out elemental tasks like eating, bathing, and walking?

Hard to picture, right?

That is, perhaps, the main reason most of us have never seriously considered a product like long-term care insurance, yet current microsimulation models reveal up to 70% people turning 65 will need long-term care for an average of three years.

In a journal article titled Long-Term Care Over an Uncertain Future: What Can Retirees Expect, researchers from Pennsylvania State University estimated that 58% of men and 79% of women aged 65 and older will require long-term care at some point, and that average lengths of care can range between 2.2 years for men and 3.7 years for women. Other studies reach similar conclusions, stating that about half of Americans turning 65 are at risk of developing a disability that could require long-term care for a period of up to five years.

“Planning is bringing the future into the present so that you can do something about it now.”

― Alan Lakein

These projections only emphasize the need to plan for the future and decide now, while we are capable of doing so, how we would like to be cared for in the event of an illness or degenerative disorder.

Although prices vary by state, the costs of long-term care can be quite high and, since these services are considered custodial care as opposed to health care, they are generally not covered by Medicare.

Those requiring custodial and in-home care typically pay for it out-of-pocket or through a long-term care insurance coverage.

At present, the average cost of a semi-private room in a nursing home is around $225 a day or $6,844 per month. In-home caretaker services, on the other hand, can cost a little over $20 an hour.

These are averages for the whole of the United States, yet actual costs may vary depending on factors such as the type and length of care required and the hour of the day in which the care is administered.

Even if $6,844 doesn’t sound like an exorbitant amount, receiving care services for an extended period of five years, for example, would add up to a whopping $410,640, without accounting for inflation.

What Is Long Term Care Insurance?

If you were in a situation where you depended on a family member or friend for basic care, would you be able to cover the costs of these services over the long term?

People often pay for long-term care out of pocket, depleting their personal resources and straining family relationships.

Those who can afford it, however, opt for long-term care insurance products that pay out either a daily or monthly benefit amount or follow a “pool of money” approach to cover services such as:

Health insurance covers medical and hospital bills, while Medicare and Medicaid only cover some long-term care expenses under particular circumstances. (For more information, read our “What does health insurance cover?“).

These options–in conjunction with funds from a retirement account, for example–could help defray the costs associated with long-term care, yet they are not available to all segments of the population.

Consequently, an excellent option for most middle Americans, especially those between the ages of 55 and 65, remains long-term care insurance, a product that aims to keep policyholders from depleting their personal savings while allowing for a broader range of care options.

What Does Long Term Care Insurance Cover?

Long-term care insurance helps policyholders, and often their spouses, cover the costs of long-term care, whether associated with cognitive impairment, long physical illness, or disability.

The types of care covered vary between plans, yet most require policyholders to be unable to perform at least two out of six “Activities of Daily Living” or ADLs.

These include:

Depending on the insurance policy and provider, homemaker services that cover tasks like shopping for groceries, preparing meals, and doing household chores essential for the health and well-being of the policyholder may be included.

Again, most long-term care insurance options will cover a portion of the costs of home healthcare, nursing home care, or assisted living facility.

Premiums & Elimination Period

The cost of long-term care insurance will depend on your selected coverages as well as factors such as your age, gender, and health history, the coverage length, and the elimination or waiting period, among others.

Benefits begin once the insured has required assistance with at least two activities of daily living for a specified timeframe known as the elimination period. Policyholders determine the length of the elimination period, yet typical options include 30, 60, 90, 180, and 365 days.

Since during the elimination period the insured must pay for care out of pocket, said time frame can be thought of as a deductible. The shorter the elimination period, the higher the monthly premium amount, and vice versa.

Once the elimination period is met and the plan determines the policyholder has a physical or cognitive inability to care for him or herself, benefits can begin.

A nurse or social worker will be the one to determine whether the policyholder is unable to perform two or more activities of daily living. Some plans offer the ability to file claims before dispatching a care coordinator to verify the claim or speak to the insured’s physician to confirm the individual’s condition.

