Understanding Long-Term Care Insurance
Coverage basics, premium costs and policy options to make an informed decision
It’s a fact of life: Someday you may need long-term care. That means you may need help at home with basic daily activities such as bathing, dressing and eating; community services like adult day care and transportation; or ongoing care in a nursing home, assisted living residence or other facility.
One option to pay for such services is long-term care (LTC) insurance. But before you sign up for a policy, there’s a lot to learn. The market has changed greatly in recent years.
Here’s what you need to know.
Why plan for long-term care?
About 70 percent of Americans who reach age 65 will need some long-term care during their remaining years, according to a study from the Urban Institute and the U.S. Department of Health and Human Services. Although some people will get by with unpaid care from family members and others, nearly half will need some paid assistance. About 24 percent will need more than two years of paid care, and 15 percent will spend two-plus years in a nursing home.
The costs of care are highly variable, depending on how long you require it, where you live and how intense your needs are. The ways to pay for services vary, too.
Traditional Medicare, the public health insurance program for people over 65, does not cover long-term care beyond some skilled care right after hospitalization for an injury or illness. Some Medicare Advantage plans, from private insurers, offer supplemental coverage for services like meal delivery and rides to medical appointments, but it is limited.
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Veterans may access long-term care through the U.S. Department of Veterans Affairs.
But the largest single funding source is Medicaid, the joint federal and state program that covers low-income Americans. Although income limits vary by state, you typically can’t get Medicaid unless you exhaust most of your savings and other assets beyond your primary home and vehicle.
That prospect leads many people to think about how they can plan for long-term care expenses in a way that protects their retirement savings and lets them get the kind of care they want. And that’s where long-term care insurance comes in, though it’s not the only solution.
“Everyone needs a long-term care plan,” says Ryan Graham, a senior financial adviser at Altfest Personal Wealth Management in New York City. “That doesn’t mean everyone needs long-term care insurance.”
Traditional long-term care insurance
Traditional long-term care policies work much like policies for auto or home insurance: You pay premiums, usually for as long as the policy is in effect, and make claims if you ever need the covered services.
You can choose a little coverage or a lot to help pay for services in or out of your home. Typical policies spell out how much you can receive daily or monthly, up to a lifetime maximum or a certain number of years. Different amounts may be allowed for care in your home, a nursing home or elsewhere. You pay extra for benefits that rise over the years to protect you from inflation.
You also can choose from policies with varying waiting periods between the time you start needing care and when benefits kick in. A typical waiting period is 90 days, but you can pay more to get benefits after 30 days or pay less to accept a 180-day delay. Likewise, you pay more for a policy that pays out $200 a day, lasts five years and grows benefits at a compounded 3 percent per year than you would for one that pays $100 a day for two years with no inflation protection.
What LTC insurance covers
Policies may limit what conditions they cover. For example, it’s not unusual to deny care for alcoholism, drug addiction or war injuries. And while a preexisting condition, such as heart disease or a past cancer diagnosis, may not stop you from getting a policy, the policy may not cover care related to that condition for some period after it goes into effect.
Generally, though, you become eligible for benefits once you can no longer perform a set number of the so-called activities of daily living — such as bathing, dressing, eating, using the toilet, getting in and out of beds and chairs, and managing incontinence — or become cognitively impaired. At that point, premiums typically are waived while you receive benefits.
But if you stop paying the premiums before the need arises, you usually lose the coverage. And if you never use the coverage, the insurance company keeps and invests your money to pay for other people’s claims and reaps a profit.
“It’s use it or lose it,” Graham says.
A bumpy history
Early LTC policies, sold in the 1990s and early 2000s, often offered generous benefits, such as lifetime coverage and benefits that grew at compounded rates of 5 percent per year. But insurers underestimated how much they would pay in claims and overestimated how much they would earn in investments. The result: They got into financial trouble and, with the permission of state regulators, substantially raised premiums on existing customers. Many companies stopped selling traditional long-term care insurance. Just a few companies sell the policies today, generally with more modest benefits at higher prices.
