Understanding Long-Term Care Insurance
Date Published: September 25, 2023
According to the Administration on Aging, nearly 70% of people ages 65 and older require some form of long-term care. So whether you’re caring for a parent, spouse, family member, or close friend, you will likely need to invest in their care at some point. This may include an assisted living community, a nursing home, in-home care, or adult day care.
Yet, according to the 2021 Long-Term Care Tracking Poll, fewer than 1 in 5 older adults feel financially prepared to pay the high costs of long-term care, highlighting the need for payment options such as long-term care insurance. While long-term care insurance has its pros and cons, it should factor into your care plan as another potential way to get your loved one the care they need.
Long-term care policies come with differing costs and differing levels of care. While the right policy can minimize care expenses, no policy pays for the full cost of long-term care. Below, we explain the basics of long-term care insurance for seniors, including the features they offer, their associated tax benefits, and other frequently asked questions.
What Is Long-Term Care Insurance?
Long-term care insurance, also called LTC insurance or LTCi, provides daily or monthly assistance with the costs of many types of long-term care services. Long-term care insurance policies can be traditional or hybrid, though traditional policies have become harder to find, making it more likely that your benefits will come from a hybrid plan. LTCi can be individual or included in group benefits via an employer.
Types of Long-Term Care Insurance Policies
Hybrids vs. Traditional Long-Term Care Insurance Policies
A hybrid policy serves two different purposes while a traditional policy serves just one. Traditional policies cover some or all of your costs if you need long-term care. Hybrid policies provide a benefit regardless of whether you need care in the form of a built-in death benefit. Under a hybrid policy, long-term care costs will reduce or eliminate the death benefit. However, if you never use the LTC benefits and never take out any loans on the policy, the death benefit will be paid in full upon your death.
Seniors should keep in mind that hybrid policies are sold with “fixed” or level premiums, while traditional policies have premiums that may increase over time. Insurance companies must petition government agencies for permission to increase premium rates, though this has not stopped them from getting approval to double their customers’ premiums in some cases.
The Basic Features of All Long-Term Care Insurance Policies
Hybrid and traditional long-term care insurance policies can both be sold as indemnity or as reimbursement policies. Indemnity policies provide a cash benefit that you can spend as you see fit, while reimbursement policies reimburse you for the exact amounts you spend on approved long-term care services.
Typical long-term care insurance policies put a cap called the daily or monthly maximum on how much you can be paid for a day or a month of long-term care. Policies also specify either the benefit period (the number of years you can receive this daily or monthly maximum) and/or the benefit pool/lifetime maximum (the maximum amount of money you can be paid in benefits for the entire time you own the policy). The daily/monthly benefit is paid out until the benefit pool is exhausted and/or until the end of the benefit period is reached.
Many policies impose an elimination period before paying for long-term care during which you pay for your own care costs. Then, the insurance company will step in, similar to how deductibles work in health care plans. Note that elimination period lengths can vary, but 90 days is the most common length.
Pros and Cons of Long-Term Care Insurance
Like any insurance, long-term care insurance is somewhat of a financial gamble. Your loved one is betting years of premiums against the likelihood of a long stretch of expensive long-term care. Should they decide to obtain a long-term care policy, make sure they fully understand the pros and cons.
For instance, if your loved one never needs or qualifies for their long-term care insurance benefits or they collect benefits for only a short time, the years of paying premiums may seem like a wasted investment. However, if they end up needing care for an extended amount of time, the money was well spent.
In many cases, a long-term care policy is more of a “peace of mind” investment than a sound financial one. That’s why it’s so important to weigh the pros and cons of investing in this type of insurance to help determine whether it’s right for you (and for them).
Home, life, health, and auto insurance policies can prevent financial hardship by predicting expenses. The same precautions apply to long-term care needs. Deciding whether to purchase long-term care insurance can be overwhelming, but consider these positives:
- Prevents emotional, physical, and financial stress: Having a long-term care policy helps alleviate or prevent the stress placed on caregivers so that aging adults no longer need to worry about becoming a burden to their families.
- Helps ensure loved ones get the care they need: If you have aging parents or other loved ones who don’t live nearby, you may worry about who will provide care for them, the quality of the care they will receive, and how they will pay for it. Long-term care insurance alleviates these concerns by placing them in control of the care they receive.
- Preserves financial security for spouse and other family members: The high cost of long-term health care can quickly deplete even a healthy nest egg and move on to using up other assets, such as a family home, burdening families with the high costs of care. Care insurance provides the means to get medical assistance without tapping other resources, which protects family members from financial hardship.
The rising costs of long-term care insurance policies and the uncertainties of the ever-changing qualification process rightly make many Americans concerned about their long-term care investment. Despite the many pros of long-term care policies, consider these drawbacks as well:
- Long-term care insurance is expensive: If your loved one has a limited income or under $200,000 in assets, long-term care insurance may not be feasible. If they decide to purchase a policy anyway and then later can’t afford the premiums, they risk losing coverage (and their investment) when they need it most.
- Premium hikes could be frequent and/or substantial: Since the policyholder will likely pay premiums for 10, 20, or even 30 years, they must be prepared for rate hikes over the years due to inflation and changing market standards.