An important detail to bear in mind when shopping for a long-term care policy is that insurance companies measure the elimination period in either calendar days or service days.

That means calendar day elimination periods will be shorter than service day elimination periods if the necessary care is not provided on a daily basis.

A person with a 60-day elimination period receiving care only three times a week, for example, would have to pay out pocket for up to four months before the plan kicks in.

That means longer elimination or waiting periods translate into higher out-of-pocket costs.

Long Term Care Insurance Options

The long-term care insurance landscape has changed drastically in recent years due to the skyrocketing costs of this undeniably valuable product.

According to LifePlans, a risk management and evidence-based solutions company, average annual long-term care insurance premiums are somewhere under $2,727 while the cost of long-term care in a private nursing home lies somewhere above $80,000 per year.

Not surprisingly, carriers offering long-term care insurance have found these products to be less profitable than originally expected due to the high number of policyholders that actually made use of their plans.

As a result, some benefit options have been eliminated, premiums have increased significantly, and additional but progressive increases are projected to take place in upcoming years.

Some long term care insurance options currently on the market include:

Reimbursement Policies

These policies are based on the medical model and reimburse the policyholder for the cost of care.

Indemnity Policies

Indemnity products pay out a fixed daily benefit amount regardless of the cost of care, so if you receive qualified service for less than $200 but your daily benefit is $200, you receive the entire daily benefit amount.

Cash or Disability Policies

Much like disability insurance, this model pays a monthly benefit amount. Once you qualify, the benefit is paid out regardless of how or where you receive care. Since the policyholder’s spouse may deliver the care, these types of policies tend to be costlier.

Short-Term Care Insurance

This type of insurance provides coverage for a year or less, meaning the policy pays on the first day you qualify for benefits.

Hybrid Policies

Also known as combined or “linked” long-term care, these policies typically include a life insurance portion with a long-term care rider. There are also annuity-based products where an existing insurance policy (from a different carrier) can be “linked” to a long-term care rider.

Benefit Riders

Most insurance companies offer additional options with which to customize LTC insurance policies. These additional options, called plan riders, are provisions that allow insured individuals to customize the terms of their policies or add benefits not initially included in their coverage.

Not all insurers offer the same riders and some don’t offer them at all, yet these are invariably add-ons offered for an additional cost.

Plan riders may include:

Choosing The Right Policy

When shopping for long-term care insurance coverage, the most important thing will be to assess your financial situation and ability to pay for a coverage that meets your needs.

Talk to your financial advisor or life insurance provider and determine whether long-term care insurance coverage may be your best choice.

If you opt for long-term care insurance, look into the long-term care services you might receive in the future and compare the costs of care in the facilities of your choice.

The NAIC recommends not to purchase more than 5% of your salary for LTC insurance. Since these plans can be pricey, they will be beyond the reach of many.

If you’re able to cover the cost of a policy, look for a coverage that provides the benefits you require as part of your long-term care plan and communicate your choices to your friends and loved ones.

The Cost Of Care

Prior to making any sort of decision regarding the cost of long term care insurance, estimate the average cost of care in your area based on your needs and preferences.

Once you have the estimated cost of your preferred method of care, calculate how much you would have to pay out of pocket for those services in the short and long term. Remember, projections suggest that those who require long-term care in their golden years may need to receive those services for an average of three to five years.

Although exact amounts vary greatly from state to state, Genworth Financial’s 2017 Cost of Care Survey suggests the national median annual costs of long-term care services are:

Services	Length of Care	Cost
Adult Daycare	5 Days a Week	$18,200
Assisted Living Facility (Private Bedroom)	12 Months	$45,000
Homemaker Services	44 Hours a Week	$47,934
Home Health Aides	44 Hours a Week	$49,192
Nursing Home Semi-Private Room	365 Days	$85,775
Nursing Home Private Room	365 Days	$97,455

According to the American Association for Long-Term Care Insurance’s 2018 Long-Term Care Insurance Price Index, some insurance costs have dropped in the past year.

