Guide to Long Term Care Insurance and Related Financial Products

It might be hard to imagine now, but chances are you’ll need some help taking care of yourself later in life. The big question is: How will you pay for it?

Buying long-term care insurance is one way to prepare. Long-term care refers to a host of services you may require late in life which often aren’t covered by conventional health insurance. This includes assistance with routine daily activities, like bathing, dressing or getting in and out of bed, as well as routine healthcare services. These services may be provided by a nursing home, assisted living facility or a home health care aid.

A long-term care insurance policy helps cover the costs of long-term care when you have a chronic medical condition, a disability or other health issue such as Alzheimer’s disease. Most policies will reimburse you for care offered by a variety of providers, including, but not limited to:

• Home health care
• Nursing home 
• Assisted Living 
• Respite care
• Adult day care

Considering the fact that nursing home care can cost upwards of $90,000 per year, paying for these services is an important part of any long-range financial plan, especially in your 50s and beyond. Waiting until you need care to buy coverage is not an option. You won’t qualify for long-term care insurance if you already have a debilitating condition. Most people with long-term care insurance buy it in their mid-50s to mid-60s.

Whether long-term care insurance is the right choice depends on your situation and preferences.

Why buy long-term care insurance?

Generally speaking, people buy long-term care insurance for two reasons:

1. To protect savings. Long-term care costs can deplete a retirement nest egg quickly. The median cost of care in a semi-private nursing home room is $90,155 a year, according to Genworth’s 2019 Cost of Care Survey^[1].
2. To give you more choices for care. The more money you can spend, the better the quality of care you can get. If you have to rely on Medicaid, your choices will be limited to the nursing homes that accept payments from this program. Furthermore, Medicaid does not pay for assisted living in many states. For many seniors requiring lower levels of care, assisted living can be a great alternative to nursing home care.

About half of 65-year-olds today will eventually develop a disability and require some long-term care services, according to a study revised in 2016 by the Urban Institute and the U.S. Department of Health & Human Services^[2]. Most will need services for less than two years, but about 14% will require care for more than five years.

Regular health insurance doesn’t cover long-term care and Medicare won’t come to the rescue, either. Contrary to what many believe, Medicare covers only short nursing home stays or limited amounts of home health care when you require skilled nursing or rehabilitation. Even for rehabilitation, Medicare coverage is subject to strict restrictions and time limitations. Medicare does not pay for custodial care, which includes supervision and assistance with activities of daily living.

If you don’t have insurance to cover long-term care, you’ll have to pay for it yourself. Eventually, you may qualify for assistance through Medicaid, the federal and state health insurance program for those with low incomes, but only after you’ve exhausted most (if not all) of your savings. Medicaid eligibility is subject to strict asset and income limits which are addressed in other content on this website.

Buying long-term care insurance might not be affordable if you have a low income and little savings. The National Association of Insurance Commissioners says some experts recommend spending no more than 5% of your income on a long-term care policy.

How long-term care insurance works

To buy a long-term care insurance policy, you fill out an application and answer a series of basic health-related questions. The insurer may ask to see medical records and interview you by phone or face to face.

You are generally allowed to choose the amount of coverage you need (subject to certain limitations). The policies usually cap the amount paid out per day and the amount paid during your lifetime. You should scrutinize the required triggering events for coverage, as well as the limitations on per day and cumulative payouts. Policies that do not provide adequate coverage may not be a very good investment if you are likely to run out of resources if you require long-term care even with the policy in place.

Once you’re approved for coverage and the policy is issued, you begin paying premiums.

Under most long-term care policies, you are eligible for benefits when you can’t do at least two out of six activities of daily living (“ADL’s”), on your own or you suffer from dementia or other cognitive impairment.

The activities of daily living are:

• Bathing
• Caring for incontinence
• Dressing
• Eating
• Toileting (getting on or off the toilet)
• Transferring (getting in or out of a bed or a chair)

When you need care and want to make a claim, the insurance company will review medical documents from your doctor and may send a nurse to do an evaluation. Before approving a claim, the insurer must approve your “plan of care.”

Under most policies, you’ll have to pay for long-term care services out of pocket for a certain amount of time, such as 30, 60 or 90 days, before the insurer starts reimbursing you for any care. This is called the “elimination period.”

The policy starts paying out after you’re eligible for benefits and usually after you receive paid care for that period. Most policies pay up to a daily limit for care until you reach the lifetime maximum.

Some companies offer a “shared care” option for couples when both spouses buy policies. This lets you share the total amount of coverage, so you can draw from your spouse’s pool of benefits if you reach the limit on your policy.

Cost of long-term care insurance

The rates you pay depend on a variety of things, including:

• Your age and health: The older you are and the more health problems you have, the more you’ll pay when you buy a policy.
• Gender: Women generally pay more than men because they live longer and have a greater chance of filing long-term care insurance claims. 
• Marital status: Premiums are lower for married people than single people.
• Insurance company: Prices for the same amount of coverage will vary among insurance companies. That’s why it is important to compare quotes from different carriers.
• Amount of coverage: You will pay more for richer coverage, such as higher limits on the daily and lifetime benefits, cost-of-living adjustments to protect against inflation, shorter elimination periods, and fewer restrictions on the types of care covered.

