Long Term Care Insurance: Best Options, Alternatives and Overview
If you live in the United States today, odds are you will need long term care at some point. The cost of total long-term care is rising each year. Long term care insurance (LTCI) is a type of insurance designed to help you pay for this type of care.
Nursing homes, living facility, medical rehab, total long-term care and even in-home care may be covered by a long term care insurance policy. If you are considering LTC insurance or think it may be a good fit for someone in your family, here are the most important details you need to know about long-term care insurance plan.
What is long term care insurance?
Long-term care insurance is a type of insurance designed to pay for the cost of care commonly used for injury, illness, age, or memory-related needs. According to the US Department of Health and Human Services , someone turning 65 today has nearly a 70% chance of needing some type of long-term care during their lifetime. But 40% of people getting long-term care today are between 18 and 64 years old.
Long-term care may include services at home or in a facility. The average person who needs long-term care uses care services for about three years. In most cases, long-term care insurance doesn’t start right away. Short-term care insurance should cover that gap period.
In many cases, the insured individual will have to meet a certain list of requirements for a successful claim. That may include an in-person assessment to ensure they meet requirements for “activities of daily living” (ADLs) that they can’t handle on their own.
The main ADLs insurers look at are bathing, dressing, eating, transferring, toileting, and continence. Insurers commonly require you to need help with at least two of these ADLs to start getting paid by your long term care insurance policy.
If you have a long-term care insurance policy and make a claim, you’ll usually get a monthly payment toward whichever service you choose. In a some cases, the insurer will pay the care provider directly. More commonly, you’ll get a check or direct deposit payment and can hire any provider that you think is the right fit for your family’s unique needs.
How much is the average long term care insurance policy?
According to a survey by LifePlans , the average annual long-term care insurance premium is $2,727 for a policy that provides $161 per day for an average of four years. That translates to a cost of $227.25 per month for a benefit worth about $4,830 per month if you ever need it.
LongTermCare.gov shares that the average nursing home in the United States costs $225 per day for a semi-private room or $253 per day for a private room. Less-expensive assisted living costs $119 per day. Home health aides cost an average of $20.50 per hour.
If you need care that costs $5,000 per month for 36 months, that’s $180,000. Most US households don’t have that kind of cash lying around for a rainy day. Even with savings, long-term care insurance can help keep most of that six-figure sum in your pocket. If one spouse outlives the other by a large margin, the insurance plan could be the key to maintaining the same quality of living for their entire lifetime.
Quality live in facilities that provide long term care cost $3,500 per month on the low end up to well over $10,000 per month for a full service nursing home, an around the clock health aide or memory care; as the rate hikes each year. While insurance premiums can be expensive, but it is usually much cheaper than the actual cost of long term care.
What does long term care insurance cover?
LTC Policies can cover a wide range of care services. On the low end, that might be a few hours per week for a home health aide to stop by and help with a few living-related chores around the home. On the high end, long term care insurance plan covers full Alzheimer’s disease needs or nursing care.
Common uses of long-term care insurance proceeds include home care, assisted-living facility, adult day care, hospice care, nursing home care, memory care (special Alzheimer’s, cognitive impairment and dementia facilities), and respite care. You may also use insurance funds for home modifications, for example adding rails to a shower or a device to get in and out of bed.
If care expenses are more than your insurance benefits, you may have to pay the difference out of pocket. Depending on your finances and age, Medicare may also be a help for some long-term care needs and home modifications.
A number of policies include a hybrid of long-term care services and life insurance . In this scenario, the policy may provide a death benefit in addition to coverage for long-term care benefits. But most long-term care and life insurance are sold separately.
Once you get paid by your long-term care policy, the insurance company isn’t going to count where you spend every dollar. You don’t need to do a full accounting of how the proceeds are used. If you really need long-term care, hopefully, your policy covers the costs of long-term care.
LTCI Taxes and Expenses
If you get LTC Insurance, you could wind up with a tax deduction that saves you money every April. If your policy meets IRS qualifications, you can deduct your long-term care insurance premiums from your income similarly to how you would deduct your health insurance.
If your long-term care is deemed medically necessary, you can deduct unreimbursed costs for long-term care as medical expenses. If you or a partner are in need of long-term care, there’s a good chance you qualify for this deduction.
