Long-Term Care Insurance: A Comprehensive Guide to Costs, Coverage, and Whether It's Right for You
Long-term care insurance isn’t an easy sell in the best of times. Who wants to be reminded that they might spend their final days in a nursing home? Now, with many care facilities ravaged by COVID-19, the reputation of institutional living has taken a hit, and buying insurance to help pay for it might be a low priority.
But long-term care considerations should be part of any retirement plan. If you’re skeptical, consider the potential costs of long-term care, which 70% of Americans end up requiring. Even an assisted-living facility costs a national median of $48,612 a year for a single room, according to the 2019 cost of care survey from long-term care (LTC) insurance broker Genworth. You’ll pay more than twice as much ($102,200) for a private room in a nursing home, and only a little less ($90,155) for a semi-private one. Medicare doesn't cover this (the program will pay only for limited-duration, rehabilitative visits to care facilities, typically following surgery).
To defray these high costs, now is a comparatively inexpensive time to buy long-term care insurance, industry spokespeople say. And they warn this may not last. As we recently reported about the life insurance marketplace, today's rock-bottom interest rates mean insurers who write long-term care insurance policies are making far less on bonds and other low-risk investments and "may have to re-price their products to reflect the new reality," according to Tom Riekse, managing director of LTCI, a national brokerage specializing in long-term care insurance. Indeed, Riekse observes in a blog post, LTC insurers such as Nationwide have already done so. Also, low interest rates could trigger a reduction in discounts for couples, according to Jesse Slome, executive director of the American Association for Long-Term Care Insurance (AATLCI), whose members sell such insurance.
Finally, there are more options than ever for receiving care, including policies that cover the cost of independent-living support and in-home care as alternatives to institutional stays — options that may have special appeal now, given the effects of the pandemic on some nursing homes. Also, standard LTC policies have been joined by a range of other hybrid insurance-investment products that provide a benefit to you or your heirs if you’re fortunate enough to never require long-term care.
Read on for more on why and how to carefully consider LTC insurance or its alternatives.
What Is Medicaid's Role in Long-Term Care?
At $50,000 or more per year, the costs of long term care could deplete the retirement savings of the typical older American in short order. The median retirement savings of those who are 60 or older was $152,000 in 2019, according to the Transamerica Center for Retirement Studies. There won't be much, if any, of that nest egg left at the age when long-term care is typically needed — which is 80 and beyond for two thirds of those who require it, according to the AALTCI.
If your savings are exhausted, continuing care will generally be paid by Medicaid, the government health insurance program for low-income adults that's run at the state level. You must of course qualify for the program, based on your having income and assets that do not exceed the thresholds set by your state. There’s then a further criteria to meet for long-term care services: Eligibility is also based on a person's inability to independently perform a number of personal care functions known as activities of daily living, such as bathing, dressing, eating, getting in and out of bed or chair, moving around, and using the bathroom.
The safety net of Medicaid can make buying long-term care insurance all but unnecessary for Americans with modest nest eggs. However, the long-term care you receive under Medicaid can vary from state to state. As the AARP points out, “while federal Medicaid law requires states to provide nursing facility care for all who are eligible, they are not required to do so for home and community based services.” The association’s Long Term Care Scorecard details and ranks what to expect from each state. In other words, while your care may be covered, it might not be the type of care your family would prefer.
At the other end of the financial spectrum, those who are unusually well funded for retirement can likely bear the costs of long-term care without help. Such self-funding is especially viable if you own the house you live in, are willing to sell it to cover any long-term care costs, and have someone who can help facilitate the sale and move you.
How Much Does Long-Term Care Insurance Cost?
With the least and most affluent retirees able to turn to other options to pay for care, long-term care insurance is best suited to those in the middle. There's no consensus on the precise amount of assets that would make long-term care insurance a smart consideration. Many advisors say that needs to be assessed as part of a comprehensive retirement plan. For his part, Slome of the industry group AALTCI says couples with assets above $500,000 are strong candidates, and that those with liquid assets of $1 million will likely be able to self-insure the cost of long-term care. Others recommend $2 million or even higher asset levels for self-insurance.
