Long-Term Care Insurance for the Elderly: What You Need to Know
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It feels good to imagine living all of your senior years without any worry. That's why the topic of long-term care insurance for the elderly is worth learning more about. After all, some people eventually need help with basic activities of daily living—things like eating, bathing, getting dressed, using the bathroom, taking care of personal hygiene, or moving from place to place. You may never need that sort of help, but wouldn't it be nice to know that you could access care if it ever became necessary?
For those who need it, long-term care (LTC) is a saving grace. Of course, the longer you live, the greater your chances of eventually needing LTC—as well as a reliable way to pay for it. (If you're wealthy, paying for care is probably not an issue. If you're financially disadvantaged, you can use Medicaid for certain types of care. But if your financial situation falls somewhere between those two extremes, your options may be a little less clear.)
That's where long-term care insurance (LTCI) comes in. Under the right circumstances, it can provide peace of mind and the ability to pay for extended help if you ever need it. But this care-funding option isn't right for everybody. So it's essential to understand the potential advantages as well as the risks. This article will give you a good introduction to the topic.
The following information is not a substitute for professional, personalized advice. Everyone's circumstances are different.
What Is LTC Insurance?
Long-term care (LTC) insurance is a type of financial product that can help you cover the costs of home care services or an extended stay in a nursing home, assisted living residence, memory care facility, or hospice. It provides a way to ensure that you and your family will be able to afford your care in the event that you eventually need assistance with two or more activities of daily living. When you purchase an LTC policy from an insurance company, you pay a certain amount of money (i.e., a premium) each month in exchange for a guarantee that your future care costs will be covered in accordance with the specific terms of your particular agreement.
Many families and individuals decide to buy LTC insurance because of the fact that Medicare only pays for long-term care under very limited circumstances and Medicaid is designed for people with low incomes and low-value assets. Plus, Medicaid programs vary from state to state in terms of what they do or do not cover. So, for example, your state may or may not cover assisted living. By purchasing an LTCI policy that covers the types of care you may need in the future, you can give yourself more options if a time ever comes when you or your family have to pursue long-term care.
However, it's important to know the potential limitations of LTC insurance. Most policies include a lot of exclusions. For example, services that are not covered by long-term care insurance usually include:
- Hospital care
- Care for self-inflicted injuries
- Paid care from an immediate family member
- Care for illnesses or disabilities caused by war or participation in illegal activity
- Treatment for alcohol abuse or self-induced drug addiction
- Care for certain pre-existing conditions such as diabetes, dementia, mobility problems, or HIV-related illnesses
Most LTCI policies are comprehensive, which means that, aside from exclusions, they cover a wide range of services, including home care and assisted living. But some policies only provide coverage for facility care. That's why you always need to read all the terms of any policy you're considering very carefully before buying it. Here are other terms that are crucial to understand:
- Benefit amounts: LTCI policies generally specify how much compensation you can receive for the cost of care on a daily or monthly basis. That amount can vary greatly from policy to policy. So you need to make sure it's high enough to cover your potential future costs if you want to avoid paying anything out of pocket. Your policy will also have a maximum life benefit, which is the total amount of coverage it will provide over your lifetime. That dollar amount is sometimes represented as a period of time (based on the daily or monthly benefit). For example, if your monthly benefit is $9,000 and your maximum life benefit is $324,000, then your coverage would probably be good for three years. Alternatively, you can purchase an LTCI policy with unlimited or lifetime coverage, but your premiums will be much higher.
- Elimination period: This works kind of like a health insurance deductible. But instead of having to pay a certain amount of money before the policy provides benefits, you have to wait a certain amount of time. That means you'll be on the hook for your long-term care costs during the waiting period. Every policy is different, but elimination periods generally range from as little as 20 days to as much as a full year. Shorter elimination periods generally come with higher premiums.
- Inflation protection: Most of today's LTCI policies include a clause guaranteeing that the value of your benefits will increase by a certain percentage each year in order to account for the rising costs of senior care. Without this protection, your benefits (in today's dollars) may only cover a fraction of your future costs since inflation erodes your purchasing power. For example, the cost of long-term care in the U.S. rose by at least three percent a year between 2012 and 2017, according to Genworth.
How Much Does Long-Term Care Insurance Cost?
When you buy insurance for long-term care, premiums are based on several different factors. For example, in addition to the benefit amounts, elimination period, and types of coverage you choose, LTCI rates are also based heavily on your age, existing health, and whether you are purchasing a single policy or a combined policy for you and your spouse. Long-term care insurance rates also vary significantly from company to company, even when the terms are nearly identical. So unless you shop around and compare, it's difficult to get a handle on exactly how high your premiums will be. There are simply too many variables at play.
