Long-term Care Insurance: What is it? Do I Need it?
Long-term care (LTC) expenses can be the greatest financial risk retirees face. No other risk has quite the same ability to threaten lifestyles. Basic nursing home care in many states can exceed $14,000 per month. So, what should people consider? The first line of defense is to transfer the risk of long-term care expenses to an insurance company with Long-term care insurance (LTC). LTC refers to the professional care provided to help a person who needs assistance with at least 2 out of 6 Activities of Daily Living (ADLs) for at least 90 days. ADLs include:
-Bathing
-Dressing
-Transferring from the Chair to the Bed
-Toileting
-Continence
-Eating
-Or the individual is so mentally impaired that there’s a need for supervision
The inability of the insured to perform two of these ADLs (as certified by a physician) triggers the payment of Long-Term Care Insurance (LTCI) benefits*
LTC can be:
-Nursing Home care
-Personal Care provided in an Assisted Living Facility
-Home Health Care
-Personal Care (at home)
-Respite Care
The likelihood of needing LTC is greater than most people realize. 70% of retirees will need LTC at some point in their lives. Currently, 9 million people receive LTC and 85% of those live in the community, and 40% are under age 65. 75% of those receiving LTC need it for a year or more, with 30% needing it for more than 5 years.
2023 national data indicates that the median annual cost of basic LTC provided in a nursing home exceeds $104,000 (semi-private room), with many facilities in metropolitan areas charging far more. LTC provided today in an Assisted Living Facility averages approximately $64,2000 per year, with a significant number of facilities charging much more.** Annual median costs provided by Home Health Aides at home costs is $75,500, unless provided “around the clock” which costs significantly more.**
It’s important to understand that neither Employer provided health insurance, nor Medicare, nor Medicare Supplemental insurance plans (including Medicare Advantage Plans) cover long-term care expenses. Though each pays for a limited amount of rehabilitation care provided in a nursing home or at home, none pays for LTC.
As mentioned, Long-term care insurance (LTCI) shifts the risk of incurring significant (LTC) expenses from individuals to an insurance company. Though LTCI has been around for many decades, over the last 10 years policies have improved significantly and gained increasing public awareness. Nonetheless, only a small fraction of those who may one day need LTC have purchased a plan.
LTCI policies include several key features. First, all individual plans are “medically underwritten.” This means to apply for a policy you must demonstrate that you are relatively healthy.*** Second, plan premiums are “age-based,” that is, the older a person is when buying a policy, the higher the premium. Once the plan is purchased, premiums are expected to remain level. However, the insurance company can petition the state to allow them to raise premiums if they can demonstrate that “it’s necessary”. Recently, many companies have raised premiums of in force policies. Therefore, when shopping for a plan, consider how often a company has raised premiums in the past. This may signal that the company has underpriced its products and could raise premiums again.
LTCI policies are sold in increments of daily benefit amounts (DBAs) which can range from approximately $50 to $500 per day for care in a facility, with home care coverage a percentage of the full DBA. Plans also have “elimination periods,” that is, the period where you are responsible for LTC expenses before the policy begins to pay. For example, if your plan had a 90-day elimination period, you’d pay for the first 90 days of care you receive before plan benefits commence. Elimination periods typically range from 0 to 180 days. LTCI policies also have “payout periods”, that is, the period the plan pays benefits. These can range from as little as one year up to five years. “Lifetime” paying benefit plans are no longer sold to individuals. Another important policy option is an inflation rider. This can add significantly to the cost of a plan but is crucial as it allows your benefits to rise annually with inflation.
The price of LTCI plans vary considerably, depending on:
-Your Age at purchase
-the Daily Benefit Amount
-the elimination period
-your payout period, and
-whether it has an inflation ride
For example, a “typical” LTCI policy’s annual premium can run $900 if purchased at age 45; rising to $2,500 if bought at age 55; $3,900 at age 65; and $7,900 at age 75, and so on. So, consider buying LTCI at a younger age at a lower price. This also avoids the possibility of later developing health problems rendering you uninsurable. Some argue that buying a plan at a younger age has you paying premiums for many more years, thereby making the plan more costly. None the less, it’s important to remember that that coverage begins upon purchase and 40% of people receiving LTC are under age 65. As a reminder, group health insurance plans don’t pay for LTC.
LTCI experts suggest you seriously consider buying LTCI if several of the following apply:
-you have financial assets (excluding your house) greater than $300,000
-you can afford the premiums (now and in the future)
-you want to be in control of the LTC you receive
-you do not want to be a burden to your family
-you want to leave an estate
-you already are saving enough to be on track to afford to retire
As a reminder, LTCI is designed to protect your lifestyle (and your partner’s) by transferring the risk of LTC expenses to an insurance company. Just as few homeowners are without homeowner’s insurance, most people should consider buying LTCI to manage the risk posed by LTC expenses. The chances of having a significant claim on your homeowner’s insurance is a tiny fraction of the likelihood of you needing LTC. It’s a good idea to check with an Elder Law attorney to see if you’re a good candidate for LTCI.
*Even if the insured can technically perform these tasks, cognitive impairment requiring substantial supervision can also trigger benefits.
**For example, the average annual cost of a semi-private room in a long-term care facility in Connecticut in 2024 exceeds $155,000, with costs for assisted living and home care much higher than elsewhere as well. Source: Genworth Insurance Company Annual Survey, 2024.
***Group LTCI plans offered through an employer will usually waive this requirement briefly during an initial open enrollment period.