However, a policy might be worth considering even if your assets fall outside of those ranges. Slome says many who save to cover long-term care are reluctant to spend the money when the need actually arises. For affluent retirees, he says, having some nominal long-term care insurance allows "earlier access to paid-for care (instead of forgoing or tapping family) and greater options in terms of care providers and services."
As a way to test your comfort with using some of your savings to pay for care, rather than leaving a bigger financial cushion for other needs or more assets to pass on as an inheritance, ElderLawAnswers suggests a one-question quiz to yourself: “In the end, would you feel worse having paid premiums over the years for insurance you did not use? Or by paying out-of-pocket for care that could have been covered by insurance?”
Recent data from AALTCI quotes the average premium for typical coverage for a 55-year-old couple as $3,050 combined, compared with $1,700 for a 55-year-old man alone and $2,675 for a woman of the same age. The solo premiums reflect that women pay more for long-term care insurance due to their longer life expectancy. The combined figure includes the discount for buying as a couple, which Slome of AALTCI predicts may drop from the current norm of 40% to only 20%, due to insurers' revenue squeeze from continued low interest rates.
A policy can even make sense if your assets are modest, especially if you live in California, Connecticut, Indiana or New York. Those states have a Partnership for Long-Term Care program that allows you to get credit for benefits received from an LTC policy, if you eventually require care under Medicaid. Every dollar the policy pays in benefits allows you to forgo spending down a dollar of your assets on care if the policy's benefits are exhausted. For example, 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're required to "spend down" in their entirety in order to be eligible for care under Medicaid.
When Is the Best Time to Buy a Long-Term Care Insurance Policy?
The timing of your LTC insurance purchase not only affects how much you will pay over the life of policy, but also whether you can qualify for coverage at all. Buying too early will likely mean paying premiums for decades during which, statistically speaking, the chance of needing LTC is very low. Waiting too long to get coverage risks failing to qualify for a policy 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, according to the AALTCI. That refusal rate jumps to 30% for folks in their 60s and 44% for those in their 70s.
Not all health problems are insurance disqualifiers. Hans E. Scheil, CEO of Cardinal Advisors, a Cary N.C. retirement-planning company, writes that insurers may accept you in spite of conditions such as high blood pressure and high cholesterol, so long as these are under control and have been stable. Issues like a prior heart attack or joint replacement may be tolerated if they occurred “over a certain number of years ago,” he adds.
Even if you're accepted, the health blemishes may trigger higher premiums. A February 2020 AALTCI survey found that having some health issues boosted the LTC insurance premiums for 65-year-olds who were buying a policy for the first time by a full 50% — from $1,400 a year to $2,100 for single males, and from $2,100 to $3,100 for single women.
What Affects the Cost of Long-Term Care Insurance?
In addition to your age and health status, the premiums for your policy will vary according to at least three other key attributes.
First, there’s the maximum amount a policy will pay over its lifetime.This may be expressed as a daily dollar limit, a time limit in years, or a total maximum spending limit over the lifetime of the policy. To determine how useful a policy will be to you, the AARP recommends comparing the amount of your policy's daily benefits with the average cost of care in your area, keeping in mind that you'll have to pay any shortfall between benefits and local costs.
Also, LongTermCare, the federal LTC website, suggests you establish how much of the cost of care you might be able to cover from non-insurance sources, such as savings. “You may have enough income to pay a portion of your care costs and you may only need a small policy for the remainder,” the site suggests. However, it also recommends erring on the side of over-insuring, pointing out that while you can usually decrease your coverage, it is more difficult to increase coverage, especially if your health has declined.