That said, you can get a better idea of today's LTCI costs by looking at the following examples of monthly premiums. They are based on a survey of top insurers by the American Association for Long-Term Care Insurance (AALTCI) for a policy with a 90-day elimination period, three-percent inflation protection, and a maximum life benefit of $164,000 in 2018 dollars (which would cover three years of care at $150 per day). These examples also break down the cost of long-term care insurance by age (from 55 to 65 years old) as of 2018:
- At age 55, a single man would pay about $156 per month. A single woman would pay about $247 per month. And for a married couple, the cost of long-term care insurance would cost about $250 per month (for the combined premium of a "shared care" policy). By age 85, the maximum life benefit would grow to $386,500 for each single or married person.
- At age 60, a single man's premium would be about $167.50 per month. A single woman's premium would be about $290 per month. And a married couple's combined premium would be about $291 per month. By age 85, the maximum life benefit would be $333,000 for each person.
- At age 65, a single man would pay $205 per month. A single woman would pay about $356 per month. And a married couple would pay about $390 per month for a combined premium. By age 85, the maximum life benefit would be $287,500 for each person.
You'll notice that a woman's premiums are generally a lot higher than a man's. That's because women live longer, on average, and therefore tend to require more long-term care. You'll also notice that the best deals are usually offered to married couples under a "shared care" policy (especially when each person is close to the same age). That's because the chances of each spouse requiring a lot of long-term care are relatively low. Regardless, you can expect to pay higher premiums for higher benefit amounts and shorter elimination periods. In addition, the younger you are when purchasing your policy, the lower your premiums will be going forward.
Also, keep in mind that insurance companies tend to raise premiums by at least a small percentage every so often. So you need to budget for those potential increases. The good news is that if you buy a tax-qualified (TQ) policy, you can deduct your long-term care insurance premiums on your federal income tax return—up to a certain amount. For example, here are the LTCI tax deductible limits, by age range, for 2018, according to AALTCI:
- Age 50 to 59: $1,560
- Age 60 to 69: $4,160
- Age 70 and up: $5,200
Do I Really Need Long-Term Care Insurance?
It depends. You should consider a number of major factors, such as your family situation, your chances of needing future long-term care, and your current and future financial health. First, however, you should consider what LTC may cost in the decades ahead. (Hint: It will be expensive.) For example, check out the projected yearly median costs of the following types of long-term care in 2037 (based on Genworth survey data and a conservative annual inflation rate of three percent):
- Nursing home care (private room): $176,015 (compared to $97,455 in 2017)
- Nursing home care (shared room): $154,919 (compared to $85,775 in 2017)
- Home health care: 88,846 (compared to $49,192 in 2017)
- Homemaker services: $86,574 (compared to $47,934 in 2017)
- Assisted living: $81,275 (compared to $45,000 in 2017)
As you can see, nothing costs more than staying in a nursing home. Insurance companies know that few people can afford an extended stay in one. That's why the best LTCI policies aim to cover the daily or monthly costs of nursing home care. But it's also why premiums can be so high.
So, is long-term care insurance a good investment? For some people, it definitely is. The answer might be yes if:
- Your net worth is between $200,000 and $2 million
- You have a good income that you can count on indefinitely
- You want to protect your assets
- You have a family history of illnesses that have required many years of LTC (such as dementia)
- You want to purchase long-term care insurance for parents who have assets you hope to inherit
- You don't want to rely on help from your family or the government
On the other hand, LTC insurance isn't the best option for everyone. So the answer might be no if:
- Your net worth is below $200,000 or above $2 million
- Your income is low or can't be counted on indefinitely
- You wouldn't be able to easily afford a premium increase of 50 percent or more
- You don't have valuable assets to protect
- You don't have any heirs, or you don't care about passing on any assets
When considering this question, think about these facts: For somebody who purchases an LTC insurance policy when he or she is 60 years old, the chances of ever needing to make a claim are about 50 percent, according to information from AALTCI. But nearly 75 percent of all nursing home stays last less than three years. And only about 12 percent of nursing home stays last five years or longer. You're more likely to need home care or the limited support offered by an assisted living facility.
At the end of the day, it's good to have long-term care insurance if (1) you aren't wealthy, (2) you're confident that you'll be able to comfortably afford rising premiums and (3) you have valuable assets that you want your children or other heirs to inherit. Otherwise, it's a good idea to explore alternative ways of funding your potential long-term care.
