It is the proverbial elephant in the room. We know it’s there; we just don’t want to think about it. But the fact remains that we may need help in caring for ourselves later in life. Long-term care insurance covers the costs related to a nursing home stay, assisted living facility, or caretakers coming to your house when you are older and dealing with health issues. Long-term care is defined as any care that is longer than three months.
As reported by nerdwallet.com, “[n]early 70% of 65-year-old people will need long-term care (LTC) services or support, according to 2020 data from the Administration for Community Living, part of the U.S. Department of Health and Human Services. Women typically need care for an average of 3.7 years, while men require it for 2.2 years.” The big question, of course, is how do you pay for it?
Medicaid pays for long-term care for individuals with very low income and without other meaningful financial resources. To qualify for Medicaid LTC in Nebraska as a single individual your income must be under $1,215 a month (the federal poverty level) and you cannot have assets in excess of $4,000. (These limits vary by state.) At the other end of the financial spectrum, those with at least $2 million to $3 million in assets, typically, can self-insure; they can afford to pay for care out of their own pockets.
What do you do if you are like most Americans and fall somewhere in between these two extremes? If you cannot afford to self-insure, because you have not accumulated enough assets, you may wish to consider LTC insurance, but you should buy your policy during your earlier years. As time goes on and you accumulate more financial resources, there may come a time when you are in a position to self-insure—and you can terminate your policy or modify it for less coverage at a lower cost.
“Considering long-term care costs is an important part of any long-range financial plan, especially in your 50s and beyond,” advises kiplinger.com, a publisher of business forecasts and personal financial advice. “Waiting until you need care to buy coverage isn't an option. You won't qualify for long-term care insurance if you already have a debilitating condition, and long-term care insurance carriers won’t approve most applicants over the age of 75.” Financial counselor and radio host Dave Ramsey “suggests waiting until age 60 to buy long-term care insurance, because the likelihood you’ll file a claim before then is slim. About 95% of long-term care claims are filed by people older than age 70, with most new claims starting after age 85. That’s why it doesn’t make sense to start a long-term care insurance policy any earlier than 60. You don’t want to be dishing out money for an extra decade—for no reason.”
Considerations for Long-Term Care Insurance
If you decide you want to go ahead with a policy, there are number of things to consider such as:
How many years should you insure for? “According to the Society of Actuaries’ studies on long-term care insurance claims, the average time for claims that last longer than a year ranged from 3½ to four years in 2014,” kiplinger.com reports. “Usually, two to four years is a good ballpark; three years is about average. The longer the benefit period the policy offers and the higher the policy benefit amount, the higher the cost to the policy buyer. So, it is a trade-off between accumulating and using the benefits and not using them at all. Essentially, the longer the benefit period that the LTC policy offers, the higher the risk the client might end up paying thousands of dollars in premiums and getting nothing in return.”
How much does a LTC policy cost?
The cost of long term care insurance is not cheap. Costs can vary significantly based on factors such as age, coverage level, and health status. On average, a 55-year-old in good health can expect to pay around $2,200 per year for a policy with $150,000 and a three-year benefit period. For a 60-year-old, the cost can be around $2,700 per year for the same coverage. As you get older the costs start to rise dramatically. A 65-year-old in good health can expect to pay around $3,500 per year for the same coverage, and at 70 years old that average cost jumps up to $5,500 annually. Potentially you may be able to get a discounted premium if you and your spouse choose to purchase policies together.
“Given the large variation in costs and policy benefits, there really isn't a one-size-fits-all rule for when LTC insurance makes sense,” explains nolo.com, a website offering do-it-yourself legal guidance. “But some consumer and financial experts recommend that you stay away from LTC [Insurance] unless you can pay the monthly premium with no more than 5% of your income. When calculating this 5% figure for future years, bear in mind that your premiums are likely to rise at least a little over the life of the policy, while at some point—for many people, when they formally ‘retire’—your income will probably drop.”
Is it likely that the premiums will go up over time?
You need to be aware that the LTC premium probably will increase over time which may force you to make a decision whether to continue with the policy. Let’s say you paid $3,000 annually for a policy for 10 years and then the insurance company notifies you that the premium will rise to $4,000 annually. If you decide this is too costly and cancel the policy, you have already paid $30,000 to the insurance company and have not received any of the policy benefits. “However,” kiplinger.com points out, “like other insurance such as homeowners, you may be paying for peace of mind, but never have to claim on it. LTC Insurance usually turns into a less-than-ideal investment at some point. The decision to buy is very individualized, and if you happen to use it early, it can be a good investment, because you have paid less premiums upfront and are using the benefits. The longer you take to use a policy, the lower the return on the policy. If you end up using the policy in the first five to 10 years, this can be very advantageous. However, the longer you take to use the benefits, the more sense it may make to just put money aside yourself if you can afford to self-insure. Of course, there is no way of knowing if and when an event will happen. “
Will there be a waiting period before the policy is in effect?
When you buy a LTC policy, most insurers will invoke a waiting period (often called an elimination period by the insurance industry) of up to 365 days, but the most common wait time is 90 days. The shorter the elimination period is, the more expensive the premium will be. During the elimination period the policy will not pay for any LTC costs; you will have to self-fund those if they arise. Some policies will not pay for facility care during the elimination period, but they will pay for home care.
Can you be turned down for long term care insurance?
Before exploring LTC insurance options, you will want to make sure you qualify. Some pre-existing conditions—like certain cancers, Parkinson’s, or Alzheimer’s—may make you uninsurable. Your chances of being declined for coverage (like the insurance premiums) go up as you age.
Some final advice
From nerdwallet.com: “As you make a long-range financial plan, the potential cost of long-term care is one of the important things you’ll want to consider. Talk to a financial advisor about whether buying long-term care insurance is the best option for you.”