First off, I do not sell any insurance whatsoever. While I advise clients on their individual insurance needs, I refer them to outside sources for implementation and never recieve compensation for doing so.
That being said, one of the biggest questions our clients ask is “What is long term care insurance?” and “Do I need long-term care insurance?”
I hear it all the time! In fact, it’s a secondary concern for most retirees only after “Can I retire yet?”
Unfortunately, most people don’t start asking these questions until it’s too late. By the time they decide if they need long term care insurance or not, they’re typically in their 50’s or older. At this point, premiums have become outrageously expensive—cost prohibitive in most cases.
In reality, the question of “Do I need long term care insurance?” is really a question of “Can I actually afford long term care insurance?”
What is long term care insurance?
Long-term care insurance is a product designed to help cover expenses for those who need long-term health and medical care. People who use these benefits aren’t necessarily sick but in many cases simply unable to perform routine tasks such as:
These common tasks most of us take for granted are referred to as “activities of daily living (ADL’s).” At the most basic level, these are things which we as humans must be able to do for ourselves.
Once we can no longer perform these activities, we’re forced to rely on the help of others. Oftentimes, this requires moving into a skilled care facility.
The costs to house and staff quality personal care for your loved ones can be outrageously high! Here’s where long term care insurance comes in.
Long term care insurance—like any other insurance—was designed to defray the costs associated with these late in life expenses should they become a necessity!
How much does long term care cost?
Long term care is very expensive. According to Genworth (a leading long term care insurance provider), the median annual rate of a semi-private room in a nursing home is $89,1297 for 2018 and over $100,000 for a private room. That’s more than most Americans make in a year!
Making matters worse, the average nursing home stay is roughly 3 years. 89k per year times a 3-year stay, and this means you may spend nearly a quarter million dollars in long-term care expenses!
It’s easy to see how quickly these expenses can eat into your retirement nest egg. While one spouse may cost nearly a quarter million dollars, if both spouses need care the costs could rise to a half million or more!
Since the financial risk to your retirement plan is substantial, you should at least consider investing in long-term care insurance. This insurance can protect your spouse—and your loved ones—should you incur these expenses later in life.
What types of long term care policies are there?
According to Thomas Day of the National Care Planning Council, there are five types of LTC policies:
- Stand-alone comprehensive long-term care policies. These are basic plans that aim to cover all types of long term care as well as any possible alternative care delivery forms. They represent the bulk of long term care policies sold today and insurance experts consider the stand-alone policy to give you the biggest bank for your buck.
Premiums can be paid monthly, quarterly, semi-annually, or annually during the lifetime of the insured individual. There are companies that allow for a “waiver of premium” that would stop premium payments once the insured began using the policy benefits.
A solid plan will provide you with stable premiums throughout the life of the plan. Think about this: 20 years’ worth of paid premiums would be spent in a few short months of typical long term care.
The benefits period can be short from just 2 years to an entire lifetime. Of course, the longer the benefit period, the more expensive the plan.
A subtype of stand-alone long term care policies is the “shared care” policy. This allows couples (or related adults) to purchase a shared plan, which is cheaper than an individual plan, and the benefits are paid to the individual that first needs them, or to both, if needed at the same time.
The risk? The benefit money could be quickly used up leaving one or both of the insured without sufficient coverage. Also, true “third pool” and third-party ownership options exist.
- Life insurance rider. Another way to get long-term care coverage is adding it as a rider to a life insurance policy. In this form, there is a life insurance benefit as well as a long-term care insurance benefit. The premium is essentially split to pay for each coverage separately.
Individual plans differ, but most require a large lump-sum premium payment, around $75,000 – $100,000 plus additional fixed-premiums over the years (guaranteed no premium rate hike). Or several smaller (but still very large) payments at specific points throughout the policy. So you would need to have that amount of money in savings to fund this type of long term care policy.
If long-term care benefits are used, the life insurance benefit is reduced. However, if there are long-term care benefits that go unused, usually the insurance company will pay an additional benefit to the beneficiaries when the life insurance benefit is paid out. And if the policyholder never uses any benefits during the benefit period, the lump-sum premium is returned.
- The either/or life insurance LTC feature. If the insured dies, the beneficiaries receive proceeds from the “life insurance” component. If however, they need long-term care, benefits are paid to offset healthcare expenses prior to the insured’s death.
