Long-term care insurance is intended to reduce out-of-pocket costs if someone winds up needing long-term care from a paid provider. Long-term care insurance can pay for a nursing facility or home care, and many policies also cover assisted living, though no policy will pay the full cost of any of these. People usually pay premiums for 20 or 30 years before reaching an age when long-term care is likely.
If, like most people, you never need or qualify for the policy's benefits, or you collect benefits for only a short time, those years of premiums will turn out to have been a wasted investment. For that reason, it's best to consider long-term care insurance as a "peace of mind" investment rather than as a sound financial one.
Who will need long-term care insurance?
Most people buy long-term care insurance in their 50s and early 60s. The cost goes up with age, but it's still affordable for many people o ver age 65. Once you hit the mid-70s, though, the cost of a good long-term care policy becomes very expensive, and it may be difficult to qualify for if you already have health problems.
Even if you're are in good health today, there's a good chance that you'll eventually need some type of long-term care, at least for awhile. By 2020, roughly 12 million people over the age of 65 will require some long-term care, according to a study by the U.S. Department of Health and Human Services.
But that only gives a general picture. The hard part is figuring out in advance whether you'll need a long period of close monitoring -- daily or even round-the-clock care -- that you'll have to pay for. Some 70 percent of the elderly don't pay for their care but get it exclusively from family and friends.
The odds of needing two years or more of extensive, paid care is not high. Long-term care insurance, then, is security against a small but nonetheless real possibility of a lengthy, expensive period of care.
How much does long-term care cost?
The reason some people are willing to risk buying long-term care insurance is the staggering cost of care if it's not provided by family and friends:
- A year in a nursing home costs more than $50,000 on average.
- Home health care can cost $1,000 a month or more.
- Assisted living facilities cost $2,000 a month and up, according to the Health Insurance Association of America (HIAA), a national trade group.
Health insurance or Medicare rarely covers any of these expenses. Medicaid does cover nursing facility and some home care costs, but you'll have to meet strict income and asset requirements to qualify. Without long-term care insurance or Medicaid, you'll be footing the entire bill out of your own pockets. It's the chance that these bills will continue for three, four, or five years that long-term care insurance is meant to help guard against.
What types of policies are available?
Several types of long-term care insurance are available, but they work on the same principle as regular insurance: You pay an annual premium, and the insurance company reimburses you for a specified amount of long-term care costs, should one or both spouses end up needing and qualifying for care under the policy's terms.
Some long-term care policies are "tax qualified." This means the policy meets certain federal regulations, and therefore some of the premium amounts may be tax deductible (as an itemized medical expense, depending on income). The benefits collected would be tax-free.
In several states -- California, Connecticut, Indiana, Iowa, and New York -- there's also what's called "state partnership" long-term care insurance. These are the same as other policies, except they provide an extra benefit that might allow you to more easily qualify for Medicaid coverage of long-term care. To qualify for Medicaid coverage , you must have very limited income and assets. With a state partnership long-term care insurance policy, you're allowed to keep more assets and still qualify for Medicaid coverage.
Long-term care insurance policies will pay benefits either on a per diem basis (a fixed benefit no matter what your costs) or on an indemnity basis (a portion of your actual expenses are reimbursed). Some policies pay only for a certified home care agency or licensed nursing facility, while others pay the policy holder directly, to use any way you sees fit.
How much does long-term care insurance cost?
The cost of a long-term care insurance policy is determined by several factors, including:
- The age of the person covered (the older the person, the more expensive)
- The amount of the benefit
- How long the benefit is to be paid
- The types of care covered
- The health status of the beneficiary when signing up for the policy
- Whether the policy includes inflation protection
- The cost of long-term care in the state where the beneficiary lives
For example, in 2005, a typical low-end long-term insurance policy cost $1,877 per year for a 55-year-old, $2,000 per year for a 65-year-old, $2,600 for a 75-year-old, and more than $ 5,000 for an 80-year-old, according to the U.S. Department of Health and Human Services. These figures are higher today.
Premiums are lower for younger people, and the policy holder must be in reasonably good health to pass underwriting. So when thinking about getting a policy, it makes sense to do so sooner rather than later.
What does long-term care insurance cover -- and what's not covered?
Coverage depends on the plan you choose. Some policies cover only nursing home care, but many policies now include coverage for in-home care, including nursing care, physical therapy, and medical equipment. Many policies also cover assisted living, which is likely to be important, since this type of care is rapidly expanding.
Policies may also include adult daycare and respite care to give a break to a caregiver who is a family member. Almost all policies cover care related to Alzheimer's or other forms of dementia (though there are exceptions, and since this is a common condition, you'll need to be careful that the policy you choose does in fact cover Alzheimer's). In general, the more types of care that are covered, the higher the premiums.
Most policies include a deductible or waiting period before the coverage begins, especially if the policy holder has any pre-existing conditions noted during the underwriting process. Most policies don't include coverage related to alcohol or drug abuse. Also, no benefits at all are paid unless the insured person qualifies for coverage under the specific terms set by the policy.
Anyone between the ages of 18 and 84 in reasonably good health can purchase long-term care insurance, according to the HIAA. People over the age of 84 aren't usually eligible to buy new policies.
Many people can't buy long-term care insurance, however, because they are rejected due to pre-existing health conditions. The Insurance Information Institute reports that in 2003 to 2004, 11 percent of people in their 50s, 19 percent in their 60s, and a whopping 43 percent of people in their 70s had their long-term care insurance applications rejected.
If one or both spouses don't qualify for long-term care insurance because of health or age, some other insurance products -- though not new insurance policies -- are available that can help with the costs of long-term care. For exam ple, viatical settlements, in which an older adult sells his life insurance for roughly the present value of the policy, can help fund long-term care. This type of product has some eligibility limitations, and the money obtained from selling the policy is taxable.
Life insurance policies may also offer something called an accelerated death benefit (ADB), which offers cash advances against the value of the policy while the affected person is still alive. These policies have some drawbacks -- you have to continue paying the insurance premium, and the policies can generally be used only if the insured person has a terminal illness, needs nursing home care permanently, or can't perform normal daily activities.
How do you purchase long-term care insurance, and what else should we be aware of?
If you're going to look into long-term care insurance for someone in your care, check with his current or former employer, life insurance provider, or insurance broker to see if she can add long-term care coverage to an existing policy. If it's for your parents, you may also be able to purchase a long-term care insurance policy through your own employer. If your parent is or was a local, state, or federal government employee or a veteran, he may be eligible for long-term care policies through a government-sponsored plan.
Insurance policies are legally enforceable contracts, but they don't always match the sales pitch of the agent or the hype in the brochure -- some policies require specific care providers or nursing homes, for example, so read the policy thoroughly. Before signing on, compare policies and prices from different companies, and consult with an elder law attorney or financial planner if you have any questions. Don't rely exclusively on the word of an insurance broker or agent. If you've already bought insurance but find it's not what you thought, the law provides for a 30-day cancellation period.
Remember that when it comes to older people and money, fraud is something to watch out for. If the sales pitch sounds too good to be true, it probably is. Always check the insurance company's rating and complaint history with your state insurance commissioner before signing any contracts or making any payments. You can also research the financial health of the insurance company through Moody's Investors Services or Standard & Poor's insurance ratings services .
For more information on what kind of long-term care insurance policy to look for, see A Buyer's Guide to Long-Term Care Insurance .