However, it's still wise to weigh the various pros and cons of purchasing LTC insurance. After all, everyone's situation is unique. For some people, the benefits will outweigh the downsides. For other people, this type of insurance may be too risky.
Here are some of the benefits of long-term care insurance:
- You can preserve your assets: Paying out of pocket for long-term care can quickly drain your savings. Many seniors also end up having to sell their homes and liquidate other assets to pay for care if they don't have LTC insurance. (Medicaid will cover certain types of care, but you can't qualify for it unless you have a low net worth. Also, under Medicaid, you may be able to keep your home while you're still alive, but when you pass away, the government will likely lay claim to the proceeds of its sale.) That's why, if you want your children or other heirs to inherit your assets, you'll need to protect them somehow. LTC insurance can allow you to get the care you need while preserving the assets you've worked so hard to accumulate over your lifetime.
- You can remain independent longer: If you don't have the funds to pay for home care, you may find yourself in a situation where you have to move into a care facility or a family member's home. Having LTC insurance makes it more likely that you can remain in your own home for much longer if you ever require care, which will give you a greater sense of freedom and independence. (If you rely on Medicaid, you may have a more difficult time getting the type of home care you need and instead be moved into a nursing home before you feel ready. It just depends on exactly what's covered by the Medicaid program in your particular state.)
- You can prevent family turmoil: When a parent or other family member needs long-term care, trying to figure everything out can be incredibly stressful for everyone involved. Unless you have a solid plan in place before you need it, your family may struggle to avoid conflict over how to pay for care, how to divide responsibilities, and how to safeguard inheritable assets. Having LTC insurance can remove much of that burden from your family members.
- Your finances will be less complicated: When you get to the point that you need long-term care, the last thing you want to be doing is struggling to figure out which of your financial accounts to draw from or what you need to sell in order to pay for it. With LTC insurance, you'll already have the financial aspect figured out. After your policy's elimination period ends, the funds you need will come from one place.
- You'll have more options for quality care: Many of the best home care agencies and long-term care facilities don't accept Medicaid. So if you rely on the government to fund your care, you'll have fewer options and may face long waiting lists for the most popular facilities. Long-term care insurance makes it easier to get the best care possible, as quickly as possible.
Here are the potential downsides of LTC insurance:
- Your premiums may become unaffordable: Most LTCI policies permit insurance providers to alter certain terms of an agreement after you've started paying premiums. In fact, an insurance company can get approval from the government to raise the premiums on all LTC policies they've already sold. Stories abound about people who've had their LTCI premiums increase by as much as 85 percent or more. That's because many insurance companies have lost a great deal of money on their LTC policies. Some have even gotten out of the LTCI business altogether. As the cost of long-term care rises, the population of seniors grows, and people live longer, a lot of companies are struggling to turn a profit on this type of insurance. That means there is a very strong chance that you could eventually be faced with a premium increase you can no longer easily afford.
- You might let your policy lapse, making it a waste of money: Did you know that 38 percent of women and 32 percent of men who have LTC insurance at age 65 will allow their policies to lapse before they die? According to the Center for Retirement Research at Boston College, it's true. By not continuing to pay their premiums, those seniors will forfeit their LTCI benefits. That happens for two main reasons: (1) They suffer from cognitive decline, which makes them forget to pay; or (2) their premiums become unaffordable—often just before they would need to use their policies. So if your premiums rise too much, you'll have a hard decision to make: Will you cancel your policy outright or get lower premiums by greatly reducing the policy's benefits? Some insurance providers will allow you to claim benefits on a canceled policy up to the amount you've already paid in premiums, but not all companies are so reasonable. That can make LTC insurance a big gamble.
- You may not ever need to make a large claim: Many people with LTCI policies die from common medical conditions that progress quickly, such as certain types of cancer or heart disease. Others remain healthier but only end up requiring a very small amount of long-term care—sometimes for shorter durations than their policies' elimination periods. So there's a good chance you'll pay for an expensive policy that you never actually reap any benefits from.
- Your insurance provider may put up a fight: An LTC insurance policy can have all kinds of legal loopholes that allow the provider to wiggle out of paying benefits. For example, most policies won't pay benefits unless the policyholder can demonstrate that he or she needs assistance with at least two activities of daily living (ADLs). But how a policy defines an ADL can be purposefully subjective, making it possible for an insurance company to deny benefits when they are needed. Is long-term care insurance a good deal if you end up having to sue your provider to get what you've paid for? Will you even have the mental, emotional, or physical ability to stand up for your rights if you're in a condition that requires long-term care?
What Are the Alternatives to LTC Insurance?