There’s also flexibility in the waiting period after you need care and before the coverage kicks in. This is equivalent to the deductible on many other types of insurance policies. You can typically choose from zero up to 100 days, according to the AARP, which recommends that you “carefully calculate how many days you can afford to pay on your own before coverage kicks in. The shorter the period, the higher the price of the policy.”
Finally, there are the optional benefits you choose, most notably automatic adjustment in coverage to stay ahead of inflation. It’s fairly standard to get a policy with a built-in 3% rise in benefits every year — which aligns with the 3% rise on LTC costs projected by Genworth for 2020. In a comment in our Retire With Money Facebook group, Theresa Speicker of Clarksville, Tenn., reported she was able to eliminate a hike in her LTC insurance rates by reducing “the inflation rider from 5% to 3.8% to keep the same premiums.”
Long-term care insurance is sometimes offered as an employee benefit or as a perk with a professional association membership, supposedly at favorable rates. However, shop around before you automatically assume the cost is less than you’ll pay on the open market. When the AALTCI — which admittedly has a stake in people buying policies through one of its member brokers — shopped around, it found at least one instance of a company plan whose premiums were higher than those of plans available to anyone.
Other Insurance Alternatives for Long-Term Care
A standard LTC policy isn’t the only insurance-based product that can help cover the cost of long-term care. Several other options can cover care costs. All have the added benefit that they retain value for your heirs even if you never need long-term care, and thus avoid a key drawback of the regular, use-it-or-lose-it LTC insurance.
The alternatives begin with the option to get a policy that combines coverage for long-term care with a life insurance benefit. Some life-insurance policies allow you to add a rider that allows you to dip into some of the death benefit early in order to pay long-term care expenses. A supplemental premium may be charged, or a fee may be deducted from the death benefit when the rider is used. Another hybrid long-term care insurance and life insurance policy offers a benefit that's fully available as either a source of care funding or a death benefit.
Alternatively, you can buy what’s known as a long-term care annuity. Purchased with a lump sum, these can be tapped for long-term care expenses until the account is depleted, after which an insurance component kicks in if further care is required. If care isn’t needed, the annuity retains its original value — plus possible modest interest earnings, minus fees.
The health requirements for such annuities may be less stringent than for long-term care policies. However, they aren’t very prevalent at the moment. As Fidelity Investment warns, “today's low-interest-rate environment has made it challenging for insurers to provide annuities with long-term care coverage.”
Who Can Help With Long-Term Care Planning
Perhaps you've helped a parent or grandparent get long-term care, and acquired some of the knowledge and resources you need to develop your own financial plan for life after you can no longer live without help. If not, the organizations cited in this report are good starting points to begin the process.
But virtually all of those groups urge seeking dedicated professional help, regardless of how you envision paying for the long-term care you need. Those who have the resources to consider self-funding their long-term care may already have a financial advisor to assist with developing an overall financial plan for retirement. If not, they should seek one, preferably with expertise that includes planning the financial aspects of long-term care.
Jeff Corliss, partner and managing director of RDM Financial Group at Hightower in Westport, Ct., says he models the financial impact of various scenarios for his clients to help them decide whether to buy a long-term care policy. The most expensive scenario, he says, is when one spouse needs care, moves into a facility and lives there for years while the other spouse continues to live in the couple's home. In effect, you're maintaining two households, and "it becomes very expensive," he says.
Those who are considering buying LTC insurance, hybrid life/long-term care insurance, or a long-term care annuity should be able to get a referral to a long-term care insurance agent or broker from their financial planner or regular insurance professional, if they have one. If not, you can find such a specialist through the directory of the American Association for Long-Term Care Insurance.
Elder-care attorneys are another useful resource. The National Academy of Elder Law Attorneys says its members can help with “planning for incapacity and long-term care, Medicaid and Medicare coverage (including coverage of nursing home and home care), health and long-term care insurance, and health care decision-making.” It, too, has an online directory of its members.
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