Historically, 70 to 80 percent of people with traditional policies have seen premium increases, says Jesse Slome, executive director of the American Association for Long-Term Care Insurance (AALTCI). Companies selling newer policies have retooled them to avoid repeating that history, he adds.
People who already own traditional policies should know that if they face a premium increase, they have options. One possibility is to pay the increase and keep the benefits you signed up for — an often-attractive choice for people who can afford the price hike and have generous older policies, says Jodi Cirignano, a managing director and wealth adviser at Peapack Private Wealth Management in New Jersey.
Another option is to accept reduced benefits at your old premium rate. Dropping a policy and seeking out new coverage when you are older and less healthy will almost certainly cost you more, experts caution. As long as you keep paying, insurers can’t legally drop you.
The majority of long-term care policies sold today combine coverage for long-term care with another benefit, usually life insurance or, less often, an annuity. These are known as hybrid or linked-benefit policies.
Most of the life insurance hybrids work like this: You pay one lump sum or a fixed amount broken into several annual payments. In return, you get long-term care coverage with features like those found in traditional policies, along with some amount of life insurance that will go to your heirs if you never use the long-term care benefits. The life insurance payout is reduced or eliminated if you do use long-term care benefits. The policy may also allow you to take back your full payment within the first few years if you decide you no longer want the coverage. Premiums usually aren’t ongoing, so they can’t rise.
The hybrid policies “address a nagging concern for a lot of people ... which is that I could pay into this thing for years and never need it,” says Christine Benz, director of personal finance at the Chicago-based financial services firm Morningstar. One way or another, you get a benefit.
But that guarantee costs you, as the hybrid policies are more expensive than traditional policies. And the life insurance payouts tend to be modest, Altfest’s Graham says, unless you attach long-term care to a larger, more expensive permanent life insurance policy.
Unlike health, home or auto insurance, “this is a policy you buy only once,” AALTCI’s Slome says. So, before you make a choice — including whether to buy a policy at all — consider:
- Your overall financial condition. Some people will look at their assets and spending and decide that they could likely cover long-term care without insurance. Some may plan to sell a second home, downsize from a family residence or get a reverse mortgage to cover such expenses, according to advisers. Others may set up a longevity fund to cover not only long-term care, but also all the costs that come from living longer than average. One advantage of self-funding: total flexibility in how you spend your care dollars.
- Your ultimate financial goals. How important is it to you to leave money behind? “Some people feel very strongly about leaving something for their families” and are highly motivated to buy insurance to protect their assets from a catastrophic yearslong need for care, Peapack’s Cirignano says. “Others are happy to bounce their very last check.”
- The full range of insurance options. Talk with agents who are authorized to sell policies from multiple companies and with financial advisers who can put your options into the context of your overall financial plan. “It’s really valuable to have some sort of third party who doesn’t have a vested interest in any one insurance company helping you navigate the process,” Morningstar’s Benz says.
- Your age and health. The older you are when you buy long-term care insurance, the more it will cost. Health problems also will make it more costly or, in some cases, impossible to get coverage. If you already have memory loss or trouble with daily self-care, you are unlikely to qualify. Some insurers require a physical exam or medical-record review; others only conduct telephone health interviews. In general, traditional policies have more stringent health requirements than hybrid ones do. While experts used to suggest shopping for long-term care insurance by your early 60s, many now suggest starting sooner, in your 50s or even your late 40s.
- Ways to pay for your policy. You may be able to cover premiums, tax-free, with money from a health care savings account (available only to consumers in certain health plans), Benz says, or you can explore the tax advantages of exchanging an existing life insurance policy or annuity for a long-term care policy. That’s a complicated process but a good deal for many people whose insurance goals have changed, she adds.
- Additional options. Group policies offered through employers may be more affordable than individual policies, particularly if you have health problems. Buying individual policies as a couple, rather than as a single person, often reduces premiums. Couples also may qualify for “shared care”: If one of them exhausts their pool of benefits, they will be able to draw from their partner’s pool. And in most states, you can shop for a limited number of policies that participate in partnerships with the state’s Medicaid program. These partnership policies will allow you and your survivors to keep more of your assets if you ever need Medicaid. The protected amount is based on what your policy has already paid for your care.