What is Long Term Care Insurance?
Long-term care insurance may be a sensitive topic for some. It is not exactly a subject you would bring up at the dinner table. After all, no one likes to consider that they or their loved ones will be unable to live independently. Long-term care insurance policies, on the other hand, are a must if you want to make a wise financial decision and protect your life savings.
It may be difficult to believe now, but you will almost certainly need assistance in taking care of yourself later in life. The big question is, how are you going to pay for it? One way to plan is to purchase long-term care insurance. Long-term care encompasses a wide range of programs not covered by standard health insurance. This involves help with everyday tasks such as washing, dressing, and getting in and out of bed.
When you have a chronic medical condition, a disability, or an illness like Alzheimer’s disease, a long-term care insurance policy will help offset the costs of that care.
Most programs will reimburse you for services rendered in a variety of settings, including:
- Your house.
- A nursing home.
- Assisted living facilities.
- Adult day care centers.
Long-term care costs should be factored into every long-term financial plan. In particular, for those in their 50’s and beyond. It is not a good idea to put off purchasing health insurance before you need it. If you already have a chronic illness, you will not be eligible for long-term care benefits. Long-term care insurance is typically purchased by individuals in their mid-50’s to mid-60’s. Long-term care insurance may or may not be the best option for you, depending on your circumstances and priorities.
Why Buy Long-Term Insurance?
According to a report published in 2016 by the Urban Institute and the US Department of Health and Human Services, about half of today’s 65-year-olds will develop a disability and need long-term care services. The majority of people will need services for less than two years. However, about 40% will need care for more than five years.
Long-term care is not covered by standard health insurance. When you need skilled nursing or recovery, Medicare will not help you. Medicare only covers brief stays in nursing homes or small quantities of home health care. Custodial care, which requires monitoring and assistance with daily activities, is not covered.
If you do not have long-term care plans, you will have to pay for it out of pocket. Medicaid, which is a federal and state-run health insurance program for low-income individuals, may help. However, this is only after you have used up all of your own savings.
Long-term care insurance is purchased for two reasons:
- To keep your money safe. Long-term care expenses will easily deplete a retirement savings account. According to Genworth’s 2018 Cost of Care Survey, a medium cost of care in a semi-private nursing home room is approximately $90,000 per year.
- To offer more options for care and medical treatment. The higher the amount of money you have, the higher the level of treatment you will get. If you need to rely on Medicaid, your options would be limited to nursing homes that accept the government program’s payments. In several states, Medicaid does not cover the costs of assisted living.
If you have a low income and no savings, long-term care insurance can be out of reach. Some experts advise investing no more than 5% of your income on a long-term care package.
It is best to wait until you are 60 to buy long-term care insurance because the chances of making a claim before then are low. You might believe that if you buy your policy at age 50 and lock in a lower monthly rate, you will pay less than if you wait until you are at the age of 60. However, it is advised that you not do not buy anything based on the monthly payment.
How Does Long-term Care Insurance Work?
In order to purchase long-term care insurance, you must fill out a questionnaire and answer health questions. The insurance provider can request to see your medical records and conduct a phone or in-person interview with you. You get to pick how much coverage you want. The sum paid out every day and over the course of your lifetime is normally capped by the policies terms and agreements.
You begin paying premiums once you have been accepted for coverage and your policy has been issued to you. When you can not do two out of the six “activities of daily living,” or ADL’s, on your own or have dementia or other cognitive disabilities, you might be eligible for coverage under certain long-term care policies.
The following are examples of activities of daily living:
- Taking a bath.
- Taking care of incontinence.
- Putting on an outfit.
- Assistance when eating or drinking.
- Using the restroom, i.e., getting on or off the toilet.
- Transferring/transitioning, i.e., getting in or out of a bed or chair.
When you need medical attention and wish to file a claim, the insurance provider may check your doctor’s medical records and will send a nurse to assess you. The insurance provider must first accept the “plan of treatment” before he or she accepts the claim.
Before the insurance provider begins to reimburse you, many plans require you to pay for long-term care services yourself for a set period of time. Time periods can fall anywhere between 30, 60, or 90 days. This time period is known as the “elimination period.
When you become eligible for insurance and, in most cases, after you receive paid care for that time span, the program begins to pay out its benefits. Most plans provide for care up to a daily limit before the lifetime maximum is reached. When both spouses purchase policies, some businesses offer a “share care” alternative. This allows you to split the total amount of coverage, allowing you to draw from your spouse’s benefit pool if your policy limit has been reached.
Types of Long-term Care Insurance Policies
Traditional Long-term Care Insurance
Long-term care insurance is typically a no-frills, stand-alone policy. It simply offers to pay for long-term care services if and when you require them. When does a standard policy take effect? When you can no longer handle two out of six ADL’s or have extreme cognitive disability, the policy kicks in. Your benefits should begin to arrive after a 30 to 90 day waiting period.
