Many people are concerned about the cost of long-term care for themselves or for a family member. As the result of a prolonged illness, disability, or injury, older individuals may need long-term care when they can no longer do the ordinary tasks of everyday living or when their health requires constant day-to-day monitoring. Here are the facts you need to decide whether to purchase long-term care insurance and to choose the most cost-effective method of providing for the possibility of long-term care.
Medicare and Medigap health coverage do not cover nursing home care. About half of all nursing home expenses in the U.S. are paid for by patients and their families. Therefore, you should think about how you would cover the cost of nursing home care for yourself, your spouse or family members.
Note: Slightly less than half of all nursing home expenses are paid for by Medicaid. And only about two percent of stays in nursing facilities are paid for by Medicare or by private health insurance. Even less assistance is available to meet the cost of care at home or in the community.
Planning Aid: For further information on Medicaid care services, see Medicaid Long-Term Care Services.
One way of covering these often burdensome nursing home costs is long-term care insurance (LTCI), which is now sold by more than one hundred insurers.
But is LTCI a good buy? This Financial Guide covers the factors you will need to think about if you are considering purchasing LTCI and offers help in selecting a policy if you decide to buy LTCI coverage.
How LTCI Works
Long-term care insurance policies pay a set dollar amount per day for covered care during the benefit period stated in the policy.
Example: You choose a policy that pays $160 per day for five years. The maximum that policy will pay is $292,000 ($160 per day X 365 days X 5 years).
The older the individual covered, the higher the premium. For instance, premiums for coverage on a 70-year-old individual are about three times those for a 50-year-old.
Most long-term care policies are indemnity-type policies, meaning they will pay you for actual charges by the care provider (up to the policy's limits). Other long-term care policies, instead of being based on indemnity, pay daily benefit amounts to the insured rather than paying for actual charges. The latter type of policy offers insurers greater flexibility (e.g., allowing them to pay for home care) and less paperwork.
When Benefits Are Paid
To receive benefits, you must usually suffer serious cognitive impairment or be unable to perform several "activities of daily living" independently.
Period Of Payment
The benefit period you choose can range from one year to life. The longer the period, the higher the premium.
Tip: Purchase at least three to five years of coverage, the average length of a nursing home stay.
Types Of Care Covered
Most policies cover skilled care, intermediate care, and custodial care at a nursing facility. Home care may also be covered or offered as an extra. You may also be able to purchase coverage for adult day care, assisted living facilities, or hospices.
This period constitutes the number of days the insured must wait-after becoming eligible for benefits-before coverage actually begins. The elimination period generally ranges from zero to 90 days, but can go up to one year. The longer the elimination period, the lower the premium.
Most policies are guaranteed to be renewable. However, rates are generally not guaranteed, and can be raised for a class of policyholders with the approval of the state insurance commission.
Rising Health Care Costs
A fixed-benefit policy will lose much of its protective ability over the course of 10-20 years. Thus, if you purchase a policy at age 60 and expect to rely on it for 20 years, you need inflation protection. This is available with most policies in the form of "benefit increase options" of various types.
Why Purchase LTCI
Here are the reasons most often given by insured for purchasing LTCI:
- To avoid being a burden to their families
- To conserve assets for heirs
- To be able to get into the nursing home of their choice
- To be cared for at home as long as possible
- To avoid Medicaid
- To have peace of mind
LTCI may not be the best way to achieve these goals. There are alternatives to obtaining LTCI that are more suitable for certain people.
The Pros And Cons
Long-term care insurance is both complex and controversial. Here is a summary of some of the main points for and against purchasing such coverage.
Reasons For Buying LTCI
LTCI, although expensive, may provide protection against costly care. Thus, if other options are not viable, LTCI may be the way to meet your goals. Although LTCI policies remain a low-value product, they are better than nothing.
If you have family caregivers, the extra home care coverage in LTCI might make it possible to remain at home longer.
LTCI premium costs increase with age. Once you develop a serious medical condition, you probably will not qualify for coverage. Thus, it is better to buy LTCI early, if at all.
Reasons Against Buying LTCI
You cannot afford the premiums or don't have enough assets to protect.
LTCI policies lack sufficient home care coverage to keep an individual out of a nursing home, unless family members or informal caregivers are available to help in providing care. Thus, if your goal is to avoid nursing homes at all costs, LTCI may not be the best way to go.
LTCI policies return from 60% to 65% of total premiums paid in benefits. This return rate is much less than returns from other types of health insurance.
Tip: LTCI policies are improving, so you may be able to get a better deal in a few years.
Tip: Refuse to pay more than one month's premium when you apply for coverage. In most states, after you buy a policy, you have 30 days to change your mind and get a refund.
Here are some options for paying for long-term care, along with their advantages and drawbacks:
Giving away assets to qualify for Medicaid may make sense for some people who want to leave their heirs an inheritance. The downside of giving away assets is that there is less flexibility and fewer resources to pay for care.
