long term care insurance

Long Term Care Insurance – Does It Fit Into Your Financial Plan?

So what exactly is long term care insurance, and is it right for you? As we get older, we are generally more prone to illnesses and other negative effects of aging. Many of these setbacks are often treatable and/or manageable with the advances in medicine that we enjoy today. However, these same medical advances are allowing us to live longer as well. Sometimes an individual’s health may deteriorate over time to a point where doing basic everyday activities becomes a challenge. The likelihood of this happening increases the longer you live.

Such activities are referred to in the industry as “activities of daily living” or ADLs. The six basic ADLs are eating, walking, bathing, getting dressed, using the toilet, and continence. Helping someone with these activities is often referred to as “custodial care”. However, skilled nursing care may also be required alongside the custodial care in treating a medical condition. The inability to perform basic ADLs due to a chronic condition or disability can last for an extended period, and is often permanent once onset begins. As such, this type of care is generally referred to as “long term care” or (LTC).

So how do you go about getting the proper care if you found yourself in such a situation? Long term care can be very expensive. Medicare only covers nursing home care and similar services at home for a limited time. And the coverage is only possible if some sort of skilled nursing care is required along with the custodial care. Similar to Medicare, regular health insurance such as that obtained individually or through an employer also does not cover most LTC. So what are your options?

What Are Your Options if You Need Long Term Care in the Future?

You can self insure. The upside of this strategy is that there are no insurance premiums. If you ultimately do not require long term care, the money set aside can be used for other purposes. The downside is that you may not have the time and/or the financial means to self insure.

Medicaid

If you have low income and few assets, you may qualify for Medicaid. The upside here again is that you do not need to purchase long-term care insurance. The premiums paid from the purchase of the policy until the time when you may ultimately use it can really add up. Also, you do not have elimination periods or overall maximum benefit limitations once you qualify. The downside is that your choice of facilities and specific available services may be limited. Some facilities and doctors may not accept Medicaid. Medicaid generally covers nursing home care, but may not cover assisted living, adult daycare, respite care, and some home care. Medicaid is administered at the state level. So coverage may differ from state to state.

Relatives

You may think that a relative could possibly take care of you in your older age. Granted this can alleviate some of the cost, especially for the custodial aspect of the care. However, you may not want to burden the relative with this undertaking. Alternatively, their situation may change, and taking care of you may not be possible. Further, the relative may not have the appropriate training, desire, or ability to provide all the necessary help. Also, with this option, you will still be responsible financially for the cost of some out-of-pocket expenses. This can include skilled nursing care, supplies, home modifications, etc.

LTC Insurance

If you feel that none of the above options will be available to you, it may be worthwhile to consider purchasing at least some basic form of long term care insurance. The main disadvantage here is that it can be somewhat expensive. This is especially true as you get older or if your health declines. But the upside is that you will be able to get the services necessary at a higher selection of facilities than would be the case with Medicaid. Plus you will not have to worry about a severe financial hit to your other assets. And maybe just as important, you won’t have to burden relatives with the task of taking care of you.

Will You Require Long Term Care in the Future?

No one knows for sure if they will need long term care insurance. It is impossible to accurately predict the future in this regard. However, looking at your family history can provide some clues. Longevity will increase the chances you will need LTC. The older you are, the more likely you will require some type of care. A family history of chronic illness may also increase your chances of needing care. Also, your current health and habits may be precursors to needing LTC. If you are overweight, smoke, don’t exercise, and have bad eating habits, you increase your chances of needing such care in the future.

According to the U.S. Department of Health and Human Services, on average, those turning age 65 today have almost a 70% chance of needing some type of LTC in their remaining life. Twenty percent will require LTC for more than five years. The average duration of LTC is about three years. Home care averages two years, and facility care averages one year.

What Does Long Term Care Insurance Cover?

Long term care insurance covers nursing home and assisted living facility services. It also covers home care. Installations of stair lifts, ramps, widening of doors, and other necessary modifications to your home may also be at least partially covered. Hospice care, adult daycare, and respite care are services typically covered as well.

Nursing facilities typically provide round-the-clock custodial as well as skilled medical care. Assisted living facilities are housing complexes for those who don’t require 24/7 care, but need assistance with ADLs. Skilled nursing care can also be provided as needed.

Home care generally involves a home health aide or nurse who comes to the insured’s home to assist with ADLs and other necessary care. A homemaker may also be available to do typical household chores such as cleaning and cooking.  LTC insurance can cover home care on a 24/7 or as needed basis. Home care is the most common type of long term care received.

It is very important to keep in mind that all coverage will be subject to the policy’s limits and maximums.

How Much Long Term Care Insurance Coverage Do I Need?

Policies may vary in what they cover and limits may apply. Coverage is usually stated as the amount the policy will pay per day. The daily rate may vary based on the service provided. Overall limits may also apply, and can be based on duration of time (i.e., years) or a monetary amount.

It is a good idea to look into the cost of care for the area in which you expect to receive the care. Then determine how much of that cost you wish to cover with insurance.

Since it may be several years, even decades from the time you purchase a policy until the time you use it, an inflation protection feature should be a very important consideration. The daily costs of care when you are 85 may be much higher than when you were 55. Inflation protection can increase premiums significantly.

The 2017 Genworth Cost of Care Survey provides information on the median cost of care in specific areas as well as nationally. The following figures are the daily national median. The annual totals are in parentheses. The cost for homemaker and home health aide services is about $131 ($47,934) and $135 ($49,192), respectively. Adult day care costs about $70 ($18,200), and a private one bedroom space at an assisted living facility is $123 ($45,000). Nursing home care costs $235 ($85,775) for a semi-private room, and $267 ($97,455) for a private room.