- The industry is volatile: Many insurance companies have dropped out of the market after suffering losses honoring their customers’ policies, adding uncertainty to your investment. While over 100 companies offer long-term care policies, around 15-20 cover most of the plans. Always research an insurance company’s financial health through Moody’s Investors Services or Standard & Poor’s insurance rating services before signing a policy.
How Much Does Long-Term Care and Insurance Cost?
The reason some people are willing to risk buying long-term care insurance is the staggering cost of long-term care. Below, you can see the annual costs of the different types of long-term care.
Type of Senior Care
Semi-private room in a nursing home
Private room in a nursing home
One-bedroom unit in an assisted living facility
Adult day health care
Home health aide
Health insurance rarely covers extended care expenses, and both Medicare and Medicaid have limitations.
Medicare only pays for skilled or rehabilitative care in a nursing home for up to 100 days or for short periods at home if skilled in-home care services are required. Medicaid will pay for long-term care services, but your loved one must meet strict income and asset limits.
If your loved one doesn’t qualify for Medicaid and they don’t have long-term care insurance, they’ll either be paying the entire cost of their care out-of-pocket or be dependent on you to help cover the cost. No matter how long they need the care, long-term care insurance could help defray this cost.
How Much Does a Long-Term Care Insurance Policy Cost?
The cost of a long-term care insurance policy is determined by several factors, including:
- Age of the applicant
- Benefit amount paid per day
- Benefit duration
- Waiting period before benefits begin
- Types of care covered
- Health status of the applicant at the time of signing
- The amount of inflation protection desired
- Cost of long-term care in the state/region where the applicant lives
- Miscellaneous provisions
According to the AALTCI’s 2022 Price Index, the average annual cost for a policy with $165,000 level benefits for a single, 65-year-old policyholder was $1,700 per year for a male and $2,700 per year for a female. However, rates vary between insurance providers, so the same policy could have vastly different premiums. Thankfully, you can shop around to compare prices for the types of policies available for your situation.
Tax Benefits for Long-Term Care Insurance
If affordability is one of the concerns keeping your parents or other loved ones from investing in a long-term care insurance policy, consider the tax benefits of having one.
If your loved one buys a tax-qualified policy, they can itemize the premiums with their other medical expenses. However, the maximum deductible limit for long-term care insurance premiums is capped by age. Only the portion of total medical expenses that exceed 7.5% of the policyholder’s adjusted gross income can be used as a deduction.
These tax benefits increase sharply for self-employed individuals. Instead of itemizing premiums, they can claim the entire amount as a self-employed health insurance deduction, which comes off the top of their income, regardless of whether they are self-employed full-time. Additionally, if your loved one owns or belongs to a C corporation, they can declare the entire premium as tax deductible.
The amount of money saved largely depends on the policyholder’s tax bracket. For example, many self-employed people in the 30% tax bracket may be able to save 20% or more of their premiums in tax benefits. Always consult with an accountant or tax attorney to learn which tax benefits apply to your loved one’s situation.
What Does Long-Term Care Insurance Cover?
A long-term insurance policy can cover one or several types of care based on the types of coverage the policyholder thinks they’ll need and the premium amount they can afford. Most policies are comprehensive, allowing benefits to be used in a variety of settings, but you’ll need to make sure you know which facilities are specifically covered. If your loved one is in the wrong type of facility, the insurance provider may refuse benefit payments.
Some policies only cover certain state-licensed facilities or nursing home care, but many also cover assisted living facilities. Many policies also cover in-home care, including nursing care, physical therapy, and medical equipment, community care, which usually means adult day care, and respite care, which gives a break to the caregiver (in this case, you).
Long-term care policies may even pay benefits to family members who act as caregivers. Others may cover home modifications, such as adding wheelchair ramps or installing safety devices. Most policies cover care related to Alzheimer’s or other forms of dementia but only if the symptoms appeared after the policy was in effect. Double-check your prospective policy’s Alzheimer’s coverage if this is a priority for you.
What Isn’t Covered by Long-Term Care Insurance?
Most long-term care insurance policies permanently exclude benefits for certain conditions, such as certain forms of heart disease, cancer, or diabetes. Other exclusions include:
- Mental disorders, not counting Alzheimer’s or other dementia
- Alcohol or drug abuse
- Attempted suicide or intentional self-harm
- Treatment in a government facility or government-paid treatment in a public facility
- Illness or injury caused by an act of war
If you have a pre-existing condition, your policy will usually include a temporary exclusion, which means that your condition typically won’t be covered for a set period. This exclusion usually lasts six months but could be shorter, longer, or nonexistent depending on your state’s laws and the policy’s fine print. Avoid policies with exclusion periods longer than six months.
How to Get the Best Daily Benefit from Your Policy
The daily benefit refers to how much the policy pays for every day the policyholder needs care. Some policies pay out based on a daily limit while others multiply that amount by 30 to establish a monthly benefit rate. You can help your loved one determine a reasonable daily benefit amount by calling local nursing facilities and home healthcare agencies to learn the average cost of these services in your area.