So called "Medicaid trusts" are another option. However, recent changes in federal law make it more difficult to have a trust and still qualify for Medicaid.
Reverse Mortgage Or Equity Conversion
Reverse mortgages and other forms of home equity conversion are often viable alternatives for those who wish to remain at home. Seniors can borrow money against the equity in their homes and defer repayment until they die or sell their house. However, for these options to make sense, a home must have a high monetary value and be fully or mostly paid for. Moreover, the individual must intend to stay in the home for the Long-Term.
Related Guide: Please see the Financial Guide: REVERSE MORTGAGES: How They Can Enhance Your Retirement.
Other Sources Of Income
Developing other income sources is an option that many older persons overlook. If you are retired, you might want to get a part-time job. If you are currently working, you might work a few years longer than you had planned. You might consider either renting part of your home or selling your current home in order to invest the proceeds.
Even though self-insurance-i.e., just paying for costs yourself if they arise-is a gamble, it is the current strategy of choice for most people. Self-insurance makes the most sense for people with major assets, for those who can afford a long nursing home stay, and for people of modest means who would quickly qualify for Medicaid anyway.
Can You Afford LTCI?
Premiums for LTCI vary greatly, depending on your age at the time of purchase, the comprehensiveness of the coverage, and the company selling the plan. Here are the approximate annual costs for LTCI:
|Age (at time of purchase)
||Cost Range (Nursing Home only)
||Cost Range (Nursing Home & Home Care)
||$250 to $1,100
||$300 to $1,500
||$450 to $2,000
||$600 to $2,600
||$1,100 to $3,000
||$1,170 to $5,000
Here are some general guidelines that suggest buying LTCI:
- Each person in the household has more than $75,000 in assets (not counting the value of the primary residence)
- Your annual retirement income per person in the household is over $30,000
- You can pay premiums without having to "go without"
- You could continue to afford the premiums, even if they increased by 20% or 30% in the future.
Related Guide: Consider the possibility of receiving benefits under a disability policy, please see the Financial Guide: DISABILITY BENEFITS: How To Get All That You're Entitled To
How To Select An Insurer
If you decide that LTCI is your best option, it is important to shop around for the right company. Some states have enacted important consumer protections in the LTCI area while others have not. Do not assume that a company is a safe bet just because it is licensed by the state insurance department to sell LTCI.
Tip: Seek independent advice before buying, e.g., from your financial advisor. Use a local independent agent or broker who has been recommended by someone reliable. Do not buy from an agent who sells door-to-door.
No matter how good a policy sounds, it is worth little if the company won't be there when it comes time to pay. Buy from a company with strong financial reserves. Unfortunately, there is no foolproof method for determining which companies are financially strong. However, it pays to look up a company's rating by A.M. Best or Standard and Poor's, both of which evaluate the financial health of insurance companies.
Planning Aid: To find information about insurance companies that provide long term care insurance, see the Insurance Company Guide.
Tip: Purchase long-term care insurance from a company that has an A+ or A++ rating from Best or an A, AA, or AAA rating from Standard and Poor's. Most public libraries have these references.
What To Look For In A Policy
Read the policy from cover to cover. Do not rely on marketing literature. When you compare LTCI policies, consider the following features:
A policy that covers nursing homes should also cover assisted living, a better alternative for many people who can no longer live on their own. If you want a policy with home care, look for one that offers a full range of community-based services, including adult day care, or that pays you a monthly cash allowance to spend as you please for care.
Tip: If you lack family caregivers you can count on far into the future, avoid buying a policy with home care coverage-it will not be sufficient to enable you to stay at home.
Look for a policy that bases eligibility on the need for help with activities of daily living. Policies that pay only for medically necessary care are not usually a good buy.
Tip: To be sure you are covered for Alzheimer's disease, choose a policy that covers cognitive as well as physical disability and pays benefits if you meet either criteria.
If you purchase a policy before the age of 75, inflation protection is essential to ensure adequate coverage if you need long-term care at some point in the future.
Tip: Buy a policy that has an additional cost but automatically increases benefits at the rate of 5% annually.
If you cannot afford inflation protection, either choose a less comprehensive policy or do not buy LTCI at all.
Keep in mind that the chances of needing long-term care for five years or longer are relatively small. For most people, a policy covering two or three years will be more cost-effective.
Tip: Resist pressure to buy the first policy you see. Compare it with at least two others.
Ben Baldwin, The Complete Book of Insurance: The Consumer's Guide to Insuring Your Life, Health, Property and Income, (Probus Publishing Co., 1996), ISBN 1557388806.
David Ness, Keys to Planning for Long-Term Custodial Care, (Barrons Educational Series, 1991), ISBN 0812045939.
Health Insurance Association of America, The Consumer's Guide to Long-Term Health Care Insurance (Washington, DC).
Evensky and Katz, Planning for Long-Term Health Care, (Boston, Houghton Mifflin Co., 1992), ASIN 0395510996.
National Association of Health Underwriters, Understanding Long-Term Care Insurance (Washington, DC).