Long-term care (LTC) insurance is a type of insurance policy that helps cover the costs associated with extended or long-term care, whether it takes place at home, in a nursing home, an adult daycare or an assisted living facility.
Statistics reveal that about 70% of Americans end up requiring long-term care. And, according to the Cost of Care Report by LTC insurance broker Genworth, even a single room in an assisted-living facility costs a national median of $54,000 a year. You’ll pay more than twice as much ($108,405) for a private room in a nursing home, and only a little less ($94,900) for a semi-private one.
These figures underscore the need to plan ahead, research your options and perhaps even look into the best long-term care insurance companies.
Read on for more on why and how to carefully consider LTC insurance or its alternatives.
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
- Do Medicare or Medicaid cover long-term care?
- Alternatives to long-term care insurance
- Long-term care insurance FAQ
- 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:
- Toileting (or using the bathroom)
- Transfering (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 nursing care by licensed professionals, which can take place at home, in assisted living facilities, nursing homes or adult daycares. Some policies also cover custodial care (where the caregiver doesn't need to be licensed).
Hospice care, respite care, home modifications, medical equipment and even custodial care training for family members may be covered as well.
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.
Premiums are generally more affordable for stand-alone policies, as there is no other financial benefit you can derive from them. If you end up not needing long-term care, you don't get a return on your investment — the benefit is lost. Similarly, if you can't keep up with premium payments, the policy is canceled.
You may add insurance riders to stand-alone LTC policies. One popular rider is inflation protection, which increases your benefit each year by a fixed percentage to keep up with inflation. This rider is particularly valuable, as the costs of care have increased steadily over time.
Hybrid life and long-term care insurance
Hybrid 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 policyholders' death, even if they used the policy to cover long-term care.
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 daycare, 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.
There's no consensus on the precise amount of assets that would make long-term care insurance a smart choice. Many advisors say that needs to be assessed as part of a comprehensive retirement plan.
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.
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 long-term care insurance allows "earlier access to paid-for care and greater options in terms of care providers and services."
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.
For every dollar the partnership policy pays in benefits you can 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.
Average costs of 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.
In 2022, the median retirement savings of people 65 or older was $87,725, while the average retirement savings was $279,997, according to a report from Vanguard.
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 American Association for Long-Term Care Insurance (AALTCI).
How much does long-term care insurance cost?
According to recent data from AALTCI, a stand-alone LTC insurance policy worth $165,000 per person in coverage would result in a combined annual premium of $5,025 for a 55-year-old couple in good health. This example reflects the cost of a policy that grows at a rate of 3% annually to keep up with inflation. That also means the benefit pool would grow from $165,000 each to $400,500 by the time the policyholders reach the age of 85.
A 55-year-old man purchasing the same policy would pay an annual premium of $2,220, while a woman of the same age would pay $3,700. The solo premiums reflect that women pay more for long-term care insurance due to their longer life expectancy.
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:
|Age||You'll lock in lower premiums if you buy coverage when you're younger and healthier. That's because there's a lower risk of you needing long-term care in the immediate future.|
|Health||If you are in poor health, you may not be able to purchase coverage, or your premiums could be higher. Conversely, being in better health will result in lower premiums.|
|Gender||Women's longer life expectancy increases their likelihood of eventually requiring long-term care.|
|Marital status||Many insurers offer a discount to married couples who purchase coverage together.|
|Insurance company||Insurance companies assess risk differently, so they may charge different premiums for similar policies.|
|Amount of coverage||Policies with higher benefit amounts and coverage limits generally cost more.|
|Optional coverage||Some long-term care providers offer add-ons or riders that augment or modify coverage, such as inflation protection and waiver of premium. These riders can provide additional peace of mind but will also increase your monthly premium.|
|Waiting or elimination period||This is the period after you need care but before the coverage kicks in, and it serves the same function as a deductible in other policies. You can typically choose between zero to 100 days. The shorter the waiting period, the more expensive the policy.|
When to buy long-term care insurance
The timing of your LTC insurance purchase not only affects how much you will pay over the life of the 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 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. Issues like a prior heart attack or joint replacement may also be tolerated if they occurred “over a certain number of years ago,” he adds.
