Long-term care (LTC) expenses are among the greatest financial risks retirees face. No other risk has quite the same ability to threaten lifestyles. In this context, LTC refers to the 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
-The inability of the insured to perform these ADLs (as certified by a physician) triggers the payment of Long-Term Care Insurance (LTCI) benefits*
LTC can be:
Nursing Home care
Care provided in an Assisted Living Facility
Care provided in an Adult Day Care 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.
2020 national data indicate that the annual cost of basic LTC provided in a nursing home exceeds $93,000 (semi-private room), with many facilities in metropolitan areas charging considerably more. LTC provided today in an Assisted Living Facility averages approximately $55,000 per year, with a significant number of facilities charging much more.** LTC provided at home costs less, unless provided “around the clock”. It’s important to understand that neither 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, neither pays for LTC.
Long-term care insurance (LTCI) transfers 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’ key features are important to understand. First, plans are “medically underwritten.” This means one must be relatively healthy to be eligible to buy a LTCI policy.*** Second, plan premiums are “age-based,” that is, the older a person is when he/she buys a policy, the higher the premium. Once 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”. Therefore, when shopping for a plan uncover how often a company has raised premiums. It may be a sign that the company has underpriced its products and will raise premiums again.
LTCI policies are sold in increments of daily benefit amounts (DBAs) which can range from $50-$500 per day for care in a facility, with home care coverage a percentage of the full DBA. Plans also have “elimination periods,” the period you first receive LTC that you must pay for yourself. 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 range from 0 to 180 days. LTCI policies also have “payout periods”: the time period the plan pays benefits. These can range from as little as one year up to five years. “Life-time” paying benefit plans are no longer sold. Another important option is an inflation rider. This can add significantly to the cost of a plan but is a must as it allows your benefits to rise 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 rider
For example, a “typical” LTCI policy’s annual premium can run $900 if purchased at age 45; $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 40% of people receiving LTC are under age 65, and group health insurance plans don’t pay for LTC.
LTCI experts suggest you seriously consider buying LTCI if a number of the following apply:
-you have financial assets (excluding your house) greater than $300,000
-can afford the premiums (now and in the future)
-want to be in control of the LTC you receive
-do not want to be a burden to your family
-want to leave an estate
-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. 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 2020 exceeds $155,000, with costs for assisted living and home care much higher than elsewhere as well.
***Group LTCI plans offered through an employer will usually waive this requirement briefly during an initial open enrollment period.