What Is Long-Term Care Insurance?

Table of contents

• How does long-term care insurance work?
• Types of long-term care insurance policies
• Pros and cons of long-term care insurance
• Who needs long-term care insurance?
• Average cost of long-term care
• How much does long-term care insurance cost?
• When to buy long-term care insurance
• How to choose the right policy and coverage amount
• Alternatives to long-term care insurance
• Summary of our guide to long-term care insurance

How does long-term care insurance work?

Long-term care insurance works in much the same way as health insurance. You pay a premium, in this case as either a lump sum or in regular installments, and the insurer guarantees a payout or reimbursement amount to cover the costs of care when you need it.

Unlike health insurance, however, LTC insurance benefits are generally triggered when you are diagnosed with a cognitive impairment or require assistance to perform two or more activities of daily living (ADL). These include:

• Dressing
• Bathing
• Eating
• Toileting (or using the bathroom)
• Transferring (like moving from a bed to a wheelchair)
• Walking or ambulating

Benefits may be paid daily, weekly or monthly, depending on the plan. The mode of payment also varies. For example, some policies work on an indemnity model, where the plan sends you a check for the fixed benefit amount and you pay for the services you want. Other plans work on a reimbursement model or pay the care facility or provider directly.

Most LTC policies cover skilled care by licensed professionals, which can take place at home (home health care), in assisted living facilities, nursing homes or adult daycares. Some policies also cover custodial care (where the caregiver doesn't need to be licensed).

The best long-term care insurance policies may also cover alternative care options such as hospice care, respite care, home modifications, medical equipment and even custodial care training for family members.

Types of long-term care insurance policies

There are two main long-term care insurance options: stand-alone long-term care insurance and hybrid life and long-term car insurance. While they have some common elements, they each work differently and are priced accordingly.

Stand-alone long-term care insurance

With stand-alone LTC policies, your premium payment is ongoing and goes toward maintaining the policy, which will provide a maximum benefit during a benefit period (typically lasting two to five years). Once you require care, you'll need to wait a certain number of days (called the elimination period) before benefits are paid out.

Here are some general details about stand-alone policies:

• Premiums are generally more affordable, as the policy offers no other financial benefit. However, they may be subject to rate increases.

• If you end up not needing long-term care, the policy lapses and you don't get a return on your investment.

• Similarly, if you can't keep up with premium payments, the policy is canceled.

• You may add insurance riders such as inflation protection, which increases your benefit each year by a fixed percentage.

Hybrid life and long-term care insurance

Hybrid or linked benefit policies combine a life insurance policy — most commonly universal life insurance — or an annuity with long-term care benefits. Most policies guarantee a percentage will be paid out to the policy's beneficiaries upon the policyholder's death, even if they used the policy to cover long-term care.

Here are some general details about hybrid LTC policies:

• With hybrid policies, you pay a fixed premium for a predetermined number of years, typically 10 to 20. After that period, you can start using the benefit to pay for care.

• Because of this long-term care component, hybrid policies tend to be the more expensive option.

• As these are generally life insurance policies, you can always surrender the policy and get a cash surrender value (your cash value minus surrender charges) if you can no longer afford your premium.

Pros and cons of having long-term care insurance

As with any type of policy, there are pros and cons to buying long-term care insurance.

From the costs of premiums to the waiting periods before the policy kicks in, each factor will play a role in figuring out if LTC insurance is the right choice for you.

Pros of long-term care insurance

There are several benefits to having long-term care insurance. These include:

• Paying for care: Most people who live into their 70s, 80s and beyond expect to need some form of long-term care, and having LTC insurance can help cover a variety of costs related to that care. That includes the costs of in-home care, adult day care, assisted living and nursing home care.

• Protecting your assets: An LTC policy can help protect money and assets, such as a home or investments, from being depleted to cover long-term care costs.

• Safeguarding your family's assets: In addition to protecting your own assets, long-term care insurance can also help protect your family's assets if you run out of money and need financial assistance to pay for the care you need.

• Reimbursing family members: Some policies offer reimbursement for family members who provide care. This is an excellent option for those who choose to have family members serve as primary caregivers.

Cons of long-term care insurance

There are also several potential downsides to buying an LTC policy. These include:

• Elimination period: Stand-alone policies have a waiting period or elimination period before the policy begins to pay out. That means there will be a time when you are receiving long-term care but the policy won't cover it.

• Cost: Premiums for LTC policies may be cost-prohibitive for some. According to AALTCI, a 55-year-old in great health can expect to pay between $950 and $1,500 in annual premiums for a level-benefit LTC policy worth $165,000.

• Pre-existing conditions: Some providers are very strict about pre-existing conditions and may deny coverage if you have certain medical issues that existed prior to purchasing the policy.

• Limits on types of care: Some policies have limitations on the types of care they cover. For example, some policies may only cover care in a nursing home and not at home. With that in mind, read the policy carefully to ensure it will cover the type of care you want.

Who needs long-term care insurance?

The least affluent retirees may qualify for Medicaid, while the most affluent are able to turn to other options to pay for care. That makes long-term care insurance best suited to those in the middle.

According to Jesse Slome, executive director of the AALTCI, couples with assets above $500,000 are strong candidates for insurance, while those with liquid assets of $1 million will likely be able to self-insure and cover the cost of long-term care with savings. Others recommend $2 million or more in assets for self-insurance.

