What Long-Term Care Insurance Is (and Why You Might Want to Consider It Now)
Buy now, get the care you need later.
The standard approach to saving for retirement tends to be acquiring a large pot of money which you then invest (ideally in a tax-advantaged retirement account). What many retirees (or those soon to retire) soon realize is that the same pot of money that you use for food, vacations, and property tax after leaving the workforce will also have to fund the cost of long-term care in your later years, should you need it.
A study by the U.S. Department of Health and Human Services estimates that half of the population will require long-term services and support—such as an in-home caregiver or residence in an assisted living community—if they reach age 65. The average costs of those services will be about $140,000, but for many Americans the number will be much higher.
"It's a point in our life none of us wants to get to actually, but the cost of long-term custodial care can literally wipe out a couple's retirement savings," says Terry Savage, a nationally syndicated financial columnist and author of The Savage Truth on Money.
Long-term care (LTC) insurance offers a way to prepare for in-home nursing care or extended stays in assisted living facilities—even adult day care—all while protecting your nest egg. Rather than spend your hard-earned money on these costs, your long-term care insurance will cover it.
How long-term care insurance works
LTC insurance will cover any cost related to your stay in an assisted living facility, adult day care, or nursing home. It will also help to cover the cost of in-home care. It won’t cover medical expenses, such as if you end up in the emergency room for a heart attack or need routine tests done.
A doctor will have to sign off on your need for LTC before the insurance kicks in.
“Long-term care insurance provides long-term care support services for individuals who need help with two of the five activities of daily living: bathing, dressing, toileting, transferring, and feeding,” says Jody D’Agostini, CFP, an Equitable advisor.
It will also cover care for those with Alzheimer’s disease or dementia, she adds.
There are two types of long-term care insurance. Financial planner Arvind Ven, CEO and founder of Capital V Group, a California-based wealth management firm, describes the first as a “use it or lose it” type of policy. These policies are considered stand-alone LTC insurance policies and they are generally more affordable. The downside is, you could pay for this kind of insurance for as many as 20 to 30 years without ever using it, which means money down the drain.
The second type of long-term care insurance is called asset-based LTC insurance or hybrid policies, because they combine LTC insurance with life insurance. This type is generally more expensive, but the premiums are fixed. There is also a death benefit which gets paid out to your heirs.
“That has a cash value or death benefit, and money goes to the beneficiaries if the insurance is not used,” Ven says.
Who needs long-term care insurance, and who qualifies
Everyone might need LTC, and most will qualify when they’re still young. The key is to obtain coverage before a preexisting condition prevents you from signing on. Chronic illness and disabilities can prevent you from securing this coverage.
For that reason, most folks will want to shop for it in their 50s and 60s.
“You can buy it at any time, but when you’re under 50 you’re saving for other things,” Savage says. “In your 50s, you’re not likely to have a condition that will preclude you from getting coverage. If you’ve already had a stroke, it’s too late. Ask your agent about medical underwriting.”
Ven says most policies will require some kind of medical interview or evaluation before you’re approved.
When you’re able to afford it, start shopping around. As D’Agostini says, the longer you wait, the more expensive the coverage will be. Then again, purchase too far before you need it and you could be throwing money at a policy you may not benefit from.
“Some people start in their 40s and keep on paying, thinking they did the right thing,” says Ven. “But as they get older, they can increase the premiums. They’re not fixed and each state has different laws. But overall, as people get older, they can increase and they have to pay this for the rest of their lives.”
D’Agostini adds that the decision to purchase this insurance should also take your income into account. “If you have about $300,000 to $3 million of assets, then you might consider securing some coverage,” she says.
Low-income families with less than $300,000 could get LTC covered by Medicaid. Folks with more than $3 million might be able to cover the costs themselves, but getting insurance ensures you can pass on more of your money to your heirs.
How much long-term care insurance costs
Like all types of insurance, what you pay will vary based on your individual circumstances, so it’s important to talk to an advisor.
“The cost depends upon how old you are when you purchase the policy, your health, the maximum amount per day that the policy will pay and for how long, as well as whether you get an inflation enhancement on the policy,” D’Agostini says.
Like most insurance policies, you can start by asking your current providers for rider options.
“You can purchase long-term care insurance from a financial advisor, or an insurance agent,” D’Agostini says. “You can contact one of them or explore options through your state’s Department of Insurance. Some states have a State Partnership Program that links with Medicaid. It may protect a certain amount of your assets should you have a need for LTC in the future.”
Savage suggests going to an LTC insurance expert.
When shopping for a policy, be sure to ask the basics: how much the policy will cover each year, how many days of care the policy will cover, and how much it will cover over a lifetime, for starters.