In this case, benefits are limited to policy maximums. Once the benefits run out the policy expires and no life insurance or long term care insurance benefits remain viable. Should the insured die prior to the stipulated benefits running out, a reduced death benefit option may still exist.
- Integration with a deferred annuity. In purchasing a deferred annuity with long-term care benefits, part of the earnings pay for long-term care risk and expenses.
Typically, these options come with high fees (partly used to pay for long term care costs and risk) and a large lump-sum initial premium payment. These reduce the investment return the annuity would otherwise have. It also begs the question “Would I be better off investing somewhere else and purchasing long term care insurance separately?”
- Packaged with a disability policy. Disability insurance with long-term care benefits can be combined together. Prior to age 65, the policy would be used for disability income.
After age 65, the premiums are designated towards long-term care insurance coverage.
- Together in a State Partnership Plan. This is a federally-supported and state-operated option for those that purchase a qualified long term care insurance policy. It’s not a type of policy per se, but rather an additional protective measure you can obtain if you purchase a qualifying insurance plan.
It is designed to help people protect their assets when seeking Medicaid eligibility to pay for long term care. Normally, assets have to be spent down in order to qualify for Medicaid for LTC purposes. Currently, 45 states have a partnership option, including Nevada (Click the link for more detailed info on Nevada long-term care issues).
A qualified partnership plan must:
- Include inflation protection (some states don’t require inflation protection for policyholders older than 76 years of age), and
- Allow for a dollar of assets to be kept for every dollar of benefits paid toward long term care.
For example, if your policy pays $200,000 of long-term care benefits and you still need coverage, Medicaid will disregard $200,000 of your assets when determining eligibility.
Jesse Slome, executive director of the American Association for Long-Term Care Insurance, says that a partnership plan, “Benefits your spouse the most because you’re not dooming them to poverty just so you can qualify for Medicaid.”
One thing to note is that hybrid (non stand-alone) insurance plans do not qualify for the state partnership plans.
What type of long term care insurance policy is best?
Those are a few types of long term care insurance policies. Only one makes any real sense to me, which is buying long term care insurance as a stand-alone policy.
Would you buy home insurance and expect it to return a profit? What about your car insurance? Would you purchase that hoping to cover an accident and also help you save for retirement or provide your family a life insurance benefit?
Insurance is best bought to cover a specific financial need and nothing else! When insurance companies reach outside the box to create multiple savings, growth, and insurance protection possibilities—they end up overcharging for every component within.
How are long term care insurance premiums paid?
Premium options vary based on the policy. Generally, you can pay premiums annually, semi-annually, quarterly, or even monthly. This mostly depends on your individual preference.
As with most purchases, buying multiple policies or purchasing longer contracts (annually over monthly) will prove to be less expensive.
What does long term care insurance cover?
According to LongTermCare.gov, long term care insurance can be used in a variety of settings (not just long term care facilities) and for different services:
- In your primary residence
- Adult daycare services
- Hospice and respite care
- Assisted living facilities
- Specialized care facilities, such as Alzheimer’s facilities
- Nursing homes
Covered services include skilled nursing, which can range from basic check-ups, vital sign measurements, wound care and dressing changes, catheter care, medication administration and management plus other services.
Occupational, physical therapy, and assistance in daily activities can also be received. Some policies may even cover “homemaker” services which include cooking and cleaning.
How much will long term care insurance cost?
Determining what you should expect to pay is difficult. Every applicant is unique, financially and health-wise. There are a few steps, however, which can help you choose the right policy for your retirement.
The first step is to find out what average long-term care costs are in your local area. The Genworth calculator is a great place to start.
After getting a ballpark estimate, consider the following carefully as each aspect affects the cost of insurance:
- Choose how long you want to receive your benefits – The average stint of long-term care lasts around 3 years, but this is just a generalization. Consider your family health history and members of your family who have received long-term care assistance when making this decision.
- Select your elimination period – This is similar to a deductible in insurance planning. It’s the amount of time you must wait once you’ve been certified by a professional to receive your benefits. Generally, elimination periods can range anywhere from 0 to 365 days.
- Choose your inflation option – This option exists to make sure your policy withstands the devastating impact of inflation. You would typically be more aggressive with this option the younger you are because you most likely wouldn’t be utilizing your long-term care policy for several decades.
