What would you do if you or a loved one needed care for dementia, heart disease, or another ailment?
It is hard to imagine that you might not be able to perform the same daily activities as you do now. The reality is all of us must plan for a long life expectancy and determine how we will cover the increased expenses of care now rather than wait for the inevitable.
If you have not built the wealth you need to pay for long-term care, one option is to purchase long-term care insurance (also known as “LTC”). LTC is critical because most of its coverage is not covered by regular health insurance or Medicare. Activities not typically covered by medical insurance include routine daily activities, such as dressing, bathing, grooming, using the toilet, cognitive impairment, and getting in and out of a bed or chair.
Long term care insurance is a vital component of a successful financial plan, especially as you get older. Most people purchase LTC insurance in their 50s or 60s. Waiting to purchase LTC insurance until you need it isn’t an option because you may not get approved. Many companies won’t approve people over 75.
What is long-term care insurance?
Long-term care insurance covers various services for people with chronic illnesses and disabilities. And it is designed to cover the costs associated with the care you need to treat the condition.
Policy coverage will vary and may cover only a specific daily or monthly benefit for in-facility living or in-home care.
There is also no guarantee that premiums won’t increase. Therefore, reviewing the insurance company’s history of increases is essential before purchasing a policy.
What does LTC cover and why is it important?
By the age of 65, the average adult has a 70% chance of needing long-term care in the future.
While LTC coverage varies by the company and policy you purchase, benefits may include:
- Assisted living facility or nursing home care
- Care in your home so you don’t have to relocate
- Adult day care and custodial care
Some LTC policies offer lifetime benefits. But, because these policies cost more, some people purchase policies with a payout limit, i.e., five years.
It is essential to read the fine print and consult with a qualified advisor before purchasing a policy. They can provide you with options and costs for different policies. In addition to providing you options of coverage, they may be able to determine if you qualify for coverage.
Why purchase long-term care insurance?
According to data in 2020 from the Administration of Community Living which is part of the U.S Department of Health and Human Services, 70% of people who are 65 will need some long-term care services. That number continues to increase.
The average lifetime cost of formal long term care is $172,000 over an average of two to four years. Every adult will need to either self-fund these costs or consider long-term care insurance to protect the retirement nest egg.
And while there are various reasons people purchase coverage, common ones include:
- Filling the gap between the cost of long-term care coverage and what you must pay. In a 2020 study by Genworth on the Cost of Care, the median price of care was $93,072, and a private room cost was $105,852.
- Protecting you and your family’s savings and investments.
- Providing flexibility in your options.
- Receiving services from a qualified practitioner
- Providing financial peace of mind for you and your family
Some people believe Medicare will cover the cost of coverage. Medicare may cover short-term home stays or limited home health care when skilled nursing or rehabilitation is required, but the coverage is minimal. Medicaid may provide some relief for low-income individuals with little or no savings.
Note – Always check with your state for coverage options. Some states are planning to provide coverage to eligible residents in the future.
How does long-term care insurance work?
First, determine what benefit you may need and how much you can afford. Some of the riders you will need to consider include:
- The elimination period – the number of days you must wait until your policy will begin to pay a benefit to you
- An inflation rider – to keep pace with inflation.
- Benefit – how much the policy will pay you if you need care
- Types of benefits – policies that offer home health care often cost more.
Next, select a policy. The insurance company will confirm you are eligible for coverage. This requires that you are medically underwritten and approved by the insurer.
The process may include a medical exam or online or telephone interview. In addition, the insurance company will also review your medical history to determine if you have any pre-existing medical conditions that would preclude you from purchasing a LTC policy.
Most long-term care insurance policies reimburse the policyholder a daily amount (up to a pre-selected limit) for services that help with activities of daily living.
Once you are approved for a policy and the elimination (waiting) period is met, you must meet the qualifications of eligibility for policy benefits based on ADLs or “activities of daily living.”
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The general list of the qualifying activities of living are:
- Functional mobility or transferring – moving from one place to another in a daily routine.
- Personal hygiene
- Showering or bathing
- Cognitive impairment including dementia and Alzheimer’s
When a policyholder can no longer do at least two ADLs, they qualify to receive the policy benefits. Once a claim is filed, the insurance company will need to review the case, review the doctor’s notes and recommendations, send a medical professional for an evaluation, and approve the care plan.
In the event the insured has dementia the benefit start date is different. While they may be able to perform all of the ADL’s, if they need substantial assistance performing the ADL’s or protecting themselves from harm (generally health or safety threats), they may be eligible to receive benefits sooner.
What is the cost of long-term care insurance?
Like health insurance, the cost of long-term care insurance will depend on several items. These items include:
- The insurance company – Each separate provider will have its policy and coverage offerings. Be sure to consult with a qualified advisor to determine the best options.
- Amount of coverage – You may want the very best policy money can buy, or you may want to diversify your investments and plan for potential late-life healthcare in other ways.
- Age and health status – Most policies will require a health questionnaire and review of medical records to determine the cost of your policy and premiums.
- Gender – Women are more expensive to cover with LTC insurance because their average life span is greater than men.
- Marital status – Married partners can receive lower premiums when applying together.
You can compare those annual premiums with the very high cost of potential long-term care costs.
What is a hybrid policy?
Hybrid LTC policies were designed for individuals who do not want to lose the money they pay for long-term care coverage if they do not need it. Hybrid policies generally combine LTC coverage with a life insurance policy. If you do not use the LTC, some of the premiums you paid are available to you or your heirs, and in some cases the life insurance benefit will be more than the premium.
For example, the initial premium paid on the policy is $300,000 and the death benefit (what the insured’s beneficiaries will receive) is $325,000.
Hybrid policies may offer a guarantee as opposed to traditional LTC policies. If premiums are paid for a certain period, there is a guaranteed death benefit or cash value in the policy.
One disadvantage of hybrid policies is higher premiums. Policyholders of hybrid coverage generally pay premiums over a shorter period, increasing the annual amounts.
Another option with a hybrid policy is to pay a lump sum amount instead of a monthly premium. This will leverage both the amount of long-term care coverage available and provide a death benefit that is typically more than the lump sum premium paid.
Because there are a variety of options, it is recommended that you consult with a qualified advisor and review your situation and the best options available to you.
How do state “partnership” programs work?
In most states, the partnership program for long-term care offers particular policies that meet certain quality standards. These standards include adjustments that would allow for inflation, causing the cost of LTC to increase.
If a policyholder chooses this partnership, then they may be able to protect more of their assets once they have used up their policy benefits and need to switch to Medicaid coverage. Without the partnership benefit, someone without LTC coverage or who has used up all existing coverage would have to spend down their assets to receive financial help from Medicaid.
If you are interested in a state partnership program, then reach out to your state’s insurance department.
Conclusion – What is Long-Term Care Insurance
There are a variety of decisions and options to consider when purchasing coverage. You must review your options and read the disclosures to make an informed decision.
Therefore, it is also advisable to consult with a qualified advisor. They are uniquely qualified to review your options and determine the best course of action. If you work with an advisor, confirm that they can offer you the best coverage for your situation. Some advisors can only offer products from a specific company which may not be the best option for you.
If you need a plan to budget for the costs of long-term care coverage, download the free budgeting template: