THE COMPLETE GUIDE TO LONG TERM CARE INSURANCE FOR RETIREMENT PLANNING
The U.S. Department of Health and Human Services publishes a wealth of information about planning for personal and medical care needs at LongTermCare.Gov. And according to the site’s published research, most people in the U.S. will need long-term care during their lives. Unfortunately, however, long-term care is an expensive proposition: Americans pay an average of over $6,000 a month for a semi-private room in a skilled nursing facility, and even home care costs an average of $20 an hour. As retirees age, these expenses can exhaust their resources.
While the chance of needing this kind of care increases with age, about one-third of Americans who require some assistance are under 65. People may need long-term help with medical or personal care because they are infirm, aged, disabled, or ill. Also, while Medicaid picks up about 40 percent of all long-term care costs in the country, the percentage is expected to increase in coming years. Simply, people can require different types of long-term care, but anyone who needs it should expect residential care to cost thousands of dollars a month.
As you age, long-term care expenses can eat up savings quickly, but most people would rather not have to qualify for Medicaid in order to qualify for long-term care. That’s why retirement planners usually tell their clients to spend some time figuring out how they would handle the cost of a nursing home, assisted-living facility, or home healthcare if they need it. Fortunately, several financial products exist to help you plan for these expenses. You should also spend some time deciding if you already have financial products or assets that may help you cover the costs. And if you want your family to avoid stress and losses as you age through your retirement, you should consider including long-term care insurance in your advanced planning.
What is Long-Term Care Insurance?
You can purchase a kind of health insurance called long-term care insurance (sometimes shortened to LTCI) at any age. Unlike health insurance policies that focus on covering medical costs, a long term care insurance policy will reimburse you for the cost of eligible personal care. Typically, eligible costs include assistance with activities of daily living (or ADLs) such as eating, bathing, and mobility. If, as you age, you require residential care, the policy would also help pay for room and board.
LTCI policies aren’t standardized in the same way that health insurance policies are, so you will need to compare the coverage, benefits, and premiums of any policies that you consider. In addition, long-term care insurance premiums usually rise with age, as they do with other kinds of health insurance. And since you’re unlikely to find an LTCI provider who guarantees level premiums, you’ll need to plan for price increases. Typically, however, once you start receiving benefits, you no longer have to pay the premium.
With these aspects in mind, here are some important things to consider when you compare long-term care insurance policies:
Average Monthly Cost For a Semi-Private Room in a Skilled Nursing Facility
Most people in the U.S. will need long-term care during their lives. Unfortunately, however, long-term care is an expensive proposition.
What Does Long-Term Care Insurance Cover?
Since nobody standardizes these policies, you have to check each policy carefully to fully understand their coverage. But under most LTCI plans, you usually must be disabled enough to need help with at least two ADLs in order to qualify for benefits. You might need assistance for a variety of reasons—Alzheimer’s disease, other kinds of mental impairments, physical infirmities, illnesses, or injuries—but the policy probably won’t limit the reasons for you to need care. Instead it will probably require you to be unable to perform two or more ADLs without assistance. When you compare policies, however, you should check if any specific diseases or impairments are excluded from coverage.
In addition, you should look out for policies that only offer coverage for residential nursing home or assisted living costs. You should instead consider a policy that covers a variety of different personal care and health care situations such as:
- In-home care
- Adult day care
- Nursing home care
- Community care
- Skilled nursing homes
- Care provided by a family member
Some policies may require you to use a state-licensed agency or long-term care facility for whatever kind of care you need, so they won’t pay to help with costs assumed by family caregivers unless that caregiver has appropriate licensing. Since insurance companies assume more of a risk when they offer more flexible benefits, you can also expect higher premiums when the policy offers you more choices.
Long-term care insurance premiums vary, but they can easily cost a few thousand dollars a year for retired people. The premiums may be worth it, however, as this kind of LTCI could help you handle tens or even hundreds of thousands of dollars worth of expenses. And while most policies set limits on the amount of time they will provide coverage, a three to five year maximum is likely to cover any needed care. After all, according to the CDC, the average length of time spent in a nursing home is a little over two years.
At the same time, you may have valid concerns that you will need care for longer than a few years. If both you and your spouse buy LTCI, you can often find shared-care riders, which can offer you extra insurance in case you need care for more time than a single policy allows. Under these riders, if one of you exhausts your benefits, you can begin to dip into the benefits provided by your spouse’s policy. What’s more, with most LTCI policies, you can access this benefit if one spouse passes away even if the policy terminates upon death. Note that this rider may increase your premium, and to get this rider, you typically both need to buy the same type of policy from the same insurer.
Who Considers Buying Long-Term Care Insurance?
Most people consider buying this kind of health insurance as they approach retirement age. You can certainly purchase these policies when you are younger, however. Some companies may even offer group policies to employees as a benefit. Especially if your employer also offers help paying premiums as part of a retirement package, this might be a good option for you. All other things being equal, the younger you are when you buy your policy, the lower your premiums, but make sure your premiums won’t increase as you get older.