Both long-term care insurance premiums and the cost of long-term care are only tax-deductible if you itemize your deductions. After the recent 2017 tax law changes, it is less likely that you will be itemizing than in the past. If you still qualify for itemized deductions, you could find big tax savings from care-related costs.
Premiums must meet the same requirements as medical-related deductions. That means you typically have to spend at least 10% of your adjusted gross income (AGI) to get the deduction. If you are self-employed, you may be able to deduce the premiums without meeting the 10% AGI threshold.
What does this all mean in dollars and cents? If you pay $3,000 in annual premiums and fall within the 22% tax bracket, you would save $660 per year on your taxes. That’s a good thing to keep in mind, particularly if you were on the fence about signing up due to the cost.
If you ever need it, long-term care can quickly turn into a six-figure cost . If you don’t have the savings, insurance, or other financial preparations in place, you could wind up having to go without needed care or rely on a family member for basic needs like going to the bathroom, eating breakfast, or changing your clothes.
It’s may be hard to picture yourself leaning on someone else for daily needs. But if it does come to be, having long-term care insurance in place might give you the choice between a private room and a shared one. It could be the difference between care at home or having to get dropped off at adult daycare. Preserving savings and increasing options are big reasons for getting long-term care insurance.
Few people think about the long-term likelihood of needing care, but the numbers are very clear. As we get older, the odds of needing care only increase. Just like with life insurance, we hope we’ll never need long-term care. But it’s a good idea just in case.
Whether or not they prepared financially for it during their working years, the need for long term care is a reality that most seniors must eventually face. Every situation is different, but most people as they age will either need long-term care themselves or find that their spouse needs it. Without proper planning, that can be a sobering truth indeed.
Top LTCI Options
A study by Genworth Financial shows that long-term care, independent of medical bills, costs seniors anywhere from $18,000 a year (adult day care) to $97,000 a year (private room in a nursing home). And it’s a scenario the majority of seniors will face; about 70 percent of 65-year-olds will incur some type of long-term care costs in their lifetime, at an average cost of $138,000 per person.
For those who start thinking about long-term care resources in their ’50s, purchasing a long-term care insurance policy could be a prudent option. But the premiums generally cost between $2,500 and $5,000 a year, and a senior will need to keep paying for the insurance after retirement . As with all insurance, it’s a gamble to theorize whether the expenditures in your younger years will be worthwhile, since no one knows how healthy their retirement years will be.
Alternatives to LTCI
Another option, and a relatively new product, is a life insurance policy with a long-term care rider. These policies are structured to allow for life insurance payouts when the policyholder is younger and has beneficiaries to protect, which will turn into long-term care coverage in that person’s later years. The rider accumulates the most value when entered into in a person’s ’40s or ’50s.
When a senior faces a dire need for long-term care, other options do exist to help fund that expense even if that individual didn’t plan for it in his earlier years. Some seniors liquidate assets like houses and cars, which they no longer need if they are moving into a care facility, to pay the bills. Others, if their assets have become depleted, can use Medicaid to help pay for continued care. But those who don’t wish to drain their resources or find themselves restricted to Medicaid-accepting facilities might find themselves in a bind with a pressing need for an alternative income source.
Is Long Term Care Insurance Worth It?
With 10,000 Baby Boomers turning age 65 every single day for the foreseeable future, the need for long term care will inevitably arise at some point for most of them. And this form of care is very expensive; those who will need nursing home care can expect to easily pay at least $70,000 a year or more for this type of service. Other lesser forms of care, such as home health care may be cheaper but will still rank as a major expense. The American Association of Long term Care Insurance predict that 68% of all those age 65 and above will need some form of long term care before they die.
Long term care insurance is one of the primary forms of protection against this expense. This form of coverage can help to pay for nursing home care, home health care or any other type of managed care for those who need it. And 20 years ago, long-term care policies were the darling of the insurance industry, and they represented the future of the insurance business in the eyes of many experts.
But that scenario has changed drastically since then, with a growing number of insurers dropping this form of insurance from their list of product offerings because of the spiraling costs of long term care. In many cases, insurers have been forced to raise the premiums on their policies or even discontinue the coverage on them in an effort to keep up with this increasingly expensive form of care.