When calling local facilities, be sure to ask about the costs of long-term care, not short-term rehabilitation. Also, ask for rates for both private and semi-private rooms since there’s often a considerable cost difference. Remember that the daily benefit must cover the facility care costs, which are often the largest expenses in long-term care.
Budgeting for Your Benefits
Once you have a good idea of the daily expenses involved in local long-term care, decide how much of that daily amount you feel your loved one could reasonably co-insure out of their own funds. When making this calculation, keep in mind that whatever funds they’ll provide for their care must be kept in a readily accessible investment vehicle so they can access these funds easily if and when they need to.
Some people think they must over-inflate the daily benefit amount to ensure they keep pace with the rising costs of care. After all, long-term care costs are rising so rapidly that a suitable daily benefit today may only be half of what is needed in just 15 years. However, this is why an inflation protection benefit is a useful addition to any policy. It will keep the daily benefit designated in your plan current with the rising costs of care.
Who Qualifies for Long-Term Care Insurance?
Unfortunately, not all people qualify for long-term care insurance. Those who wait until the need for care is imminent or are already in poor health usually find that it’s too late to purchase a policy because eligibility is based more on health than age.
However, those who have sufficient finances to cover ongoing premiums, apply while they’re in good health, and do not yet need long-term care are likely to qualify. Insurance companies may recommend purchasing a policy as young as 40, but buying that young may not be necessary. Most people sign up for a policy during their 50s or early 60s.
Who Doesn’t Qualify for Long-Term Care Insurance?
The 2022 AALTCI report also showed that 20.4% of people in their 50s had their applications for long-term care insurance declined. The decline rate increased to 30.4% at ages 60-64, 38.2% at 65-69, and 47.2% at 70-74. Additionally, your loved one likely will not qualify for LTC insurance if they currently:
- Use oxygen
- Use a wheelchair
- Use a walking aid
- Require assistance with any ADLs
- Require assistance with shopping
- Require assistance managing transportation, finances, or communication
- Require home health, nursing home, or assisted living care
Additionally, pre-existing conditions that can disqualify your loved one from receiving coverage include:
- Kidney failure
- Liver cirrhosis
- Muscular dystrophy
- Parkinson’s disease
- Sickle cell anemia
However, even with a pre-existing health condition, your loved one may still qualify for long-term care insurance. Health underwriting standards occasionally change and vary between insurers.
Importantly, once your loved one qualifies for insurance and the policy takes effect, the NAIC’s Long-Term Model Care Act states that insurance providers cannot cancel, refuse to renew, or terminate a long-term care policy based on the age, gender, or deterioration of the mental or physical health of the policyholder.
Is Long-Term Care Insurance Worth It?
Long-term care insurance is usually worth the cost of the premium since long-term care costs can bankrupt unprepared families. However, in certain situations, insurance may not be worth the money.
If you are younger than 50, you likely shouldn’t be worried about long-term care insurance yet as paying the premiums for that many years could offset the eventual benefits. Additionally, if you have significant resources, either in finances or in assets that you can leverage later, you may be able to pay for any long-term care needs out-of-pocket if/when they become necessary.
Premiums can also be too expensive to be worth it. If a policy costs more per month than 7% of your monthly budget, you should look for a different plan.
Frequently Asked Questions
Can you be turned down for long-term care insurance?
Yes, you can be turned down for long-term care insurance. Insurance companies consider your age and current health status when determining whether to sell you a policy. Covering long-term care is extremely expensive, so companies will turn down seniors who already have severe conditions such as Alzheimer’s. Each company has its own age and health restrictions, so even if you are denied at one company, you may still be accepted at another.
Is long-term care insurance the same as life insurance?
Long-term care insurance is not the same as life insurance, but it is often a special form of life insurance. Some whole life or universal life policies are built as “hybrids,” combining the death benefit features of life insurance with the provisions for long-term care found in more traditional long-term care insurance policies. Hybrid policies can be quite complex, but they are often an excellent way to get coverage for potential long-term care costs.
Can a person with dementia get long-term care insurance?
The severity of the cognitive impairment, the fine print of the insurance policy, and the benefits needed change whether a person with dementia will qualify for long-term care insurance. While policies usually cannot be purchased after symptoms of Alzheimer’s or dementia have become evident, policies purchased prior to symptoms may cover your care depending on their definition of cognitive and physical impairment.
What are the 6 ADLs for long-term care?
The ADLs (Activities of Daily Living) include toileting/continence, bathing/hygiene, dressing, grooming, mobility, transferring, and eating. Losing the ability to perform any of these functions can lead to a profound decline in health and quality of life over time. Professional long-term care services are often needed when a senior needs help with two or more of these ADLs.
Are long-term care policies tax deductible?
Some long-term care policies qualify as tax-deductible items. This means that you may be able to write off the premiums that you pay for these policies, counting them as unreimbursed medical expenses. Additionally, plans that are part of state partnership programs can help you qualify for Medicaid by lowering your countable income for your state’s Medicaid eligibility. Always look at the specifics of your policy and consult a tax expert or Medicaid planner before making any big decisions.