By: David K. Carboni, Ph.D.,CFPⓇ
Long-term care (LTC) expenses are among the most little known, but possibly among the most devastating potential threats to most retirees’ financial security. The likelihood of needing LTC is greater than most people think. Recent studied indicate that there’s approximately a 50% of someone needing LTC at some point in their lives. Currently, 9 million people receive LTC and 85% of those individuals live in the community, and 40% of them 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.
LTC expenses can be considerable. Most recent data in CT indicate that the cost of basic LTC provided in a nursing home exceeds $114,000 a year, with many of the higher priced facilities charging considerably more. Such care provided today in an Assisted Living Facility in CT averages approximately $40,000 per year, with a significant number of facilities charging much more. LTC provided at home costs less, unless “round the clock” care is needed.
LTC refers the care provided to help a person needing assistance with at least 2 out of 6 Activities of Daily Living (ADLs) for at least 90 days. ADLs include:
Transferring from the Chair to the Bed
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)
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.
LTCI is designed to transfer the risk of incurring significant (LTC) expenses from an individual to an insurance company. Though LTCI has been around for over thirty years, over the last 10 years policies have improved significantly and gained increasing public awareness. None the less, only a small fraction of those who may one day need LTC have purchased a plan.
LTCI has a number of key features important to understand. First, plans are “medically underwritten.” This means you must be relatively
*Even if the insured can technically perform these tasks, cognitive impairment requiring substantial supervision can also trigger benefits
healthy to be eligible to buy a LTCI policy.* Second, plan premiums are “age-based,” that is, the older you are at the date of purchase, the higher the premium. Once you buy a plan 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 you shop for a plan find out how often a company has raised premiums in the past. It may be a sign that the company has underpriced its products and will raise premiums again.
You generally buy LTCI 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. The plans also have “elimination periods.” This refers to the time period when you first receive LTC that you must pay for it yourself. For example, if your plan had an elimination period of 90 days, you’d pay for the first 90 days of care, and then your plan would begin paying benefits for care you receive after 90 days. Elimination periods typically range from 0 to 180 days. LTCI policies also have payout periods: the length of time the plan pays benefits. These can range from as little as one year to “your life-time.” Another important option is an inflation rider. This can add significantly to the cost of a plan, but it’s a must as it allows your benefits to rise with inflation.
*Occasionally, group LTCI plans offered through an employer will waive this requirement briefly during an initial open enrollment period.
The price of LTCI plans vary considerably and reflect:
Your Age at purchase date
the amount of the DBA you select
the length of the elimination period you elect
the length of your payout period, and
the presence (or absence) of an inflation rider
A “typical” LTCI policy’s annual premium can run $800 a year if purchasedatage 45; $2,300 if bought at age 55; $3,800 at age 65; and $7,500 at age 75, and so on. So it behooves the consumer to consider buying LTCI at a younger age at a lower price. Likewise, this strategy avoids the possibility of later developing health problems and thereby becoming uninsurable. Some argue that buying a plan at a younger age has the consumer paying premiums for many more years and making the plan more costly. None the less, it’s important to bear in mind that 40% of people receiving LTC are under age 65, and group health insurance plans rarely 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
In reality, LTCI is should be viewed as a way to protect your retirement’s financial security (and your partner’s). As mentioned, LTC expenses are among the most significant expenses that can threaten your future. LTCI allows you to protect your retirement income and assets by transferring the risk of significant LTC expenses from your shoulders to that of an insurance company. Just as few home owners are without home owner’s insurance, most employees should not ignore the risk posed by LTC expenses.