A policy can even make sense if your assets are modest, especially if you live in a state that has a Partnership for Long-Term Care program like California, Connecticut, Indiana or New York. The partnership program allows you to get credit for benefits received from an LTC policy if you eventually require care under Medicaid.

For every dollar the long-term care partnership policy pays in benefits, you can forgo spending down a dollar of your assets on care if the policy's benefits are exhausted. So, if you received $50,000 in benefits from an LTC policy, you'd be allowed to retain up to $50,000 of the assets you'd be required to "spend down" to be eligible for Medicaid.

Average costs of long-term care

The costs of long-term care could deplete the retirement savings of the typical older American in short order. Here are the median costs of care in the U.S. by type of service.

How much does long-term care insurance cost?

The cost of long-term care coverage will vary based on the type of policy and coverage amount you select as well as your gender and your age and health at the time of purchase.

Here are some price examples for a traditional or stand-alone long-term care insurance policy with $165,000 in level benefits. Choosing an inflation growth option (also called inflation protection) will increase these costs.

Linked benefit policies, which cover long-term care expenses and provide a death benefit, can cost much more. Since policies vary considerably by company, this isn't an apples-to-apples comparison.

What affects the cost of long-term care insurance?

The following are some of the most important factors that affect the cost of long-term care insurance for adults:

When to buy long-term care insurance

The timing of your LTC insurance purchase impacts both the cost of the policy and your eligibility. Purchasing too early will mean paying premiums for years when the likelihood of needing long-term care is low. Conversely, waiting too long risks you being disqualified for coverage due to health issues.

While some experts say you can wait until you're in your 60s to buy long-term care insurance, the AALTCI recommends getting a policy when you're in your mid-50s. Applicants in their 50s have only about a one in five likelihood of rejection for LTC insurance due to health issues. That refusal rate jumps to 30% for folks in their 60s and 44% for those in their 70s.

How to choose the right policy and coverage amount

1. Compare daily benefits to the cost of care in your area. LTC policies have a lifetime benefit maximum, which can be expressed in different ways (daily dollar limit, time limit, or total maximum spending). To assess a policy's usefulness, compare its daily benefits to the average local cost of care, as you may need to pay the difference.

2. Have a contingency plan. If you had to pay out of pocket for long-term care, what non-insurance sources would you have at your disposal? Speak to your financial advisor about using other funding sources such as savings or assets.

3. Err on the side of caution. It's recommended to err on the side of over-insuring, as it's easier to decrease coverage than increase it, especially if your health declines.

4. Comparison shop. Compare plans from several long-term care insurance companies before choosing, even if your employer offers seemingly affordable group LTC coverage. Employer-sponsored plans may be best for those who are ineligible for individual coverage. Couples and relatively healthy individuals might benefit from individual policies.

Alternatives to long-term care insurance

If private insurance isn’t the right solution for you, there are a few other long-term care alternatives available:

• Medicare: Medicare does not cover extended nursing home stays but will help pay for up to 100 days of rehabilitation or skilled nursing care after a major health issue, based on a doctor’s recommendation.

• Medicaid: Medicaid is the largest public payer of long-term care services. Eligibility for the program is strictly needs-based. If you didn't qualify for it in the past, you may qualify now or in the future if you spend a significant portion of your assets paying for care.

• U.S. Department of Veterans Affairs (VA): The VA offers a Veterans Aid & Attendance Pensions Benefit, which provides qualified veterans and surviving spouses an additional monthly amount on top of their pension if they are housebound or require help with ADL.

• Life insurance with accelerated death benefits: Adding an accelerated death benefit (ADB) rider to your life insurance policy allows you to access a portion — typically up to 50% — of the death benefit while you are living to cover long-term care expenses. Whatever you receive will be subtracted from the money disbursed to your beneficiaries upon your death.

• Savings: People with plenty of money saved for retirement can likely cover long-term care costs without help. According to Jay Zigmont, Ph.D., CFP® and Founder of Childfree Wealth, "In general, if you have $3 million or more in net worth you may want to consider self-insuring."

• Short-Term Care Insurance: Short-Term Care Insurance covers a limited period, often a year or less, with many insurers offering immediate benefits without an elimination period. It's beneficial for those ineligible for long-term care insurance due to age, and for women, who pay the same rates as men despite longer life expectancies (a costlier factor for insurers).

Summary of Money's What Is Long-Term Care Insurance?

• Long-term care insurance can protect your assets (and those of your loved ones) should you require extended care later in life.

• There are two main types of long-term care policies: stand-alone or traditional LTC and linked benefit or hybrid policies.

• Stand-alone policies are less expensive but won't provide you a return on your investment if you end up not needing care.

• Hybrid policies generally guarantee your loved ones will receive a minimum death benefit upon your death, even if you require long-term care.

• Long-term care insurance is best suited for those who wouldn't qualify for long-term care benefits under Medicaid but don't have enough savings to self-insure.

• Annual average long-term care costs stand at around $68,000, yet these costs keep increasing year-over-year.

• The average cost of a stand-alone long-term care policy for a 65-year-old couple in good health is around $7,150 per year for a $165,000 (per person) policy with a 3% inflation protection rider.

• Long-term care isn’t something you should ignore until it becomes imminent. If you’re already retired or near retirement, long-term care planning should be a priority.