What long-term care insurance costs and funding options

Insurance

Oct 23

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The National Association of Insurance Commissioners (NAIC) recently claimed that fewer than 1 in 30 Americans own an LTC policy—including only 7% of adults over age 50. Despite an aging population, the number of those insured (7.5 million) hasn’t budged at all since 2008. These low coverage numbers are perhaps attributed to not only to the high cost of policies but also the significant percentage of people who wrongly believe they’re covered through employer-provided health insurance or government programs. Regardless of how you do it, planning for long-term care expenses is a must: especially if you want to ease the financial, physical, and emotional burden on your loved ones.

What is long-term care?

Long-term care (LTC) is defined as help you may need with “activities of daily living” (or ADLs) for longer than three months due to injury, health, or cognitive impairment such as dementia, memory loss, or Alzheimer’s. Such activities include bathing, dressing, eating, toileting, continence, and transferring (walking or moving oneself from a bed).

This type of care can take place in various settings including home-based care, residential care facilities, adult day care, and nursing facility support services. Long-term care insurance, likewise, helps cover the cost of related services—often by reimbursing you if you cannot perform (or need substantial assistance in performing) at least two activities of daily living.

Will you need long-term care?

According to the U.S. Department of Health and Human Services, someone celebrating 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. What’s more, women are expected to need 3.7 years of care compared to 2.2 years for men, and an estimated 20% of today’s 65-year-olds will require care for longer than 5 years. Based on this data, long-term care expenses will likely impact your retirement plan so you’ll need to plan accordingly.

Long-term care funding options

The question you must answer before deciding how to fund long-term care involves your tolerance for risk. Risk-averse? Taking out an insurance policy to protect you in case you need long-term care is likely your best option. Alternatively, you can roll the dice and hope either you don’t require this or have enough of a buffer in your retirement savings to cover the corresponding costs. Either which way, you need a plan to address these potential expenses. This can include…

Purchasing a long-term care policy

Long-term care insurance is expensive, with costs varying widely per the amount of coverage needed and specific LTC carrier. A recent American Association for Long-Term Care Insurance (AALTCI) study reports the average annual cost for a 55-year-old single male is $2,220 (for a policy covering $165,000 in benefits with a 3% growth rate to account for inflation). The same exact policy costs more for a single 55-year-old woman ($3,700), however, as women tend to live longer than their male counterparts and thus file more frequent claims. Fast forward 10 years to age 65, and the annual price for the same policy increases to $3,135 (males) and $5,265 (females).

As for when exactly you should buy this (and while acknowledging everyone’s situation is different, especially if you have a family history of illness at a young age), experts recommend obtaining a policy in your mid-to-late fifties to lock in a lower premium. While several factors feed into this, the primary one is that you must qualify for long-term care insurance—meaning you must be healthy to buy coverage. With many people seeing a slight decline in their health beginning in their 50s, it’s no surprise 30.4% of people aged 60 to 64 who submitted long-term care applications were denied in 2022 (climbing to 38.2% for those aged 65-69 and significantly higher for those aged 70+).

Another reason to buy a policy when you’re younger is that long-term care premiums are based on your age when you apply. That said, you don’t want to do so too early since people aged 70+ file more than 92% 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 need to file a claim.

Buying a hybrid insurance policy

One alternative option to standalone long-term care policies is 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 some term policies at the time of application—allow you to access a portion of the policy’s death benefit every month to pay for long-term care expenses. Hybrid policies are more popular than traditional long-term care policies: out of the 350,000 Americans who purchased long-term care protection in 2019, 84% added a hybrid policy.

One large advantage an LTC rider has 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 money wasted if you never file a claim. Hybrid policy premiums also remain fixed while a standalone policy is subject to premium increases.

As for costs and per Insurance.com, a hybrid policy generally costs 5% to 15% more than a standalone policy—depending on the company you choose. Nevertheless, if your top concern is long-term care, a standalone long-term care policy often provides more coverage for the money. Hybrid product premiums, meanwhile, aren’t tax-deductible (unlike qualified standalone policies).

A long-term care annuity is yet another hybrid type as an insurance product that gives investors a guaranteed stream of income. In this case, you pay money up front (via a lump sum or series of payments) that is then invested and later paid out at an agreed-upon time in an agreed-upon amount and timeframe. Any gains from the investment are then received tax-free, provided they’re used for LTC expenses. While long-term care annuities often have simpler underwriting requirements than other insurance products, they require you fork over a large sum of money right from the get-go.

Self-funding long-term care

While we can’t tell you exactly how much money you’ll need to self-fund long-term care, we can share various costs to better help you plan. For example and according to CareScout, national monthly median costs are currently as follows (with 2020 costs noted in parentheses for reference):

Home health aide: $6,483 ($4,576)

Adult day health care: $2,167 ($1,603)

Assisted living facility: $5,900 ($4,300)

Nursing home, private room: $10,646 ($8,821)

Nursing home, semi-private room: $9,277 ($7,756)

In assuming you’ll require two years of at-home care with a health aide and one year in a semi-private nursing home, for example, you’d need to shell out over $189,000.

You should also remember that these are current averages and, of course, costs will increase as the years march on. For example, way back when in 2004, the median annual cost of a home health aide was $42,168. In 2021? It rang in at a much heftier $61,776. A rapidly aging U.S. population will only further ignite inflationary pressures as related to long-term care.

Qualifying for Medicaid

Medicaid is a government program that provides health coverage to millions of people with low incomes and/or disabilities. While Medicaid rules and eligibility requirements vary by state, the program sometimes covers many long-term care expenses: including room and board in nursing home facilities. Some states even allow assistance with activities of daily living in the comfort of your own home.

As Medicaid qualification requirements include asset limits, however, you’ll need to fall below your state’s threshold—typically for a minimum of five years—before applying (known as the “look-back period”). Even if you qualify for Medicaid, know that you won’t have access to options or benefits accompanying other long-term care options (e.g., limitless facility choices, as you’re required to seek care only from those that accept Medicare program payments). What’s more, you won’t receive coverage for assisted living facilities in most states.

Long-term care terms to know

Should you ultimately decide to opt for a stand-alone or hybrid policy, familiarize yourself with the following key terms:

Elimination period

The elimination period is the timeframe during which you’ll pay for long-term care services out of pocket before insurer reimbursement kicks in. Common elimination periods are 30, 60, and 90 days, though some policies dictate a specific timeframe reflecting consecutive days of disability rather than a set time period; the shorter the elimination period, the more expensive the policy (generally speaking).

Daily benefit amount

This is the daily dollar amount you’re entitled to as soon as the policy is triggered. Choosing the level here is a balancing act between obtaining an affordable premium and adequate protection.

Benefit period

Your benefit period is the total amount of time—often 2, 3, 5, or unlimited years—the insurance company will pay benefits. Some policies offer a “dollar lifetime” benefit, meaning the total maximum amount of dollars they’ll pay.

Inflation riders

Inflation riders—also sometimes called “automatic benefit increase riders”—increase your daily benefits automatically on a yearly basis. This is especially important given that long-term care costs typically increase approximately 3 to 5% every year.

In sum: long-term care funding options

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 ever arise.

Have questions about long-term care or healthcare-related expenses in general? Schedule a FREE discovery call with one of our CFP® professionals so we can help!