Wealthy people generally have enough savings to fund their own long-term care. And low-income people can usually qualify for Medicaid without much trouble. But for people in the middle class, good LTC funding solutions can be a lot harder to figure out. That's why long-term care insurance seems like one of the most common-sense options. However, as you've already read, there can be real drawbacks to choosing that route. So, what alternatives exist—aside from trying to scrape together enough money from whatever savings, family assistance, and Social Security or pension income you may have? Here are some of the possibilities worth exploring.
Seek advice from a reputable legal or financial planning professional before pursuing these options.
- Medicare: This federal government program covers long-term care—but only under limited conditions. Medicare will pay for 20 days of care in a skilled nursing facility (at no cost to you) if you were admitted to a hospital for at least three days and begin your stay in the nursing facility within 30 days after being released from the hospital. After that, Medicare will cover part of your costs for up to 80 days more as long as you pay a daily copayment. Medicare will also cover hospice care as well as skilled nursing care if your physician prescribes it as medically necessary. In some cases, it will also cover care for people who will likely never improve from conditions such as dementia, multiple sclerosis, Parkinson's disease, or stroke-related disability. Personal care services are excluded from Medicare coverage.
- Medicaid: With this federally supported but state-managed program, the coverage depends on the particular state you live in. At minimum, it is designed to cover the cost of skilled care and personal care services in a nursing home. In many states, it also covers the cost of home health aides and homemaker services. Some states also cover the costs of staying in an assisted living facility. However, not all long-term care facilities or home health agencies accept Medicaid. And in order to qualify for Medicaid, you have to prove that your income and net worth fall below a state-specified threshold. So if you're in the middle class, you'll need to spend down your savings and sell most of your assets in order to become eligible. That's why Medicaid is usually the option of last resort. Medicaid may allow you and/or your spouse to continue living in your home, but when it is eventually sold, the government can lay claim to some or all of the proceeds.
- A partnership-qualified (PQ) policy: In some states, residents have the option of purchasing long-term care insurance that provides extra protection of their assets should they ever need to qualify for Medicaid. Essentially, if you use up all of your LTCI benefits and still need care, you can apply for Medicaid under modified rules that allow you to have a higher net worth than would otherwise be permitted. This type of policy is also known as a qualified partnership (QP) or qualified state long-term care insurance partnership (QSLTCIP) policy.
- Investing: You can use the money that you would otherwise apply toward LTC insurance premiums to make smart investments in stocks and bonds (both foreign and domestic). The earlier you begin investing, the greater your returns will be. The downside is that it's a risky strategy with no guarantee of how much money you'll have should you eventually require long-term care. The benefit is that you don't have to meet any medical criteria, and you'll be free to spend the proceeds on whatever type of care you want or need. At the very least, investing whatever you can now will make it less likely that you'll need to sell your assets later or rely on a government program.
- An irrevocable trust: Some people think that they can simply transfer their assets to their children in order to decrease their net worth and qualify for Medicaid. However, when you apply for Medicaid, the government will look for any asset transfers you've made within the previous five years. Plus, once they are out of your name, those assets can be lost if your children go through an expensive divorce, file for bankruptcy, or get sued. So a simple asset transfer may not help you get the care you need while protecting the things you want to pass on. Instead, with the help of a good lawyer, you may be able to protect those assets by setting up an irrevocable trust that doesn't impact your chances of qualifying for Medicaid.
- A longevity annuity: With this type of insurance, you pay a large amount up front in return for the guarantee of a regular amount of income later in life. The payout doesn't begin until you reach a certain age. For example, if you put $100,000 into a longevity annuity when you are 60 years old, you could conceivably receive more than $2,000 a month—starting at age 80—for the rest of your life. The downsides are that you need a lot of initial capital, and if you die before the age of payout, your insurance company doesn't have to pay your estate anything. It's basically a form of insurance that protects you financially if you live a longer life than expected. But the money could also help you pay for care services, if required, during your elderly years.
- A hybrid LTC and life insurance policy: Like an annuity, this kind of insurance can allow you to pay a one-time premium. That way, you don't have to worry about not being able to afford rising premiums later on. You also get LTC insurance and life insurance in a single package. So if you don't end up using all of your benefits on long-term care, your heirs will inherit whatever is left over as a death benefit when you pass away.
- Your home equity: If you have a lot of home equity, you may be able to draw from it in order to pay for at least some of your long-term care costs. Options worth considering include a home equity line of credit or a reverse mortgage. Just make sure you consult with a trusted financial expert since each of those options can have disadvantages.
When Should You Buy Long-Term Care Insurance (If You Decide to Get It)?
