While nobody can predict if you’ll in fact need long-term care, it’s important to have a plan in place should the need ever arise; you can easily burn through your life savings in the absence of one. That said, this post will help you better evaluate whether or not a long-term care policy makes sense as well as relevant considerations should you choose to purchase one.

What is long-term care?

Long-term care (LTC) is defined as help you may need with “activities of daily living” (ADLs) due to injury, health, or cognitive impairment from dementia, memory loss, or Alzheimer’s. Such activities include bathing, dressing, eating, toileting, continence, and transferring (walking or moving oneself from a bed).

What is long-term care insurance?

LTC policies work similarly to mortgage and auto insurance policies in that you pay premiums—typically for as long as the policy is in effect—and make claims should you ever need covered services.

Most long-term care policies cover you if you cannot perform (or need substantial assistance in performing) at least two ADLs.

How long-term care differs from long-term disability (LTD) insurance

LTD insurance is designed to replace a portion—often 40-60%—of the income you’d lose if you can’t work due to an injury or illness. Though ranked behind musculoskeletal disorders (e.g., fractures or joint disorders), cancer, pregnancy-related complications, and mental health issues such as depression and anxiety round out the most common reasons behind long-term disability claims. These policies sometimes even cover cardiovascular and circulatory disorders (e.g., heart attacks and coronary artery disease).

On the other hand, people often purchase LTC insurance policies for coverage during retirement and/or to cover the cost of a nursing home or home health aide should they become unable to care for themselves.

Does Medicare cover long-term care?

Many people incorrectly assume Medicare covers long-term care. The truth is that it doesn’t, except in very limited circumstances. Long-term care insurance policies typically cover out-of-pocket expenses accompanying home care, assisted living, and nursing homes—benefits not covered by Medicare and other public programs. Even if you qualify for Medicaid, you’re still restricted to facilities that accept payments from the program whereas an LTC policy offers you more care options.

You’ll likely need long-term care as you age

U.S. Department of Health and Human Services data reports that someone with a 65th birthday today has an almost-70% chance of needing some form of long-term care (LTC) services in his or her remaining years. What’s more, women are expected to need 3.7 years of care compared to 2.2 years for men. An estimated 20% of current 65-year-olds will require care for more than 5 years.

Regarding the type of care needed, 65% of people rely on home-based long-term care services for an average of two years—often involving help with bathing, dressing, taking medications, and supervision—so they can live as independently as possible in the comfort of their own homes. The other 35% who utilize LTC services spend a year (on average) in facilities such as nursing homes or assisted living facilities.

Care is expensive (and not getting any cheaper)

While we can’t tell you exactly how much money you’ll need to self-fund long-term care, we can share various costs to help you better plan. For example, Genworth’s Cost of Care Survey estimates 2023 national monthly median costs as follows (with 2021 costs in parenthesis):

· Home health aide: $6,292 ($5,148)

· Adult daycare: $2,058 ($1,690)

· Assisted living facility: $5,350 ($4,500)

· Nursing home, private room: $9,733 ($9,034)

· Nursing home, semi-private room: $8,669 ($7,908)

In assuming you’ll need one year of at-home care and one year in a semi-private nursing home, for example, you’d need to shell out over $179,000 to cover a home health aide for one year and a one-year nursing home stay.

You should also remember these are current estimates and—of course—costs will increase as the years march on. Compounded with the fact that the U.S. has a rapidly aging population, and this will only further ignite inflationary pressures related to long-term care.

How much does long-term care insurance cost?

Unfortunately, long-term care insurance is expensive—and costs vary widely based on the coverage amount and LTC carriers. For example, a recent American Association for Long-Term Care Insurance (AALTCI) study reports the average annual cost for a 55-year-old male rings in at $2,100 (for a policy covering $165,000 in benefits with a 3% growth rate to account for inflation). This same policy costs more for a 55-year-old woman ($3,600), as women tend to live longer than their male counterparts and thus file more frequent claims. Fast forward 10 years, and the annual price for the same policy increases to $3,135 (males) and $5,265 (females).

The need to plan for long-term care

Now that you have some pertinent background information, you can see why long-term care planning—regardless of whether you have a policy or will pay for expenses out of pocket—is critical for any financial plan to succeed. For those who don’t want (or can’t afford) to pay for such expenses on an out-of-pocket basis, keep reading to learn your long-term insurance policy options, the ideal age to purchase such policies, and key concepts you should familiarize yourself with should you purchase a policy.

