Long-Term Care (LTC) Insurance – Is It for You?
- Who needs it?
- Why do I need it?
- How much will it cost?
- What expenses does it cover?
- Where should I buy it?
- What are the features of a policy that I should consider?
- When should I evaluate if I need it?
- What are the newer products to consider?
The answers are below:
Who Needs LTC?
LTC insurance may be necessary for some individuals as they age. All baby boomers will turn 65 over the next ten years, and people are living longer as medical science improves. The increase in the life expectancy trend comes with the caveat that climate change and other conditions appear to be plateauing the life expectancy, but I will leave that up to the scientists to explain. Current estimates indicate that 70% of all individuals will require LTC in their lifetime. According to the 15th annual Genworth Cost of Care Survey released in 2018, the blended annual median cost of LTC support services has increased an average of 3 percent from 2017 to 2018, with some care categories exceeding two to three times the 2.1 percent U.S. inflation rate. The cost of that care varies based on care setting, geographic location of care and level of care required, among other things. Using Genworth’s Cost of Care Survey tool will help you calculate the cost of LTC across the U.S.
You will want to determine how much you can pay out of pocket for nursing home care. The estimate of the shortfall can be used to determine how much coverage someone would need to purchase. The premiums on an LTC policy will be different based on the features such as the benefit period that ranges from 3 years to lifetime coverage, elimination periods between 30-180 days, and a daily benefit up to the full cost of daily care as well as an inflation rider that ranges from 3%. For most people the recommended policy features include purchasing a policy with an elimination period (time you have to wait for coverage) of a minimum of 90 days, a benefit period of three years, and a daily benefit of between $150 -$200 per day. The elimination period is the period of time during which an individual would have to cover their LTC needs from savings and retirement income. A 90-day elimination period forces an individual to use their own assets for short term needs and reduces the annual premium you pay for the policy. A benefit period of three years will provide sufficient coverage for most individuals. Unless there is a history of Alzheimer’s disease in the family, you usually would not want to purchase a policy lifetime benefits. A lifetime benefit policy annual premium policy is over twice as expensive as the annual premium for a three-year policy. A financial planner can help you determine estimates of your LTC needs that are not covered by your accumulated retirement funds and other assets, so you can make informed decisions about how much LTC insurance that you should consider purchasing.
Why do I need LTC insurance?
A common misconception is that you do not need LTC insurance because the expenses are covered by Medicare. However, Medicare only covers hospital stays and rehabilitation for up to 100 days. Therefore, when you need assistance with routine activities people do every day (called activities of daily living or ADLs), then you will need help either from family members, or care specialists. If a family member is not available to assist, or you do not want to burden them as you age then you will have to pay the expenses of a higher level of care. There are six basic ADLs: eating, bathing, getting dressed, toileting, transferring, and continence. LTC insurance provides people with those services—but it’s expensive. The costs of LTC needs have to be paid out of your income, savings, or LTC insurance. Most LTC insurance policy benefits start when you need help with at least two of the ADLs, so prior to reaching that level you will have secure assistance from other sources.
How much will LTC insurance cost?
When it comes to paying for the cost of LTC, Medicaid is an option for individuals that cannot pay the expenses of care out-of-pocket, or afford LTC insurance. However, the quality of care may not be the best, and available facilities have been decreasing due to the limited payments received from the government. In general, relying on the government to pay for your LTC is not a good option, if you can avoid it. There is a portion of the population who have some assets, but they can qualify for Medicaid as long as the majority of their limited assets are liquidated and any pension or social security payments are pledged for their care. The concern in that situation is that a healthy spouse may not have sufficient remaining assets they can retain to support themselves for the rest of their lives. A healthy spouse can only retain $113,600 in assets for the other spouse to be eligible for LTC benefits provided by Medicaid, so that is not the best option for individuals with some assets and income.
There is also a portion of the population that has sufficient assets and retirement income to cover the cost of LTC, so they should self-insure. However, purchasing LTC insurance is a good option for some people to provide them piece of mind that their retirement nest egg will not be fully liquidated and the second spouse will not be left destitute because the majority of the assets were used to pay for LTC expenses of the first spouse to need it. LTC insurance will also allow individuals with modest means to pay for LTC expenses instead of relying on free care provided by relatives.
What Does LTC Insurance Cover?