Traditional long-term care insurance guarantees that you will be able to pay for at least a part of your care no matter where you need it. A long stay in a nursing home would be less likely to deplete your savings or wipe out your estate this way.
Hybrid Life and Long-term Care Insurance Policies
A different option for insurance is a policy that combines life insurance and long-term care coverage. Under a hybrid policy, you would have access to the death benefit. This is the money a beneficiary will receive in the event that the policyholder passes away. The money received from the death benefit is used to pay for long-term care when you are still alive.
If you do not need care, your heirs will receive the full amount. Rates are called “noncancellable,” which ensures that premiums are set in stone for the rest of one’s existence. However, be aware that a hybrid policy is typically thousands of dollars more costly than a conventional policy. This is because, in addition to LTC coverage, you are still purchasing life insurance that you do not need.
Insurance providers invest the money in your hybrid policy in the same way they do with whole life insurance. The problem is that they aren’t making good investments. This means your returns will likely lag behind inflation. Because of the missed profits, hybrids may end up being the most costly long-term care insurance policy type.
As a result, hybrid policies can only be used as a last resort. Only if you are unable to qualify for a conventional long-term care insurance policy due to medical underwriting should you consider purchasing one.
How Much Does Long-Term Care Insurance Cost?
There are a variety of things that impact the amount you will pay for premiums. Some variables include:
- Your Age and Your Health. When you decide to purchase a policy, the older you are at this time and the more health conditions you have, the more your policy premium will cost.
- Gender. Women pay more than men because they generally live longer and are more likely to file long-term care insurance claims.
- Marital Status. Married couples typically pay low premiums than those who are single.
- Insurance Provider. Insurance company prices for the same amount of coverage can differ. That is why it is important to compare quotes from various carriers.
- Amount of Coverage. Additional features and coverage will cost more. Some examples of additional features to long-term care insurance are: higher regular and lifetime benefit limits, cost-of-living increases to protect again inflation, shorter elimination times, and less limitations on the forms of treatment.
A word of caution: After you buy a policy, the price will go up. Rates are not guaranteed to remain the same throughout your life. Many policyholders have seen increases in their rates in recent years as insurance providers sought approval from state regulators to raise premium rates. They were able to justify cost spikes in premium rates because the total cost of claims was higher than anticipated. The premium hikes were allowed by regulators because they wanted to ensure that insurance providers had enough resources to continue paying claims.
Tax Benefits of Purchasing a Long-term Care Insurance Policy
If you itemize your deductions, long-term care insurance can provide tax benefits, particularly as you get older. The federal and some state tax codes allow you to deduct part or all of your long-term care insurance premiums as medical expenses if you meet certain criteria. The amount of insurance you can deduct increases as you get older.
Premiums are “tax-qualified” long-term care insurance plans are the only ones that count as medical costs. These policies must meet certain federal requirements in order to be classified as tax qualified. If you are not sure whether a long-term care policy is tax qualified, ask the insurance provider you are working with.
How to Buy A Policy
You have the choice of purchasing directly from an insurance provider or through a broker. You may be eligible to purchase a long-term care insurance plan through your provider. Some employers allow employees to buy insurance from their brokers at community rates. You will still have to answer some health questions if you buy coverage this way. However, this route may be easier to qualify for compared to you buying long-term care insurance on your own.
To compare rates, ask applicable insurance companies to provide quotes for the same type of coverage. Also, if you are given a discount at work, you may be able to find better deals elsewhere.
In its 2019 price comparison, the American Association for Long-term Care Insurance
Discovered that premiums varied widely among insurers. Therefore, it is recommended that those interested in purchasing this type of care work with three different insurance providers. This way, you work with experienced insurers that can provide rates of their marketed long-term care policies.
Understanding What a State “Partnership” Insurance Plan Is
To allow people to prepare for long-term care, most states have “partnership” agreements with long-term care insurance providers.
This is how it generally works –
Insurers promise to provide plans that follow certain quality requirements. For instance, offering insurance with cost-of-living increases to protect against inflation. In exchange for purchasing a “partnership agreement,” you can cover more of your assets if you exhaust your long-term care coverage and then seek Medicaid assistance. If certain stated, for example, a single individual will need to pay down their assets to $2,000 in order to qualify for Medicaid. You will be able to apply for Medicaid faster if you have a partnership long-term care coverage plan.
Check with your state’s insurance agency to see if your state has a long-term care partnership policy.
One of the most important actors to remember when making a long-term financial plan is the possible cost of long-term care. Consult a financial planner to determine if long-term care insurance is right for you.