The best age to buy long-term care insurance is between 40 and 60 years old. The earlier you purchase it, the lower your premiums will be. At an earlier age, you'll also stand a better chance of qualifying for LTCI since you'll need to pass a physical exam and allow your medical records to be reviewed. Insurance companies prefer young and healthy customers.
That said, you shouldn't discount the possible benefits of purchasing a policy if you're over age 60. When considering what age to buy long-term care insurance, your health is one of the biggest factors. If you've had a relatively trouble-free health history, then you may be able to get an affordable policy as late as your 70s. However, the chances of that happening are definitely much slimmer. And most insurance providers won't even consider anyone over age 80.
Who Should I Buy From, and What Should I Look For?
Not all LTC insurance companies are created equal. Some companies deploy persuasive sales agents who try to sell policies that sound good but have terrible terms when you actually look at them. So it's wise to never believe anything you read or hear in an advertisement, marketing brochure, or sales pitch. When it comes to considering a long-term care insurance policy, the only thing that matters is the actual written agreement. You should have a trusted lawyer who specializes in retirement, LTC, and estate-planning issues go over any policy you're thinking of purchasing.
It's usually better to purchase a policy through an independent insurance broker than directly from an insurance company. A good broker will be able to compare terms and prices from several different companies to help you find a policy that best fits your particular situation.
When approaching an insurance agent, insurance broker, or financial planner, be prepared to listen carefully and ask good questions. He or she should want to know about your retirement plans and goals, your current financial situation, your current health, and any personal or family history of medical problems. Make sure you find out how much experience and expertise he or she has when it comes to selling LTC insurance policies. Request verification of that experience.
When considering a policy from a particular insurance provider, find out how much that company has paid out in LTC claims over the years. A large amount (when compared to other companies) may indicate that it conducts business in a more honest, good-faith manner. By the same token, any lawsuits against the company for unpaid claims could indicate that it's more likely to deny the payout of benefits when things are in a legal grey area. Also, since each state has regulations about which companies can or cannot sell LTC insurance, it's worth making sure that the provider you're considering has approval in your state. You can learn that information from your state's office of consumer protection.
Always look closely at the terms of any policy before you buy it. Make sure you understand everything. Pay particular attention to the insurance provider's rights when it comes to raising premiums or denying claims. You need to be comfortable with the risks.
How Do You File an LTC Insurance Claim?
The first thing you should do is grab a copy of your LTCI policy and carefully read through everything. Ensure that you understand all of the terms, including the benefit amounts, elimination period, types of coverage, exclusions, and conditions you must meet. Seek the help of a trusted legal or financial professional if anything confuses you.
Call your insurance provider or visit the company's website to request all of the claim documents you'll need. If you've already entered a care facility or started receiving assistance from a home care agency, you can probably have the facility or agency handle these details on your behalf. (You'll just need to sign an authorization form.) But if you have a trusted family member who can do these things for you, that's also a good option.
Several documents will likely need to be completed, such as:
- A claimant's statement: For this document, you'll need to provide basic personal information as well as the reasons for your claim. You'll be asked to explain the kinds of activities you require assistance with and how long you think you'll need that help. You also may be required to provide a recent history of your care and/or any hospitalizations. This document is also sometimes called a care support history, a policyholder's statement, or an insured's statement.
- An information release form: This document will authorize your insurance provider to request and gather your personal health information so that it can successfully process your claim. This form ensures that your insurance company complies with the Health Insurance Portability and Accountability Act of 1996 (HIPAA), which is intended to protect your private medical data.
- A physician's statement: This is one of the documents that your insurance company will use to verify that your long-term care is truly necessary. Your primary care doctor (or the physician at your facility) will complete it and may provide various medical records such as office notes, diagnostic test results, or anything else that supports his or her professional opinion.
- A nursing assessment: This is similar to a physician's statement, except that it's completed by a licensed nurse. It will describe the kind of care you need and the specific plan for providing it. The nurse who completes it may also provide various info such as your vital signs and history of care.
- A care provider's statement: This will be completed by your care facility or agency if you are already receiving long-term care. The document is intended to verify that your facility or agency is properly licensed and equipped to handle your particular care needs as outlined in the nursing assessment.
After your insurance provider receives all of the necessary documents, you or your authorized representative will be scheduled for a phone interview to go through everything. Most claims take at least 30 business days to fully process. Your insurance company will then notify you of its decision to either approve or deny your claim.
When it comes to long-term care, it's always better to have a solid plan than to get caught unprepared. After all, your elderly years will matter just as much as any other time of your life. So seriously consider the potential benefits of long-term care insurance. But also be aware of the risks. Make sure you consider all of your options, not just one.