How to buy a long-term policy

You do have a few different options here that include purchasing a policy through an insurance agent, your financial planner, or an insurance broker. Some employers also offer coverage to employees, and state partnership programs—involving alliances between long-term care insurance companies and state Medicaid programs—exist as well.

As an alternative to standalone long-term care policies, you can consider adding a long-term care rider to your life insurance policy (sometimes referred to as a “hybrid” long-term care policy). These riders—offered on most permanent and many term policies—provide access to a portion of the policy’s death benefit every month to pay for long-term care (the same qualifying criteria often apply to receive benefits through your rider).

One big advantage of an LTC rider over a standalone LTC policy is that if you don’t use the care benefit, the policy still pays the death benefit—whereas standalone policies can feel like wasted money if you never file a claim.

Finally, the passing of the SECURE Act 2.0 means that beginning in 2025 employees will have the option to withdraw up to $2,500 from their company’s retirement plan to pay for long-term care insurance. The permitted amount is either up to 10% of the vested plan balance or $2,500 (whichever is lower).

When to buy long-term care insurance

While everyone’s situation is different—especially if you have a family history of illness at a young age—experts recommend you obtain a policy in your mid-to-late fifties to lock in a lower premium.

There are several reasons for this, the primary one being that you must qualify for long-term care insurance—meaning you must be relatively healthy to buy coverage. Many people begin seeing a slight decline in health in their 50s, explaining why 30.4% of applicants between the ages of 60 and 64 were denied long-term care insurance in 2021. This percentage increases to almost 38.2% for those ages 65 to 69 and is significantly higher (47.2%) for those between age 70 and 74.

Another reason to buy a policy when you’re younger is that long-term care premiums are based on your age when you apply; that said, you want to avoid doing so too early since those aged 70+ file more than 92% of long-term insurance claims. In other words, if you buy a policy in your 40s, you’ll likely pay premiums for more than two decades before you ever file a claim.

Key concepts to know before buying a long-term care policy

Before purchasing a long-term care policy, be sure to familiarize yourself with a few key terms.

First up? The elimination period, during which you’ll pay for long-term care services out of pocket before the insurer begins reimbursing you (think of this like a deductible on your insurance but measured in time). In general, the shorter the elimination period, the more expensive the policy. Common elimination periods are 30, 60, and 90 days, but some policies may require this duration to consist of consecutive days of disability rather than a set time period (e.g., if your elimination period is 30 days, you’d need to be hospitalized or considered disabled for 30 consecutive days before coverage kicks in).

Your daily benefit amount is the daily dollar amount you’ll be entitled to as soon as the policy is triggered. Choosing the right level here is a balancing act between obtaining an affordable premium and ensuring you have adequate protection.

Your benefit period is the total amount of time—often two, three, five, or unlimited years—the insurance company will pay benefits. Some policies offer a dollar lifetime benefit, which is the total maximum amount your policy will pay.

Inflation riders—sometimes called “automatic benefit increase riders”—up your daily benefits on an automatic basis each year, which is especially important as long-term care costs typically increase by about 3-5% annually.

Final thoughts on long-term care

Is a long-term care insurance policy worth it? The answer ultimately depends on your own unique situation and whether or not you can afford to self-fund long-term care. If you can’t, considering at least a hybrid policy is a worthwhile endeavor as it can help protect your retirement savings.

Have more questions about long-term care? Schedule an appointment with one of our CFP® professionals.

FAQs

Several factors in fact influence LTC policy costs and typically include the age of the policyholder, the maximum annual payout amount, the maximum number of days covered per year, the lifetime maximum benefit limit, and any optional features/benefits chosen by the policyholder.
Coverage varies by insurer, but know that long-term care insurance policies generally do not cover care provided by family members (meaning the policy won’t pay them directly), medical care costs (typically those covered by Medicare and/or private health insurance), and any illness, treatment, or condition resulting from a self-inflicted injury, alcoholism, or drug addiction.
According to the American Association for Long-Term Care Insurance, new policyholders generally face only little (if any) risk for future premium rate hikes since insurers can’t single out specific policyholders. Furthermore, insurers must also demonstrate a specific reason for a requested rate increase—lack of profitability isn’t valid in this case—which is then reviewed and approved (or denied) by each state government in which the policy was issued.

Is a Long-Term Care Policy Worth It?