Today, a couple around the age of 60 purchasing a new long-term care insurance policy may pay around $3,490 for an estimated coverage amount of $666,000 if they began to receive benefits at the age of 85. Their 2017 study concluded the average premium for a couple of the same age would be around $3,790.

Although long-term care insurance premiums have steadily increased since these products entered the market, this type of insurance can offer incredible benefits to healthy individuals between the ages of 50-65.

Special Considerations

Something to be aware of is the fact that long-term care insurance premiums are affected by your gender. Since women tend to live longer than men and are more likely to use this type of insurance product, it’s not surprising long-term care insurance costs are higher for their demographic.

Because female policyholders cost insurance providers more money, premiums for them can be up to 25% higher.

Single women can pay even more.

When shopping for long-term care insurance, keep in mind that different insurers set different prices for similar, if not identical, benefits and coverage details. Before making a final decision, get quotes from different carriers and meet with a financial advisor who can help you determine a good inflation protection option.

Experts from the American Association for Long-Term Care Insurance recommend a one-year policy with inflation protection of 1%, 2% or 3% (compounded annually).

The organization also states the one-year policy is their recommended product because around 41% of long-term care insurance claims last less than a year.

Calculating Your Needs

When choosing a benefit payout option, look into the cost of your preferred form of care in your area. That information will help you determine both the benefit amount and the benefit payout option that best meets your projected needs. This decision should also be based on your assets and income at the time you purchase the long-term care insurance policy.

Before you begin, ask yourself:

A surefire way to calculate the cost of care in your area is to call several nursing homes, assisted living facilities, adult daycares, and hospices, and inquire about the annual cost of their services.

If you have any health conditions or know of certain risks and propensities in your family, think realistically about your choices and the likelihood of you requiring services for an extended period.

To Calculate Your Needs:

1. Coverage Amount – Look into the cost of care in your community to determine what you can expect to pay for long-term care services should you require them. For a more accurate estimate, call or visit long-term care facilities in your area and inquire about pricing. Base your coverage amount on your findings.
2. Benefit Period – Consider your health status and family health history when selecting a benefit period. Is there an incidence of a particular illness or disorder in your family? On average, for how long would a person with said condition require care? Consider the statistical data. Different sources cite different statistics, yet research suggests that a one to three-year policy could be a safe bet for most individuals over the age of 65.
3. Benefit Payout Options – When choosing between a daily or monthly benefit option, think carefully about your projected needs. If you require different types of care services on different days, selecting a daily benefit may leave with out-of-pocket costs if the benefit amount were less than the cost of care on a given day.
4. Elimination Period – Evaluate your finances and determine how much you would be able to pay out of pocket in the event you required long-term care. For how long would you be able to cover such services? Could you afford to pay a higher monthly premium in order to have a shorter elimination period?
5. Inflation Protection –  To protect your investment from future premium increases, consider an inflation protection rider. Experts suggest you opt for either a 1%, 2% or 3% compound inflation protection.

Long Term Care Insurance In A Nutshell

Besides providing you additional peace of mind, long-term care insurance could be an essential component of your post-retirement financial plan.

For those with the means to do so, purchasing long-term care insurance coverage is a surefire way to protect assets from long-term care costs and leave behind an inheritance for future generations.

This type of policy could also ease the financial and often emotional strain placed on family members caring for an ailing loved one.

Long-term care policies also ensure you get the type and quality of care you require and that the care is delivered according to your wishes.

This is especially important for independent individuals who want to retain a degree of autonomy when it comes to the services they receive and the setting in which the care is delivered.

Keep in mind that health insurance does not cover long-term care and that Medicare and Medicaid only cover certain types of care under particular circumstances.

Knowing your odds of requiring long-term care in the future, are you willing to take the risk of not having any sort of protection in place?

If you haven’t already done so, speak to your insurance agent or financial advisor and inquire about long-term care insurance options, and compare the costs of care in your area to determine whether such an insurance product is a worthwhile option for you.