A quick refresher

• Long-term care refers to a host of services to help with “activities of daily living,” such as bathing, eating and remembering to take medication. Regular health insurance and Medicare pay for medical expenses. But they don’t pay for custodial care, which is the nonmedical help with routine activities. Medicaid, the federal and state health insurance program for low-income people, pays for nursing home care. But you have to spend most of your money first before you qualify.
• Planning is vital once you reach your 50s and 60s, because long-term care is expensive. Among 65-year-olds, 52 percent will eventually develop a disability and require long-term care services, according to a study by the Urban Institute and the U.S. Department of Health and Human Services. Of those who require long-term care, men will need services for an average of 1.5 years, and women will need them for an average of 2.5 years.

A long-term care insurance policy pays for care up to the policy’s limits if you have a severe cognitive impairment, such as dementia, or you can’t do two out of the six activities of daily living. Most policies sold currently cover the costs of care in a nursing home, assisted living facility or adult day care center or at home. However, some buyers are wary about shelling out the money for coverage they may never use. And there is no guarantee that your annual policy price won’t increase in the future. In fact, over the past decade many long-term care insurance policyholders have been hit with big price hikes.

Alternatives to buying a long-term care insurance policy.

Saving money up front for long-term care

If you have robust savings, you could plan to pay for long-term care out of pocket.

• Pro: You don’t risk paying for insurance that you may never use.
• Con: A few years of care could put a big dent in your savings, leaving less money for your heirs. You could also run out of money. In that case, you may qualify for Medicaid, which would pay for nursing home care. However, your options would be limited to facilities that accept Medicaid patients as well as the availability of Medicaid designated beds at those facilities. Also, in some states, Medicaid does not pay for assisted living.

Tapping into ‘living benefits’ on an existing life insurance policy

This feature is sometimes called “accelerated death benefits” and is available on most permanent life insurance policies such as whole life insurance. It lets you take a portion of the life insurance payout while you’re still alive to pay for medical expenses, including long-term care. The death benefit is reduced by the amount used for long-term care.

• Pro: The cost is included in your rates on some life insurance policies, and you can add it for a small increase in cost on other policies at the time of purchase.
• Con: The triggers for when you can access the benefits for long-term care vary from policy to policy, so read the fine print carefully. For instance, some policies require you to be diagnosed with a terminal illness. Also, using the policy for long-term care reduces the payout your beneficiaries will receive.

Selling your existing life insurance policy

You can sell your permanent life insurance policy and use the proceeds for anything you want, including long-term care expenses.

• Pro: The proceeds you receive from selling your policy, a transaction called a life settlement or viatical settlement, are usually more than what you’d get if you surrendered the policy for the cash value.
• Con: The proceeds may be taxed, and your survivors will no longer receive any death benefit from the policy. (When you die, the death benefit will be paid to the new owner of your policy.) It can be tough to evaluate whether you are receiving fair value for the policy. Life settlements generally aren’t available for term life insurance policies.

Annuities

You can buy an immediate annuity to provide a steady stream of income to pay for long-term care. With an immediate annuity, you pay a one-time lump sum and the insurer provides a guaranteed stream of income for a certain period or the rest of your life. The amount you receive depends on how much you paid in, as well as your age, health and gender.

• Pro: You can buy an immediate annuity even if you’re in poor health. In fact, you can qualify for a higher annual payout from the annuity if you are in poor health than if you’re in good health.
• Con: You need a large sum of cash to invest, such as $50,000 or more. The income from the annuity still might not be enough to pay for your care. The tax implications for annuities are complex, so you’ll want to talk with a tax advisor to understand the future tax implications.

Buying a combination long-term care/life insurance policy

These policies, also called asset-based or hybrid life insurance and long-term care insurance policies, provide a pot of money for long-term care if you need it or a death benefit to your beneficiary if you do not max out the long-term care benefits. Typically, you pay one large premium upfront, such as $75,000, or a few large payments over a few years. Under some policies, such as the Lincoln MoneyGuard II from Lincoln Financial, you can get your money back if you decide years later you don’t want to retain the policy.

• Pro: You get something for your money even if you never use the long-term care portion of the policy. If you don’t use it for long-term care, or don’t use all of it, your beneficiary gets a life insurance payout when you die.
• Con: It’s an option only if you have a large sum of money to spend.

Wrapping it all up

There are several options for planning for end of life long-term care expenses. All of these approaches are generally more effective if you start sooner when you are younger, in better health and have more years to accumulate additional resources. For many people, a combination of these approaches may work best. For others, due to age or underlying health conditions, some of these options may already be off the table. The key takeaway here is to plan ahead and put yourself in position to afford the care you need in a place of your choosing if and when the time comes that you require long-term care.