When Are You Eligible for Benefits Under Your LTC Policy?

You must meet specific criteria in order to be able to qualify for benefits under your policy. These criteria are called “benefit triggers.”

Activities of daily living are the typical measuring criteria which determine if you are eligible to receive benefits. Most insurers will allow benefit payments when you need ongoing assistance with at least two of these activities.

You can also qualify if you have a cognitive impairment such as Alzheimer’s disease.

When Should You Purchase Long Term Care Insurance?

The younger and healthier you are, the cheaper the premiums will be. If you purchase the policy too early, you will likely be paying unnecessary premiums for too many years. And the premiums do increase over time for policyholders as a group. Premiums do not increase on an individual basis after you purchase the policy due to declining health or older age.

Also, long term care insurance does not build up a cash value as do some life insurance policies. Instead, you lose all the premiums paid if you do not ultimately need the policy. However, many insurers today offer a “nonforfeiture” option. This feature allows you to get some type of benefit if you cancel your policy or ultimately never use it prior to your death. The benefits are usually either a reimbursement of part of your premiums, or a shortened benefit period. This option can also increase a policy’s premiums significantly.

As you get older, you become less insurable and the premiums will be more expensive. It is generally best to purchase long-term care insurance while you are in your 50s. This way you are still young and healthy enough to qualify for coverage at reasonable premiums.

Most policies generally allow you to stop paying premiums once you start receiving benefits.

Elimination Period

The elimination period is similar to a deductible for other types of insurance policies. With LTC policies, the elimination period is the number of days you must pay for long-term care once you are eligible for benefits before the policy starts paying. The longer the elimination period, the lower your premium will be.

However, be sure that you can afford the elimination period you choose. Elimination periods generally range from a few days up to a year or more. Periods of 30, 60, or 90 days are more common.

Existing Conditions and Health Exam

If you already have a serious medical condition, you will probably not qualify for a long term care policy. A health exam is required for many individual policies. However, with some preexisting conditions, you may still qualify. Coverage for such conditions may not be covered for a period of time.

It is also important to know what types of conditions are excluded under your policy. For example, most policies exclude conditions resulting from self-inflicted harm and drug and alcohol abuse.

Once you are covered, your insurer cannot cancel the policy due to your age or health. The “guaranteed renewable” option in most LTC policies allows you to maintain coverage as long as you pay your premiums.

Income Tax Issues with Long Term Care Insurance

The premiums you pay for long term care insurance are currently treated as medical expenses for federal income tax purposes. The amount which qualifies as a medical expense is limited depending on your age. However, due to income restrictions, many do not receive the benefit of such deductions.

Medical expenses are only deductible to the extent they exceed 10% of your adjusted gross income. Also, you must “itemize” your deductions in order to get the deduction.

You can also use a Health Savings Account (HSA) to pay for long term care insurance premiums. To the extent that you pay premiums with HSA dollars, you are essentially getting a tax deduction for the premiums.

Some states also offer credits or deductions for premium payments. New York, for example, offers a long-term care insurance credit for premiums paid.

Benefits received from a long term care policy are generally tax-exempt.

How Much Does Private Long Term Care Insurance Cost?

The American Association for Long-Term Care Insurance (AALTCI) publishes the National Long-Term Care Insurance Price Index each year. They also advocate a good, better, best approach to LTC planning. Some sample policy examples are as follows:

A “good” policy may have a daily benefit of $120 at plan inception, a benefit term of 360 days, a 30 day elimination period, 100% home care benefit, and 5% simple inflation growth.

A “better” policy may have a $150 daily benefit at inception, a 3 year benefit term, a 90 day elimination period, 100% home care benefit, and no inflation protection.

A “best” policy may include a $150 daily benefit at plan inception, a 3 year benefit period, a 90 day elimination period, 100% home care benefit, and 3% compounded inflation protection growth.

In 2017, based on these example policies, a single male at age 55 with “preferred” health can expect to pay on average $800, $1,050, and $1,665 per year for a “good”, “better”, “best” policy, respectively.

A single female at age 55 and in “preferred” health can expect to pay an average of $800, $1,500, and $2,600 for the same policies. Policies for women are generally more expensive since women generally live longer and may therefore require more benefits.

A couple at age 60 in average or “standard health” can expect to pay a combined average of $2,050, $2,200, and $3,790 for these sample policies.

Policy premiums can vary significantly among insurers for the same benefits.

Click here for more details from the 2017 National Long-Term Care Insurance Price Index.

Long Term Care Insurance Through Your Employer

Compared to other types of insurance, fewer employers offer group long term care insurance, and participation rates among employees are also lower. However, employer offerings are becoming more common. Participation is voluntary, and the premiums are generally not subsidized by the employer.

With group plans, it may be easier to qualify for coverage if you have an existing health issue or other eligibility obstacles. Medical exam requirements and screening are usually less strict, and the premiums may be lower.

However, according to the AALTCI, if you are in good health and married, you may actually pay less if you purchase an individual policy.

Upon leaving your employer, you may still be able to keep the policy as long as you pay the premiums.

Conclusion

A long term care insurance policy may or may not be right for you. Suitability varies based on each individual’s circumstances. But if you are considering purchasing one, you must do your homework. As with anything else, you want to shop around for a good policy at a good price. Also, check with ratings agencies such as A.M. Best, Moody’s, or Standard & Poor’s for the financial stability of the insurer.

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