It might be hard to imagine now, but chances are you’ll need some help taking care of yourself later in life. The big question is: How will you pay for it?
Buying long-term care insurance is one way to prepare. Long-term care refers to a host of services that aren’t covered by regular health insurance. This includes assistance with routine daily activities, like bathing, dressing or getting in and out of bed.
A long-term care insurance policy helps cover the costs of that care when you have a chronic medical condition, a disability or a disorder such as Alzheimer’s disease. Most policies will reimburse you for care given in a variety of places, such as:
Your home.
A nursing home.
An assisted living facility.
An adult day care center.
Considering long-term care costs is an important part of any long-range financial plan, especially in your 50s and beyond. Waiting until you need care to buy coverage is not an option. You won’t qualify for long-term care insurance if you already have a debilitating condition. Most people with long-term care insurance buy it in their mid-50s to mid-60s.
Whether long-term care insurance is the right choice depends on your situation and preferences.
Why buy long-term care insurance?
About half of 65-year-olds today will eventually develop a disability and require some long-term care services, according to a study revised in 2016 by the Urban Institute and the U.S. Department of Health & Human Services. Most will need services for less than two years, but about 14% will require care for more than five years.
Regular health insurance doesn’t cover long-term care. And Medicare won’t come to the rescue, either; it covers only short nursing home stays or limited amounts of home health care when you require skilled nursing or rehab. It does not 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. 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:
To protect savings. Long-term care costs can deplete a retirement nest egg quickly. The median cost of care in a semi-private nursing home room is $89,297 a year, according to Genworth’s 2018 Cost of Care Survey.
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 does not 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.
Companies that sell long-term care insurance
The number of insurance companies selling long-term care insurance has plummeted since 2000. More than 100 insurers were selling policies in the late 1990s, according to a 2016 study published by the National Association of Insurance Commissioners. Less than 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.
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 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 $2,050 a year for a long-term care policy with an initial pool of benefits of $164,000, according to a 2019 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 $2,700 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 are not guaranteed to stay the same over your lifetime. Many policyholders saw spikes in their rates in the last 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. The 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
You can buy directly from an insurance company or through an agent.
You might also be able to buy a long-term care policy at work. Some employers offer the opportunity to purchase coverage from their brokers at group rates. Usually when you buy coverage this way, you’ll have to answer some health questions, but it could be easier to qualify than if you buy it on your own.
Get quotes from several companies for the same coverage to compare prices. That holds true even if you’re offered a deal at work; despite the group discount, you might find better rates elsewhere.
The American Association for Long-Term Care Insurance advises working with an experienced long-term care insurance agent who can sell products from at least three carriers.
In its 2019 price comparison, the association found that rates varied widely among insurers.
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.
For more information about Long-Term Care Insurance call JCT Insurance Agency at (626)354-2000 or email jctfinancialsvc@gmail.com
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