- Choose your additional features and benefits – This is the main reason why it’s difficult to pinpoint a price without specific proposals in your hand. These options can range anywhere from survivorship benefits, returns on your premiums, and even spousal waivers.
How does long term care insurance work when I need it?
Performing due diligence will help save you a lot of time and money. Make sure that you ask your policy provider lots of questions and read all of the fine print and definitions of the policy.
Long term care insurance companies pay billions yearly in policy benefits, so they are looking for ways to save their money, not yours. Therefore, they may look for any reason to deny you coverage, which is why it’s so important to follow your policies rules and meet requirements.
First, when it comes to using long-term care benefits, one of the most important steps is knowing what you signed up for when you purchased the plan. Knowledge of what your policy covers is extremely important so that you can make the right care decisions, avoid delays in benefits payments, and minimizing headaches when filing claims.
Second, know the length of your elimination period (recall that this is the time that you must wait before benefit payments begin). But even more importantly is knowing exactly what your policy counts towards the elimination period.
Some policies may count every day towards the elimination period, whereas others may only count the days that you receive a physical therapy visit at your home. In the latter example, if you receive visits twice per week, and the elimination period is 30 days, it would take several months before the elimination period expires and your policy starts paying out benefits. This would drastically change your financial obligations.
Third, file claims early. Even if you think that you are about to use a long term care service, get the claim in as soon as possible. Most claims will require some form of a signature from a licensed medical provider. Most medical certifications of long term care need will come naturally as the insured experiences declining health, but make sure you check if a medical provider needs to take additional action or send anything to the insurance company.
Fourth, if hiring help, like a home-aide, make sure that you know what your insurance provider requires in order to receive payments. For example, what licenses are needed? Does the aide need to spend a certain amount of time with you? Does the aide, their employer, or the insured need to send documents to the insurance company?
If you fail to meet the requirements of the policy, you risk not receiving the financial help you planned for.
If you are in a healthcare facility or at home and needing services, reach out to a social worker or your care providers for help.
Do you need long term care insurance?
Long-term care expenses are a major threat to your retirement. For many retirees, as little as 50 to 100 thousand of unexpected medical expenses can completely derail an otherwise well-structured retirement plan.
Assuming that you, your spouse, or you and your spouse may need skilled care or medical assistance at some point in life is a good bet! The only question is how will you pay for that care?
There are 3 main ways to pay for your potential long term care expenses:
- Self-insuring – Many people can afford to “self-insure”. Their assets are substantial enough to weather a potential medical or healthcare storm. Covering 250K for one spouse or 500K for both won’t represent a hardship to this group of retirees.
- Relying on the state – Other people don’t have the financial means necessary to cover such expenses. In this unfortunate case, the state will cover much of the associated costs after personal financial assets are depleted. Partnership plans can help protect your assets, but it requires that you purchase a LTCI plan, which some may or may not be able to afford.
- Those who need Long-Term Care Insurance – The third and trickier subset of retirees find that they have “just enough” assets to retire. The threat to them is they can be financially wiped out should the need for prolonged care arise late in life. For example, retired couples with a million in investment assets. They may live a comfortable retirement and “feel rich”, but a 500K long-term care expense hit to those assets would be financially devastating.
The effects of caring for loved ones
“Do I need long-term care insurance?” Maybe, maybe not.
Regardless, this question is quite prominent among our retirement transition planning clients.
They’ve seen first or second hand the mental, emotional, and financial effects of caring for a loved one. With this experience, people often see firsthand how devastating it can be!
Genworth is one of the largest long-term care insurance providers. They do a study called “Beyond Numbers” each year. The 2018 Beyond Dollars study has some interesting facts:
- 44% of caregivers experience depression-like symptoms
- 35% say it’s had a negative impact on their other family relationships
- 33% say they have an extremely high level of stress
- 48% reported a reduction in quality of life
From a financial standpoint, it gets worse for caregivers:
- 62% pay for care with their own money
- 45% experience a reduced standard of living
- 70% missed time at work (further negatively affecting finances)
- 38% reduce or stop contributions to their own personal retirement savings
And here is a remarkable figure, and one that can serve as a lesson for many:
“84 percent of caregivers and 75 percent of care recipients said they would have done things differently if given the chance. Not surprisingly, care recipients most often cited ‘planning better’ as the one thing they would do differently.”