Long term care policies will usually only cover expenses up to a certain amount for a certain period of time. For example, a policy may pay the first $400 of expenses per day for a period of two or three years. Any expenses above and beyond those limits will be the responsibility of the insured. Of course, policies that offer greater amounts of coverage will cost more than policies with lower limits.
The answer to whether carrying long-term care insurance coverage is worth it boils down to a few different factors. For those who qualify for Medicaid, this is probably not a wise purchase, as it will effectively disqualify them from this program. Therefore, if you make less than $22,000 a year, then a long term care policy is not likely going to fit into your budget and you will be better off trying to qualify for Medicaid.
And those who are fortunate enough to be able to self-insure are probably better off doing so. If you project to have at least a million dollars saved by the time you retire, then those who fall in between these categories are usually better off having at least some level of coverage to fall back on if-or more likely, when-they need some form of care. But most long term care policies also have a waiting period of at least 90 days (which functions as a deductible), and over half of all seniors who need care will only need it for less than 90 days. This can be hard to swallow for many insureds, especially considering that they may be paying around $2,000 a year for their coverage.
As with life and disability insurance, it is usually best to purchase long-term care insurance while you’re young and still in good health. Of course, this means that you’ll probably pay premiums for a much longer period of time than you will if you wait until you turn 50 before purchasing coverage. But your premiums will probably be less over that time, and you’ll have a better chance of qualifying for a preferred rate. But you probably won’t need to think about this type of coverage until you’re at least 30 (and many insurers don’t even issue policies to insureds that are below this age).
For example, say you are a 35 year old male and apply for a long term care policy that will pay $3,000 per month in benefits for three years and has a COLA rider to keep pace with inflation (and just FYI, the inflation rate for long term care is considerably higher than the overall inflation rate). If you have no major health issues, then you might be able to get coverage for $100 a month.
The total policy benefits come to $108,000 per year. But if you were to invest that same amount in the stock market inside a Roth IRA instead and earned an average annual return of 6% until you turned 65, then you would end up with $100,562-only about $8,000 less than you will get from the policy. And, of course, if you never need the coverage, then you will be free to spend that money however you like.
But it’s a different story if you are a 50 year old married man who buys the same coverage as above but pays $115 a month. If you were to invest that much each month into a Roth IRA under the same conditions as above, then at age 65 you would end up with a mere $34,408 – about a third as much as the same policy is worth.
Running computational comparisons like this can help you to determine whether it is better to self-insure than to purchase coverage. Just be sure to factor in any outstanding medical conditions you have, such as high blood pressure or cholesterol or a respiratory condition that could result in you getting rated up. And, of course, be sure to use reasonable assumptions about the rate of return that you would earn if you were to invest the monthly premiums instead. But ultimately, the choice between saving and paying for a policy boils down to how much you would rather keep your money free for other things, even if the amount saved is less than the amount of the coverage.
Another key factor to consider is your family history of longevity. Do your forebears have a history of living well into their nineties? If you are 65 and still in the bloom of health, then you may be wise to purchase a long term care policy, because you may last just as long, but become unable to perform all of the activities of daily living during your final years.
Be sure to look carefully at the terms of any policy that you are thinking of buying. Most of them have an option inflation rider that increases by 3 or 5 percent per year in either a simple or compounding fashion. Also be sure to look carefully at the length of coverage and the elimination period. Most policies provide coverage for 3 years because the average nursing home stay (for those who stay longer than 90 days) is about 2 ½ years.
And the average waiting period is usually 90 days for most policies. Longer terms of coverage, shorter waiting periods and the more generous inflation riders will of course raise the cost of the premiums. But if you feel that there’s a good chance that you may need to stay in a nursing care facility for a longer period of time, then these additional benefits may be worth the money. Consult your financial planner today for more information on long-term care insurance and whether it is right for you.
Using Life Settlements to fund Long Term Care
Enter life settlements, in which seniors sell unwanted life insurance policies and receive a cash windfall that can be used for long-term care needs. Not every individual qualifies for a life settlement , but declining health can often increase the odds that a settlement will be favorable. To learn whether you or your loved one could pursue a life settlement, try Magna’s life settlement calculator , or schedule a call with one of our specialists today.