However, even if you're accepted, your health may trigger higher premiums — sometimes by as much as 50%.
How to choose the right policy and coverage amount
LTC policies have a lifetime benefit maximum. That 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. Just keep in mind that you'll have to pay any difference between benefits and local costs.
Also, LongTermCare.gov, 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. If you can pay for most of your care with income or savings, you may only need a small policy to cover the rest.
However, the site also recommends erring on the side of over-insuring. While you can usually decrease your coverage, it is more difficult to increase coverage, especially if your health has declined.
And as with any type of insurance policy, shop around and compare plans and pricing — even if your employer offers group long-term care insurance at seemingly affordable rates.
AALTCI suggests employer-sponsored plans may be the best option for those who have health problems and are ineligible for individual coverage. Couples and people in relatively good health may want to look into individual policies, as they could end up paying more for coverage through their workplace.
Do Medicare or Medicaid cover long-term care?
Medicare doesn't cover long-term care costs; the program will pay only for limited-duration, rehabilitative visits to care facilities, typically following surgery.
On the other hand, Medicaid, the government health insurance program for low-income adults that's run at the state level, may cover some long-term care services. However, coverage will depend on the individual's eligibility and their state's Medicaid program.
To qualify for Medicaid, your income and assets should not exceed the thresholds set by your state. And there's a further criteria to meet in order to qualify for long-term care services: the inability to independently perform a number of personal care functions known as activities of daily living (ADL). These activities include bathing, dressing, eating, toileting, getting in and out of bed or chair and moving around.
The long-term care you receive can also vary from state to state. As 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 short, while your care may be covered under Medicaid, it might not be the type of care your family would prefer.
Alternatives to long-term care insurance
An alternative to traditional LTC policies is hybrid long-term care and life insurance policies. Depending on the company, these policies may be combined with a rider that lets you dip into some of the death benefit early to cover long-term care expenses. You may pay a supplemental premium for this rider or have a fee deducted from the 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.
Long-term care insurance FAQ
Who can help with long-term care planning?
Look for a financial advisor with expertise in planning for the financial aspects of long-term care. Alternatively, you can contact an LTC insurance agent or broker if you're considering buying LTC insurance, hybrid life and long-term care insurance or a long-term care annuity.
If you don't know where to start your search, American Association for Long-Term Care Insurance has a directory of brokers.
You may also look through the directory of the National Academy of Elder Law Attorneys. Its members can help you with planning for incapacity, long-term care, Medicaid and Medicare coverage health and long-term care insurance, and health care decision-making.
Can you buy more than one long-term care insurance policy?
While you can buy more than one long-term care insurance policy, experts generally recommend purchasing only one. The cost of maintaining multiple policies might outweigh its benefits.A single policy may not cover 100% of all your long-term care expenses, but it can significantly reduce that financial burden, allowing you to supplement with other income sources.
What are the legal issues of long-term insurance?
Long-term care insurance policies are regulated by the state in which you purchase them. Each state has its own laws governing consumer protections and the types of policies (and policy term) companies can offer.For instance, in California, there are three designated types of policies (nursing-facility-only, home-care-only and comprehensive care), each with different benefit minimums as required by the state.
What are the most popular long-term care insurance policies?
Do long-term care insurance regulations change over the years?
Yes, regulations can change over the years, and it's important to stay informed about the rules in your state.
In recent years, certain states have implemented a new requirement for employers to deduct an additional payroll tax from their employees' paychecks to fund long-term care insurance, unless the employee can show proof of having private long-term care insurance coverage.
As the demographics of the United States continue to change and put more of a strain on public long-term care resources, regulations and laws related to long-term care insurance are likely to evolve as well.
Summary of our guide to 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 LTC and 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 $50,000, 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 $5,025 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.