To make matters worse, your kids may end up paying your long-term care expenses. Most states now have filial support laws to ensure the state doesn’t bear the financial burden of long term care expenses.
Due to these filial laws you’re not only risking your own personal financial stability—but the financial stability of your kids as well! This is perhaps one of the biggest reasons most people need to plan for long-term care expenses.
Long term care insurance helps ease the financial burden
Having long-term care insurance will ease the financial and emotional burden on your loved ones. Caregivers have additional help and support, and their personal lives are far less impacted.
It’s safe to assume that long-term care insurance—if it’s needed—can vastly improve the quality of life for your loved ones. But again, most people wait too long to even ask the question of whether or not they need long-term care insurance.
What is the cost of NOT having long term care insurance?
Above, I began to not so subtly hint at the costs, both financial and emotional, of not having long term care insurance. Let’s look at some of the consequences of not having insurance:
Your children may have to pay for your long term care costs. Many states have filial support laws which impose a duty on third parties to cover the expense of your unfulfilled medical payments. Would your children be able to cover this financial burden?
Your nest egg could easily be wiped out. As I pointed out above, if you incur a few hundred thousand dollars in long-term care expenses (which is very easy to do with the cost of care these days) and you aren’t cash flowing millions of dollars, how are you going to pay for your care? Long-term care costs show no sign of slowing down so long term care insurance can help you ease the financial burden and the emotional toll on you and your family.
Here are national averages for some long-term care costs:
- $225 a day or $6,844 per month for a semi-private room in a nursing home (other reliable resources cite this figure as being even higher)
- $253 a day or $7,698 per month for a private room in a nursing home
- $119 a day or $3,628 per month for care in an assisted living facility (for a one-bedroom unit)
- $20.50-50 an hour for a health aide
- $20-50 an hour for homemaker
- $68 per day for services in an adult day health care center
Financial devastation for your partner. If your shared nest egg is spent down to cover costs, what will your partner live on for the rest of their life?
If you are convinced that you need long term care insurance but still can’t find a way to pay for it, talk with your financial advisor and model the long term care insurance premiums and the costs associated with long term care itself into your retirement plan. That will give you a gauge as to whether paying for long term care insurance if worthwhile or not.
Did you wait too late in life to ask the question?
So what happens if you’ve waited too long? Retirement planning becomes far more important . . . for starters.
If long term care insurance premiums are seemingly prohibitive, the decision to self-insure or not becomes overwhelming. It takes a comprehensive retirement financial plan to even determine if long-term care insurance premiums are affordable or not.
In the process, you’ll need to analyze multiple scenarios such as:
- What happens financially if you or your spouse becomes sick late in life for 3 years (or more)?
- Will the final medical expenses devastate my spouse financially?
- What if both of you need long-term care?
- What is your opportunity cost of the long-term care insurance premiums over your lifespan? Could you do better by investing those premiums?
- What happens if you self-insure and never need long-term care insurance? Will your beneficiaries benefit?
- What if we self-insure and self-fund major late in life medical expense? Will our beneficiaries be financially penalized if we do need long-term care?
The need for long-term care insurance summarized
- Moderate net worth investors should seriously consider purchasing long-term care insurance. Those with minimal assets have limited options. Primarily, this means going on state aid once their assets are depleted.
- Wealthy investors can afford to self-insure, in hopes of never needing this type of coverage. If they do need it they’ll have enough to cover the expense assuming their retirement plan is done properly.
- The earlier you invest in a long-term care insurance policy, the lower the premiums will be. Waiting until later in life—say your 50’s—might make purchasing a long-term care insurance policy cost prohibitive.
- Always review your options with a long-term care insurance specialist. There are many nuances to these policies which many financial planners don’t understand.
Ideally, you should start your search for a great insurance advisor by finding one who doesn’t take commissions. It’s more beneficial to pay them an hourly rate—even if it seems expensive—than a commission. This helps remove any conflicts of interest in their recommendation to you.
There’s a multitude of potential scenarios that must be weighed carefully. If you don’t have the capability to crunch the numbers it’s worthwhile to hire an hourly financial planner who does. Someone who can crunch the numbers and prepare a comprehensive plan.
Should you need further information, feel free to reach out to us directly. Our fee-only fiduciary planning firm does hourly and project financial planning for certain clients.