The list of things I want to do when I retire includes traveling, logging some quality family time and eating a lot of good food.
If you’re like me, weighing the potential negative financial consequences of long-term health care issues (that may never arise) isn’t something that comes to mind when you dream about your future.
Table of Contents
- What Is Long-Term Care Insurance (LTCI)?
- Who Needs Long-Term Care Insurance?
- When Should You Purchase Long-Term Care Insurance?
- How To Find Long-Term Care Insurance
- How Much Does LTCI Cost?
- How Long-Term Care Insurance Works
What Is Long-Term Care Insurance (LTCI)?
Long-term care insurance, or LTCI, is insurance that pays for a specific subset of medical expenses. LTCI policies typically cover the cost of paying someone to help you with what are called “activities of daily living” such as:
- Going to the bathroom
- Getting in and out of bed
- Getting dressed
Regular health insurance and even Medicare don’t cover these types of things. So LTCI can give you better choices and a higher quality of care.
A successful claim on a long-term care insurance policy unlocks daily money to help you pay for assistance with routine activities.
LTCI claims usually apply to people living in nursing homes or assisted living facilities as well as people who require in-home aid and/or those who visit adult daycare centers.
It’s a type of insurance that often gets overlooked. But it can be extremely important for financial planning.
Who Needs Long-Term Care Insurance?
The average duration of LTC is 3.7 years for women and 2.2 years for men.
People who need long-term care include those with chronic medical conditions, disabilities and disorders.
Financially, that can be a huge burden. Gentworth Financial, one of the larger long-term care insurers, reported in its 2020 Cost of Care Survey that the median cost of a semi-private room at a nursing home was $93,072 per year.
“Getting old is part of life,” money expert Clark Howard says. “At some point, [most] of us are going to need care. Maybe in a nursing home. Assisted living. Or skilled care in our homes. Are you prepared?”
Clark says that long-term care insurance isn’t for the wealthy (which he defines as a net worth of at least $3 million excluding your home) or for anyone who qualifies for Medicaid (which is based on low income). But he says everyone else should consider LTCI to protect their finances and their quality of life.
“People think the government’s going to pay. But let me tell you, the government requires that you completely impoverish yourself before they’ll pay through the Medicaid program,” Clark says. You can have no assets. They ultimately take your family home. They take everything if you depend on the government.
“It’s your choice. Take your chances that you’ll be in the small group of people that will never need help in old age or buy insurance to cover yourself.”
When Should You Purchase Long-Term Care Insurance?
The best time to purchase long-term care insurance is in your late 50s or early 60s, according to Clark.
At that age, you may have greater cash flow. You are probably still young and healthy enough to pass the medical underwriting as well, Clark reasons.
You may also want to consider purchasing LTCI if you have a parent in that age range (or older) who isn’t covered. In that situation, you may want to buy long-term care insurance to protect your inheritance or to keep your family finances safe.
But Clark says you also shouldn’t jump the gun: “The premiums are not guaranteed. So you can even start at a higher premium and it will go up at some point in the future, which is why I don’t like people to buy long-term care insurance too young.
“Because you may pay for it for years and years and you get closer to an age 20, 30 years later where you’re going to use it, and they raise the premiums so much that you have to give up the policy after you’ve been paying for it for a generation.”
How To Find Long-Term Care Insurance
Under the hood of any insurance company, you’ll find a team of actuaries.
When setting policy prices, they build in a margin for error and layer in profit on top of their estimates. But as it turns out, predicting the cost of long-term care years into the future isn’t easy.
The number of long-term care insurance providers is shrinking fast: People are living longer, so more people are reaching old age and making claims.
Clark recommends working with an independent agent who can shop for policies from a variety of companies on your behalf. The following brokers are major players in the space that offer free quotes:
Don’t be tempted to make cost the only factor you consider when shopping for LCTI. When you’re buying any type of long-term insurance policy, Clark recommends buying only from companies with an A++ or A+ rating from AM Best. That’s a company that rates insurance firms based on their long-term financial solvency.