Note, too, that if you already have certain pre-existing conditions or serious health issues in your health history, you could get declined. Even if you aren’t declined, you may pay more or find that the company imposes a waiting period for before it will pay for care for such pre-existing conditions. Typically, these waiting periods can last for six months or longer.
Some common reasons that long-term care insurance companies may decline you include already having history with some kinds of cancer, currently using long-term care or getting help with ADLs, have a history of strokes or serious heart problems, or suffer from a progressive neurological condition like Parkinson’s Disease.
You can always speak with an insurance agent to make sure you qualify. Experienced agents should be able to refer to applications and the insurance company’s underwriting guidelines to advise you about acceptance, the likelihood of rate increases, or exclusions.
Long-Term Care Insurance Waiting Periods
Even if you don’t have a pre-existing condition when you purchase your policy, the insurance company may have waiting periods (sometimes called elimination periods) that everybody has to satisfy before they will start paying benefits. In this way, long-term care is similar to long-term disability insurance. The company doesn’t offer to cover short-term care needs, so they may impose a 30-day exclusionary or waiting period each time you require personal care. Since many of their clients also have Medicare, the companies may also assume that the government will help pay for these short-term or intermittent needs.
Does Medicare Cover Long-Term Care?
Don’t assume, however, that Medicare or supplemental insurance can substitute for the sort of benefits you’d receive from a long-term care insurance policy. Medicare actually only helps pay for care if you also need medical or rehabilitative care. Also, Medicare only pays for care for a maximum of 100 days. In other words, you may be able to rely upon Medicare for short-term, but not long-term care.
If you only need assistance with ADLs but not the services of a nurse, therapists, or other medical professional, you probably won’t qualify for Medicare benefits at all. If you don’t qualify for Medicare benefits, then you also won’t qualify for benefits under your Medicare supplement, Medicare Advantage plan, or other kinds of traditional health insurance.
How Does Medicaid Cover Long-Term Care?
State laws for Medicaid eligibility vary considerably. Typically, you must not have more than $2,000 in assets, though the government does exclude some assets from this figure.
Types of Care Covered
It can be difficult for you to predict if you will need home healthcare, assisted living, or a skilled nursing facility in your old age, and some policies may provide coverage for residential, community, or home health care. Some policies, however, may limit benefits to only certain types of care, like nursing home care, or the types of custodial care provided by an assisted living facility.
Daily & lifetime Maximums
Most policies, too, have a daily maximum benefit, and they may also limit benefits to a period of time or cap the amount of money they pay out. For example, a policy might pay up to $150 a day and no more than 80 percent of the total bill. They may also impose a lifetime limit of from two to five years.
Inflation Protection Riders
Some long-term care insurance policies have an inflation protection rider that indexes benefits to inflation as policyholders age. It’s likely that the cost of long-term care will continue to rise, so this may help. Expect, however, to pay more in premiums for this kind of rider.
Even though Medicaid allows spouses to keep their share of assets within limits, to qualify for Medicaid you will still have to spend a substantial portion of your assets first. You can’t just give away all of your money to your children when you need long-term care because the government will look into your history for the past five years. That doesn’t mean you can’t transfer any assets, but it does mean you should probably consult with an elder care attorney to make responsible plans.
Alternatives to Long-Term Care Insurance Policies
Long-term care insurance and spending down all of your assets to qualify for Medicaid aren’t the only ways to plan for the expense of long-term care as you age. You should consider the pros and cons of long-term care insurance and compare them with other ways that may help you plan for this possible expense.
Pros and Cons of Long-Term Care Insurance
Of course, long-term care insurance offers you the obvious advantage of getting assistance to pay for your services. You might enjoy the peace of mind of knowing you won’t have to deplete your estate and assets if you need residential or in-home care in your old age. In addition, AARP reports that the IRS generally won’t tax benefits paid out by a LCTI plan. For some plans, too, you the IRS will allow you to deduct your premiums if you itemize deductions. These selling points might convince you that long-term care insurance can help you plan for retirement.
Of course, you should also consider some disadvantages of long-term care insurance:
- You can’t predict that you will need long-term care, how long you will need it, or how much you will need. If you don’t need personal care or don’t need much help, you may not enjoy much value from your premiums.
- Premiums will usually increase over time, and you may even have trouble affording them in the future. Some states have non-forfeiture rules that allow you to gain some benefits from a policy even if you have to cancel it, but these rules are not universal.
- One of the biggest problems with long-term care insurance is that there’s no standardization, so policy benefits, exclusions, and limits can vary widely. This makes it a hard kind of health insurance to shop for.
- Check the exclusions, waiting periods, and elimination periods in your policy. In some cases, you may still have to spend your own money until your benefits begin.
- The premiums that you spend on your insurance policy might be used for something else that could serve your unique needs better.
Long-Term Care Insurance Partnerships
If you live in a state with a long-term care partnership program, you may enjoy an additional benefit from your insurance policy. Partnership programs for long-term care are joint state and federal programs that can help you protect more of your assets if you have purchased qualified policies and need to qualify for Medicaid because you have exhausted your benefit.
