Why buy long-term care insurance?

Nearly 70% of 65-year-old people will need long-term care services or support, according to 2020 data from the Administration for Community Living, part of the U.S. Department of Health and Human Services. Women typically need care for an average of 3.7 years, while men require it for 2.2 years.

Regular health insurance doesn’t cover long-term care. And Medicare won’t come to the rescue, either; it covers short nursing home stays or limited amounts of home health care when you require skilled nursing or rehab only. It doesn’t pay for custodial care, which includes supervision and help with day-to-day tasks.

If you don’t have insurance to cover long-term care, you’ll have to pay for it yourself in most states. You can get help through Medicaid, the federal and state health insurance program for those with low incomes, but only after you’ve exhausted most of your savings.

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 semiprivate nursing home room is $93,072 a year, according to Genworth’s 2020 Cost of Care Survey.
  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 the government program. Medicaid doesn’t pay for assisted living in many states.

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 popular is long-term care insurance?

The number of insurance companies selling long-term care insurance has plummeted since 2000. Slightly more than 100 insurers were selling policies in 2004, according to 2020 data from the National Association of Insurance Commissioners. About a dozen are selling policies today.
The uncertain cost of paying future claims as well as low interest rates since the 2008 recession led to the mass exodus from the market. Low interest rates hurt because insurers invest the premiums their customers pay and rely on the returns to make money.
The market is continuing to change. Genworth, one of the largest remaining carriers, suspended sales of individual long-term care insurance through agents and brokers in March 2019. The company sells policies to groups and directly to individual consumers through its own sales department.

How long-term care insurance works

  • To buy a long-term care insurance policy, you fill out an application and answer health questions. The insurer may ask to see medical records and interview you by phone or face to face.
    You choose the amount of coverage you want. The policies usually cap the amount paid out per day and the amount paid during your lifetime.
    Once you’re approved for coverage and the policy is issued, you begin paying premiums.
    Under most long-term care policies, you’re eligible for benefits when you can’t do at least two out of six “activities of daily living,” called ADLs, 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.

DISABILITY INSURANCE

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 making long-term care insurance claims.
• Marital status: Premiums are lower for married people than for single people.
• Insurance company: Prices for the same amount of coverage will vary among insurance companies. That’s why it’s important to compare quotes from different carriers.
• Amount of coverage: You’ll 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 single 55-year-old man in good health buying new coverage can expect to pay an average of $1,700 a year for a long-term care policy with an initial pool of benefits of $164,000, according to the 2020 price index from the American Association for Long-Term Care Insurance. Those benefits compound annually at 3% to total $386,500 at age 85. For the same policy, a single 55-year-old woman can expect to pay an average of $2,675 a year. The average combined premiums for a 55-year-old couple, each buying that amount of coverage, are $3,050 a year.
A caveat: The price could go up after you buy a policy; prices aren’t guaranteed to stay the same over your lifetime. Many policyholders saw spikes in their rates in the past several years after insurance companies asked state regulators for permission to hike premiums. They were able to justify rate increases because the cost of claims overall were higher than they had projected. Regulators approved the rate increases because they wanted to make sure the insurance companies would have enough money to continue paying claims.

Tax advantages of buying long-term care insurance

Long-term care insurance can have some tax advantages if you itemize deductions, especially as you get older. Federal and some state tax codes let you count part or all of long-term care insurance premiums as medical expenses, which are tax deductible if they meet a certain threshold. The limits for the amount of premiums you can deduct increase with your age.
Only premiums for tax-qualified long-term care insurance policies count as medical expenses. Such policies must meet certain federal standards and be labeled as tax-qualified. Ask your insurance company whether a policy is tax-qualified if you’re not sure.

How to buy long-term care insurance

There are two main types of disability insurance: short-term disability insurance and long-term disability insurance. Short-term disability insurance covers lost income for about three months while long-term disability insurance typically pays a portion of your lost income for anywhere from one year to your entire life.

Understanding state ‘partnership’ plans

Most states have “partnership” programs with long-term care insurance companies to encourage people to plan for long-term care.

Here’s how it works: The insurers agree to offer policies that meet certain quality standards, such as providing cost-of-living adjustments for benefits to protect against inflation. In return for buying a “partnership policy,” you can protect more of your assets if you use up all the long-term care benefits and then want help through Medicaid. Normally in most states, for instance, a single person would have to spend down assets to $2,000 to be eligible for Medicaid. If you have a partnership long-term care plan, you can qualify for Medicaid sooner. In most states, you can keep a dollar that you would normally have had to spend to qualify for Medicaid for every dollar your long-term care insurance paid out.

To find out whether your state has a long-term care partnership program, check with your state’s insurance department.

As you make a long-range financial plan, the potential cost of long-term care is one of the important things you’ll want to consider. Talk to a financial advisor about whether buying long-term care insurance is the best option for you.

Alternatives to buying Long Term Care insurance

Save money 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 could apply for coverage through Medicaid, which would pay for nursing home care. But then your options would be limited to facilities that accept Medicaid patients. And the program doesn’t pay for assisted living in every state.

Tap into ‘living benefits’ on a life insurance policy

Also known as an “accelerated death benefit,” this feature 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 cost on others when you buy.
• Con: The triggers for when you can access the benefits for care vary by company, so read the fine print carefully. A trigger could be a terminal illness diagnosis. Also, using the policy for long-term care reduces the payout your life insurance beneficiaries will get.

Sell your 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 get 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 get a death benefit from the policy. (When you die, the death benefit will go to the new owner of your policy.) It can be tough to tell if you’re getting a fair price. Life settlements generally aren’t available for term life insurance policies.

Use an annuity

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 and 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’re 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 bills.

Buy 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 don’t 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, you can get your money back if you decide years later you don’t want 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.

Buy a short-term care insurance policy

Short-term care insurance covers the same types of care as long-term care policies, but for a shorter period of time — three months to 360 days. You choose the period when you buy. Generally, short-term care insurance has no “elimination period,” or waiting period, so the policy starts paying out as soon as you start using care. The elimination period on a long-term care policy works like a deductible: It’s the number of days you pay for care before the policy pays out. A typical elimination period is 90 days.

• Pro: A short-term care insurance policy costs less than a long-term care policy and is easier to qualify for. Although the coverage lasts less than a year, that might be all you need. You can also buy a short-term care insurance policy to pay for care during the elimination period of a long-term care insurance policy.
• Con: A short-term care insurance policy won’t provide enough coverage if you need care for more than a year. It might make more sense to save money for several months of care than to pay year after year for a short-term care policy. In addition, states don’t regulate short-term care policies as tightly as they regulate long-term care policies, so they’re not held to the same consumer protection standards. That means you need to be extra careful when buying. For example, long-term care policies must be “guaranteed renewable,” which means the policy renews year after year as long as you continue to pay for it. Many short-term care policies are guaranteed renewable, but they’re not required to offer that protection. In a review of policies on the market, consumer advocates found at least one that did not guarantee renewal. Under that policy, the insurer could refuse to renew coverage, even after you’d paid years for it and had never made a claim.

Not sure what you need? Let us help you eliminate the guess work to make sure your life’s work is protected from the unexpected.

  • We can review your current plan or policies to insure they still meet your goals.
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