You don’t want to pay for a policy only for the company to go out of business before you make a claim.
How Much Coverage Should You Buy?
Clark suggests looking for a long-term care insurance policy with a five-year benefit and an upfront waiting period of six months. He also acknowledges that some people will need long-term care for much longer than five years.
“The idea of the five years is the percent of people you’re going to cover goes up significantly from three years to five,” Clark says. “The average woman [needs long-term care for] 3.7 years. So that means a lot of people are going to need it for more than five years.”
According to Clark, medical inflation outpaces the Consumer Price Index. He wants you to buy a policy from a company that will adjust the amount of its benefit over time — as much as 3 to 5% annually.
How Much Does LTCI Cost?
The problem with long-term care insurance policies is that the premiums aren’t guaranteed to stay the same. They sometimes increase if state regulators approve changes.
There are plenty of reasons companies cite when lobbying for price hikes.
For example, genetic testing through companies such as 23andMe are making individuals more aware of their genetic backgrounds, which can include predisposition to diseases that may necessitate long-term care. Clark says that likely means more and more people will start looking to buy LTCI – especially people who learn they’re predisposed to certain conditions.
The number of companies offering LTCI is dwindling since it has proven to be a challenging business model. It’s not unreasonable to assume regulators will continue to approve price increases to make sure the market survives.
“There were over 1,000 companies at one time that issued long-term care policies and now there might be 10,” Clark says.
“I mean, it’s totally a business that the insurance industry was like, ‘Wow, we screwed that up.’ And they headed for the exits.”
Several factors determine the cost of your long-term care insurance premiums including:
- Marital status
- Insurance company
- Coverage amount
- Waiting period
Long-Term Care Alternative: Hybrid Policies
A generation ago, hybrid insurance policies didn’t exist. Now these are alternatives to LTCI. A hybrid policy is a whole life insurance policy that you can draw from to pay for long-term care.
Traditionally, the money you pay for your LTCI premiums vanishes when you die, even if you never made a claim. So one of the benefits of these hybrid policies is that if you die, your heirs get a portion of your premiums back.
The other main benefit of a hybrid policy is that you can lock in your premiums. You’ll never have to worry about a price increase, unlike those with traditional LTCI policies.
If you’re older or if you already have health issues, you may be more likely to qualify for a hybrid policy than a LTCI policy.
The downside: hybrid policies are expensive — sometimes as much as 200 to 300% more.
“With a hybrid policy, you buy a whole life insurance with a rider that lets you convert the death benefit into [long-term care] payment while you’re living,” Clark says. “The advantage is that you never have to worry about premium escalation. You have preordained the total benefit of your policy.”
According to The Wall Street Journal, the target market for these hybrid policies tends to be wealthier families who don’t want the financial legacy they plan to leave their heirs eaten up by rising medical costs.
“You can use [your benefit] for long-term care if you need it. If you don’t need long-term care, your survivors get the value of the insurance,” Clark says. “That seems to be where the industry is going because the insurers have just been so flat incapable of properly predicting cost and risk on traditional long-term care insurance.”
How Long-Term Care Insurance Works
If you file a claim, your LTCI company will review your medical documents. It may send a medical professional to evaluate you, approve that you qualify and agree to your medical provider’s long-term care plan.
Typically, you’ll pay out of pocket for the first 30 to 90 days. This is called an “elimination period,” which resembles a deductible.
Once you get through that period, the policy pays out a daily amount until you reach your lifetime maximum payout.
Keep in mind you can also take tax deductions for part or all of your long-term care premiums (if you itemize). Note that the IRS may limit your deductions for long-term care insurance based on your age.
Insurance isn’t a fun topic. Neither are health problems that typically arrive later in life.
But we can’t assume that we’ll be in the minority of people who will never need long-term care.
You can work your entire life to save for retirement only to have medical costs deplete decades of financial work. So it’s important for most people to at least consider purchasing long-term care insurance at the right time.