Long-term care insurance: The basics

What is long-term care insurance?

All forms of insurance attempt to balance the odds of financial loss against the odds of personal and financial misfortune. Long-term care (LTC) insurance is a specific type of insurance meant to help pay for the costs associated with disabilities and conditions that require essential help with basic activities of daily living such as feeding, dressing, walking, toileting, bathing, getting in and out of bed, and more.

As we get older, the likelihood of needing help increases.

As we get older, the likelihood of needing help increases. We are especially vulnerable after a health event like a heart attack, major illness, stroke, serious fall, or broken bone, when these services may be needed in a variety of settings:

• At home

• In an assisted-living facility

• In a nursing home

• At an adult day-care

• Through hospice or respite care providers

Whether planned or unexpected, the need for these services are accompanied by a shocking reality: the cost of these services isn’t covered by regular health insurance policies, and it isn’t covered by Medicare.

That gap in coverage creates a dilemma and potential hardship.

How will I pay for help if I need it? Will my savings be enough? Do I have other resources that I can use to cover the costs of care?

Many people have asked themselves these questions and concluded that long-term care insurance is the right answer for them; others have decided to manage their exposure to risk through alternative means of planning for the potential risk.

The United States Department of Health and Human Services (HHS) estimates that about 70 percent of current 65-year-olds will eventually require some form of long-term medical care to recover from an illness, medical procedure, or other disruption in their usual routine due to a health event.

And when this kind of long-term care is required, many people are shocked to discover that Medicare—the “safety net” many have come to rely on—does not cover the costs associated with skilled daily nursing care and nursing home stays.

The average duration of long-term care in a skilled, long-term residential setting varies widely, but HHS estimates about half (of the half who will need long-term care) will need less than a year of extended care:

• 48% will require less than 1 year of care

• Another 19% will need 1-2 years of extended skilled care

• 21% will require 2-5 years of long-term care

• A final 13% will have medical needs that exceed 5 years of long-term care

But the devil is in the details, as the saying goes, and the details is where long-term-care insurance becomes complicated.

What does long-term care cost?

So the odds are already perhaps 50/50 in favor of needing some sort of outside assistance—but not all outside help is paid help, and not all volunteer help is nursing help. Families and friends have been helping to care for those in need since the beginning of time, and this remains a primary resource for many. While this is a worthy resource, family, friends and volunteers many not be readily available resources for everyone, such as rural or remote residents, or those with special needs.

For those who may need to pay for help, the following HHS-sourced statistics give a sobering overview of the potential costs associated with long-term care.

While the majority (63%) will never need to pay for care:

• 13% will spend less than $50,000 in their lifetime on LTC

• 11% will require between $50,000 and $150,000 in long-term care

• Another 4% require care costing $150,000-$250,000

• The most expensive group—the final 9%—will require care over $250,000

While everyone’s tolerance and aversion to risk is different, the costs of care make personal evaluation of the numbers important when considering an annual premium against the costs of long-term care.

How much does long-term insurance coverage cost?

In recent years, national financial media have been shining a spotlight on double-digit rate hikes in the long-term care insurance market as insurers struggle to keep up with the benefits they’re now paying out on policies sold in the 1990s.

The market for long-term care insurance policies has also seen considerable shrinkage since a peak in the 1990s and early 2000s, when more than 100 companies began to offer this type of coverage. Today only 15 companies continue to sell traditional LTC insurance.

AARP notes several reasons behind the flagging popularity of traditional LTC insurance, but the “problem” with this class of policies was a classic mismatch between insurance company expectations and actual consumer behavior: “One insurer in 2008 anticipated that 10% of single policyholders would drop their coverage by age 55, according to an actuarial memorandum...The reality is that fewer than 1% of policyholders have lapsed their coverage, and the companies have been caught off guard,” according to an analyst quoted by MSNBC.

Long-term care insurance premiums (like other insurance premiums) are initially set based on a variety of complex, intercorrelated factors:

• age at enrollment

• amount, type, and duration of benefits

• pre-existing health conditions

• gender

• life expectancy

• geography

And unlike many forms of insurance, long-term care insurance requires looking deep into a crystal ball. Depending on changing circumstances, long-term care insurance may not be enough to pay for exactly what you need, when you need it. Many policies cover only basic daily expenses (some policies are capped at $120/day, while others approach $200). Beneficiaries should pay close attention to elimination periods, exclusions, and other ins and outs of collecting benefits when purchasing a policy. Finally, if an illness, accident, or disease is serious, a defined benefit period (often several years) may end before full recovery or independence is achieved.

What does all of this mean for those who are considering LTC insurance?

In September 2022, the average U.S. household median income stood at $74,580, while the annual premiums for long-term care insurance were considerable.

When should you consider long-term care insurance?

As with all forms of insurance, long-term care insurance is primarily about weighing risk tolerance, resources, and potential for peace of mind that this sort of financial planning tool may provide. It’s important to weigh the pros and cons of long-term care insurance as no two situations are ever the same, but the following considerations can help to narrow down your options.

• You have substantial savings and assets to protect.

  As a part of a comprehensive financial planning strategy, long-term care insurance can be a pragmatic tactic to ensure that a family home, considerable savings, and other financial resources won’t be completely drained if a health crisis hits an aging family member especially hard.

• You want some protection but cannot afford “hybrid” long-term care insurance.

  Since the insurance industry began to realize early purchasers were not abandoning their policies in the numbers they had initially projected, they went back to the drawing board and created a new type of long-term-care health insurance product that combines a whole life policy with the flexibility to pull out funds for long-term care—a hybrid policy. Unlike traditional long-term care policies, the money paid into premiums is not lost if you don’t use it for care; it is paid out at the end of the policy term as life insurance. (On the other hand, these policies are considerably more expensive than traditional LTC insurance.)

• You want more choices for long-term care if you need it.

  Right or wrong, the ability to pay equals the ability to access a broader range of options in care, and a long-term care policy can open the door to a wider selection of care options, from in-home nursing or caregiving to residential facilities. Heading into the future with a policy that is ready to pay a defined, substantial benefit (along with the ability to pay out-of-pocket during the policy’s waiting period), you and your loved ones will enjoy the flexibility to make the right choice, unburdened by financial constraints.

• You understand and are using available tax benefits.

  The ever-changing tax code provides credits and deductions related to long-term care and insurance.

For the rest of us, financial experts recommend preparing for the (statistically unlikely) odds we might need expensive, long-term care someday in a pragmatic, measured way. Make sure your plan includes evaluation of your individual situation to create the support network you may need when the time comes.

• Leverage your assets.

  An asset-based strategy uses equity in homes, savings, annuities, etc. to finance long-term care. It may not work for everybody, but it’s a practical option.

• Create a dedicated investment/savings account early.

  Another tactic is to place an amount roughly equivalent to an annual premium in responsible investments on an annual basis and to let these investments compound interest over the long-term, specifically to use in case of long-term medical needs.

• Create a family-and-friends care plan.

  Before the need arises, begin discussing the need for care, how care might be coordinated and by whom, where help may come from, and how it will be paid for, if needed. Get everyone on the same page before there’s a crisis. Having a plan makes it easier to implement long-term care when the time comes.