What You Need to Know About Long-Term Care

Nov 11

The U.S. Department of Health and Human Services data reflects 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: a quite daunting prospect, indeed.

While suffering from a disability or needing assistance with daily activities may not be something you want to think about, you do need to prepare for potential related costs should the situation arise. This is where long-term care insurance policies come into play, which can help cover a host of services that typically aren’t covered by regular health insurance or Medicare.

Long-term care vs. long-term disability (LTD) insurance

Before we begin, let’s clarify the difference between long-term care and long-term disability (LTD) insurance.

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

Nevertheless, people often purchase long-term care insurance policies for coverage during their retirement years and to address nursing home or home health aide costs in the event they become unable to care for themselves.

What long-term care policies cover

Most long-term care policies will reimburse you if you cannot perform or need substantial assistance performing at least two common tasks. More commonly known as activities of daily living (ADLs), these include bathing, dressing, eating, toileting, continence, and transferring (walking or moving oneself from a bed). Long-term care policies will also cover severe cognitive impairment such as dementia, memory loss, or Alzheimer’s.

Your licensed care provider will typically need to certify your care is expected to last at least 90 days in order for you to qualify for long-term care benefits. It’s also important to know you can receive long-term care services in either a nursing home or your own home.

The odds of requiring long-term care

Earlier we mentioned 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. The average duration of care required is higher for women (3.7 years) than men (2.2 years). What’s more, an estimated 20% of today’s 65 year olds will require care for longer than 5 years.

If you’re wondering what type of care is generally 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 home. The other 35% who use LTC services spend a year (on average) in facilities such as nursing homes or assisted living facilities.

To be honest, it’s impossible to know if you’ll ever really need long-term care insurance. However, without it, you can easily burn through your life savings since the cost of self-funding is very expensive.

While long-term care expenses vary to a great extent, below is a list of national monthly median costs for reference. According to Genworth, 2021 national monthly median costs (with 2020 costs in parenthesis) were as follows:

Home health aide: $5,148 ($4,576)

Adult daycare: $1,690 ($1,603)

Assisted living facility: $4,500 ($4,300)

Nursing home, private room: $9,034 ($8,821)

Nursing home, semi-private room: $7,908 ($7,756)

Therefore, in assuming you’ll require both at-home and nursing home care, you’d need to shell out over $156,000 to cover a home health aide for one year and a one-year stay in a semi-private nursing home room.

You should also remain cognizant of the fact that these are current averages and, of course, costs will increase as the years march on. For example, the median annual cost of a home health aide was $42,168 in 2004. In 2021, this figure jumped to $61,776. Compounded with the fact that the U.S. has a rapidly aging population, this will only help further ignite inflationary pressures with respect to long-term care.

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 so you can 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 healthy to buy coverage. Many people begin seeing a slight decline in health in their 50s, explaining why 24% of those aged 60-64 who submitted long-term care applications were denied in 2019. This number increased to almost 33% for those between the ages of 65 and 69 and was significantly higher for people aged 70+.

Another reason to buy a policy when you’re younger is that long-term care premiums are based on your age at the time you apply. That said, you don’t want to do so too early since people 70 or older file more than 95% 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.

Where to buy a long-term care policy

You have a few options here including an insurance agent, your financial advisor, or insurance broker. Some employers offer coverage to their employees, and you can also look into state programs: partnerships between long-term care insurance companies and the state’s Medicaid program.

As an alternative to stand-alone long-term care policies, you can also 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—allow you to access a portion of the policy’s death benefit every month to pay for long-term care (with the same qualifying criteria often applying 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.

Long-term care insurance costs

Long-term care insurance is expensive, and costs vary widely per the amount of coverage 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 is $2,220 (for a policy covering $165,000 in benefits with a 3% growth rate to account for inflation). The same policy costs more for a 55-year-old woman ($3,700), as women tend to live longer than their male counterparts and thus file more frequent claims. Fast forward 10 years in age, and the annual price for the same policy increases to $3,135 (males) and $5,265 (females).

According to Policygenuis.com, the average cost of affixing an LTC rider to your life insurance policy can add upwards of $600 to $800 to your premiums on an annual basis.

Key concepts to know before you buy a long-term care policy

First is the elimination period: the period in which you’ll need to pay for long-term care services out of pocket before the insurer begins reimbursing you. In general, the shorter the elimination period, the more expensive the policy. Common elimination periods are 30, 60, and 90 days. However, some policies may require this duration to consist of consecutive days of disability rather than a set time period.

Your daily benefit amount is the daily dollar amount you’ll be entitled to as soon as the policy is triggered. Choosing the right daily benefit level is a balancing act between obtaining an affordable premium and 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 of money your policy will pay.

Inflation riders—sometimes also called “automatic benefit increase riders”—boost your daily benefits automatically every year. This is especially important as long-term care costs typically increase approximately 3-5% every year.

Long-term care policy benefits

Long-term care policies typically cover out-of-pocket expenses that accompany in-home, assisted living, and nursing home care: which are not covered by Medicare or other public programs.

Ultimately, these policies offer a few key benefits. For starters, they help protect your savings. As we mentioned earlier, long-term care isn’t cheap. You’ll therefore want a tool to help protect you from spending all your savings on healthcare needs.

Long-term care policies also provide you with more choices for care, especially since Medicare only covers long-term care in very limited circumstances. Furthermore, even if you qualify for Medicaid, you’re still restricted to facilities that accept payments from the program. What’s more, Medicaid typically does not provide coverage for in-home care or some nursing home services such as private rooms.

The IRS allows some limited tax breaks related to long-term care

You can deduct unreimbursed costs for long-term care as a medical expense, provided they meet certain requirements as outlined in IRS Publication 502. Eligible expenses often include medically necessary in-home, assisted living, and nursing-home services that have been prescribed by a licensed health care practitioner. The care must also be for someone who is chronically ill to qualify. To fall under the “chronically ill” category, you must be unable to perform at least two of six activities of daily living—eating, toileting, transferring, bathing, dressing, and continence—for a period of 90 days. To claim a deduction, you must itemize deductions on your tax return. Also, know that itemized deductions for medical expenses are only allowed to the extent they exceed 7.5% of your adjusted gross income.

If you have a traditional long-term care policy and not a hybrid that includes life insurance, you may qualify for a limited tax deduction for your policy premiums. Like the deduction for long-term care services, this is an itemized deduction and only premiums exceeding 7.5% of your adjusted gross income are deductible. The deduction also has an age-related cap, meaning the younger you are, the less you can deduct.

Final thoughts on long-term care insurance

Insurance is the one thing nobody wants to pay for. It’s expensive, and frankly, you may not ever wind up needing it. Yet without proper coverage, you could be just one catastrophe away from serious financial implications. Due to the complex nature of long-term care products, we recommend you speak to a professional who can provide you with the clarity and guidance you need to make confident decisions in this regard.