According to the CDC, the average length of time spent in a nursing home is a little over two years.
According to the official website for the Federal Long-Term Care Insurance Program, the plan will allow you to protect assets up to the amount of the total benefits paid for by your policy before it was exhausted. For example, if your policy paid $300,000 in benefits over three years, you could protect that much in assets. Like other state and federal joint programs, rules can vary by the state you live in. This program could offer you the additional advantage of buying coverage and protecting more of your estate as you age.
Would Long-Term Care Insurance Alternatives be Best for You and Your Family?
Few retirees have the luxury of being able to pay for long-term care insurance for long out of their checking account. Still, before you decide to buy long-term care insurance, you should explore a number of alternatives that may serve you better, depending upon the circumstances:
Most life insurance policies do have living benefits riders that allow you to take some portion of the face value if you have a terminal illness and less than 12 months to live. You may also buy riders that will provide cash benefits for nursing or personal care without such severe restrictions in case of a serious illness or impairment. You could also cash out your permanent life insurance policy or sell it with a senior life settlement, provided you’re at an age where that’s permitted. Some life insurance companies even offer long-term care insurance riders. Of course, you can also use the life insurance to provide a death benefit for your spouse or children.
Rent Your Home or Rent Out Rooms
If your spouse is still active, he or she may decide to take in boarders to help defray expenses. Very often, these spouses find other spouses of people who need residential care, so this can work out well. In other cases, the spouse may decide to rent an apartment or live with adult children and simply lease out the home.
Other Income Sources
For instance, if you’re a veteran, you may qualify for V.A. disability benefits if you become disabled. Your pension and social security may be adequate to fund some kinds of care. People with limited incomes may find assistance from state and local programs at Eldercare.gov. You may also have other assets that you can liquidate to help pay bills.
Get Reverse Mortgage
If you have substantial equity in your home, and you’re at an age where it’s permitted, you may qualify for this type of home equity loan that allows you take income from your home without actually having to sell it. You won’t have to sell your house and will retain the title as long as you or a spouse continue to live there, but you will still have to pay taxes, insurance, and other associated bills.
Sell Your Home
If you’re the only one living in your home, your family may decide to help you sell it in order to fund long-term care expenses. If your spouse is still alive and active, he or she may decide it’s time to downsize by selling the home and finding a cheaper place to live.
Get Reverse Mortgage
If you fund an annuity, it can provide you with a regular income whether or not you need personal care. If you’ve kept the policy past its surrender period, you can also cash it out without any penalty if you need more cash. You may find annuity companies that offer long-term care or critical illness riders too.
The reason to consider other kinds of insurance is that they can provide financial help whether or not you need long-term care If you don’t have coverage, you might have to sell valuable assets, like your home, to pay expenses as you age. At the same time, you won’t have had to pay premiums on a long-term care policy that you might not get use out of.
Is Long-Term Disability Insurance an Option to Fund Long-Term Care?
Disability insurance usually pays benefits based upon your wages. If you’re retired, you may depend upon social security and savings for income. If you’re still working and depend upon that income, you might look into long-term disability. The problem is that many private disability plans terminate at age 65. If your employer offers group plans, you may find that you can benefit from long-term disability until you retire.
Qualified Vs. Non-Qualified Long-Term Care Insurance
Long-term care insurance policies that meet certain government standards may entitle you to valuable tax benefits. Qualified plans meet these standards, so you can deduct premiums and benefits from your taxable income within certain limits. On the other hand, some non-qualified plans may offer more flexible benefits.
You can learn more about the pros and cons of qualified and non-qualified plans directly from the government. Depending upon your situation, you may also want to consult with a tax or financial professional before you decide which option to choose.
Should You Buy Long-Term Care Insurance?
If you had a crystal ball, you could see into the future to learn exactly what you would need for future care as you age, but the unpredictable nature of retirement makes it tough to plan.
This is one way to break it down:
- People who typically benefit from this kind have policy have a lot of assets to protect and would rather preserve the value for their heirs.
- People who don’t have a lot of savings and will primarily rely upon social security for income probably will have trouble affording premiums and don’t have that much to gain from this kind of insurance.
- Some individuals and families may find that they can use other kinds of financial products or assets to help pay for long-term care expenses.
- If you have access to other kinds of disability programs, you may find these serve your needs.
How to Shop for Long-Term Care Insurance
If you have access to group policies from your job or retirement program, you should consider them. Group policies shouldn’t exclude you for pre-existing conditions, and you may get better rates with a group. Otherwise, you should find an experienced insurance agent or financial advisor who can help you compare the premiums, benefits, and elimination periods and other limitations of different policies from a variety of different companies and with an eye toward the way the market can change for you as you age. They may also offer you different kinds of insurance or financial products that can help you plan for long-term care expenses and serve other needs.
Don’t let anybody pressure you into making this important decision quickly. Planning for long-term care expenses and many other aspects of retirement requires time and consideration.