LTC insurance covers the following expenses:
- Nursing home care
- Assisted living facilities
- Adult day care services
- In-home care
- Home modification
- Care coordination
There is no general rule on whether or not someone should pay for LTC insurance. However, the factors to consider include can you rely on care from relatives for little or no cost, family history of longevity, family history of dementia, assets and income available to pay LTC expenses, future living expenses of a healthy spouse, and where you live in retirement.
According to the Alzheimer’s Association, the estimated cost for end-of-life care in 2016 ranged between $217,820 and $341,651. The average stay in a nursing home is 835 days, or almost three years according to the National Care Planning Council. For residents who have been discharged, which includes many who have received short-term rehab care, the average stay in a nursing home is 270 days.
Where should I buy LTC Insurance?
You have evaluated the above information, consulted your family about the options, and consulted a financial planner to determine your potential needs, and made an informed decision that you would like to purchase LTC insurance to cover your future expenses. You have to remember when you begin the shopping process that LTC insurance is an insurance product and the insurance company is pricing the policy based on actuarial tables used by an underwriter that projects that you will need the coverage for less time than the chosen benefit period, or not at all. Therefore, view it as insurance just in case you may need it instead of as an investment where there would be a potential return from the policy payments.
You will want to purchase a policy from a company that will be around if you need the coverage, so the recommended companies can be found on the internet by searching for the best companies that provide pure LTCI. There are several companies which come up on each of the various lists, but a major consideration is the features of their policies as well as their financial viability based on the various ratings from S&P, AM Best, Moody’s etc.
What Features Should I Consider, and When Should I Consider Purchasing It?
There are a few basic issues to consider when starting to shop for LTC insurance including how much coverage to purchase, at what age should you purchase a policy, and where should you purchase it from. Only a small fraction of individuals will need nursing home care for five years or more and most people have sources of income that can be used to cover a portion of their LTC needs. Therefore, one caution is that you should not be talked into purchasing the maximum amount of coverage available. You should balance your potential future coverage needs with your other sources of income to pay for some of your daily care expenses and the level of care that you expect. Another factor is when you should purchase the policy because the longer that you wait to purchase a policy, the higher the premium cost. An employer sponsored group plan is usually cheaper than an individual plan. An estimated LTCI premium for a healthy 50-year-old man is $1,725 per year. If the policy remains in effect until this person is 95, he can spend approximately $77,625 in LTC premiums. For a healthy 60-year-old man, an estimated premium is $2,170. If he keeps the policy until he’s 95, it can cost him $75,320 overall. Therefore, it is suggested that you purchase LTC insurance in your late 50’s to early 60’s because that balances the possible early need for a benefit with not paying for coverage over a period of time where the likelihood of needing coverage is minimal.
What are the current trends for LTC insurance products?
There are new products offered all the time by insurance companies to meet the needs and desires of potential customers based on feedback regarding why they did not purchase LTC insurance. One product being sold by insurance companies are hybrid policies that offer life insurance and LTC insurance in the same policy. While it seems like a viable option because at least your heirs will receive a death benefit if you do not use the LTC insurance. However, rates are considered “non-cancellable,” which means premiums are fixed for life (and often paid all at once up front), so that may not be the best option for most people. Hybrid policies should be a last resort and only considered if you would not qualify for a stand-alone long-term insurance plan due to medical underwriting. Another newer product is an LTC policy sharing rider for married couples where there is one shared benefit period for up to eight years compared to two separate benefit periods of 3-4 years each. The caution with this type of policy is that the cost of adding the rider is 10-16% more than the cost of two separate benefit periods. The shared benefit rider might be the best option if one spouse is more likely to need long term care for a benefit period that exceeds a normal separate term of 3-4 years and the other spouse is less likely to require a full benefit period. The determination would be based on family health and longevity history as well as the current overall health of each spouse at the time you are considering the purchase of LTC insurance. Another newer product is for people that have a family history of long-term illness but they cannot afford a lifetime benefits policy. The features of the policy include a five-year benefit period with an additional $1 million pool of coverage that would be available if you still need benefits after five years. One area of a policy where you do not want to skimp is the inflation protection where the 5% compound inflation protection has kept up with rising costs of nursing home care. Another option is a policy that has an inflation factor tied to the Consumer Price Index.