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Long-term care insurance requires careful consideration

by Emily Koelsch | Contributor
November 11, 2019

Summary: Long-term care is one of the greatest health care needs of older Americans, and it’s currently the most financially catastrophic experiences for aging adults. Purchasing long-term care insurance is one way that you can plan for this season of life and ensure that you protect yourself and your assets should you find yourself in need of extended care later in life.

Long-term care insurance helps to cover the costs of care for individuals with chronic illnesses or disabilities. It provides a range of nursing, social and rehabilitation services for those in need of ongoing care. The services needed range widely and include assistance with daily activities such as eating, dressing and showering; physical therapy or occupational therapy; and skilled nursing. Long-term care policies often provide individuals with flexibility and help cover the costs of a nursing home, assisted living, adult day care services, home care, home modification and care coordination.

Why purchase long-term care insurance?

According to data from the U.S. Department of Health and Human Services, about 70% of people 65 or older will need long-term care services at some point during their lives. While this care is usually needed for less than two years, about 14% of those individuals will need care for more than five years.

Unfortunately, regular health insurance does not cover the costs of long-term care, nor does Medicare, which only covers short nursing home stays or limited amounts of home care for rehabilitation or skilled nursing. Medicaid will help with the costs but only after individuals have almost completely depleted their savings. The result is that without long-term care insurance, individuals are required to pay for any necessary long-term care services themselves.

The cost of this care can be astronomical and quickly deplete an individual’s savings. Below is the current data shared at LongTermCare.gov showing the average cost of different types of long-term care*:

Monthly cost of a private room in a nursing home Monthly cost of care in an assisted living facility Hourly cost for a health aide Hourly cost for homemaking services Daily cost for an adult day care center
$7,698 $3,628 $20.50 $20 $68

As a result, many individuals choose to purchase long-term care insurance to protect their assets, ensure that they will have choices should they need long-term care and avoid being a financial burden on family members.

How does long-term care insurance work?

If you decide to purchase long-term care insurance, you will work with an agent to select the right policy. Once you are ready to purchase a policy, you’ll complete an application, answer several questions, provide medical records and potentially complete an interview. Once approved, you’ll begin paying premiums.

Policies vary as to what triggers benefits, but under most policies you are eligible for benefits when you (1) can’t do at least two of six “activities of daily living” (ADLs) or (2) are diagnosed with dementia or another cognitive impairment. The six ADLs are:

  • Bathing
  • Caring for incontinence
  • Dressing
  • Eating
  • Toileting
  • Transitioning (i.e., in or out of bed or a chair)

When you’re in need of care, you’ll make a claim with your company. They will then review medical documents and likely send a nurse to conduct an evaluation. Once your “plan of care” has been approved, there will be a certain period when you are required to pay all expenses out of pocket. This is called the elimination period and usually lasts between 30 and 90 days. Once you have made it through this period, you will begin receiving benefits pursuant to your policy.

How do you purchase long-term care insurance?

If you’re interested in purchasing a long-term care insurance policy, it’s important to understand that these policies are complex and vary widely. Different companies and policies have unique guidelines for who qualifies, when benefits are triggered, the amount of benefits paid, the term of payment and the costs of premiums. As a result, it’s important to do research, compare options and work with trusted professionals when purchasing a long-term care policy.

Policies can be purchased through an insurance company, a qualified agent and sometimes through your employer. When purchasing a policy, experts in the industry suggest that you pay special attention to:

  • The provider’s reputation and legitimacy. It’s important to confirm that they are licensed in your state and have good financial ratings from reputable agencies.
  • Coverage options. Some policies require that you use certain facilities or types of care. Before purchasing a policy, make sure that it covers the facilities, programs or services that you would like.
  • The benefits payout. Policies vary widely as to what they pay. Make sure you understand what your policy will pay per day as well as its maximum payout. You can help to determine if a policy is a good option for you by finding the average daily cost of care in your area and comparing it to what your policy will pay towards that. It’s also essential to understand what triggers benefits. For example, some policies are only triggered when individuals cannot complete a certain number of ADLs; however, this could exclude Alzheimer’s patients that need daily care but can technically perform all ADLs.
  • How long the waiting period is. The elimination period can range from 0 to 180 days, so make sure you know how long you will be responsible for all daily costs.
  • Available benefit protections. Make sure you know what protections your policy will provide. For example, some policies have inflation protections, which ensure that benefits stay in line with rising care costs; other policies have a “nonforfeiture clause,” which provides for the payment of some benefits if you become unable to pay your premium; and some have a “guaranteed renewable” clause, which ensures that your benefits cannot be canceled.

How do you decide whether to purchase long-term care insurance?

Determining whether to purchase a long-term care policy can be difficult. Deciding whether this is right for you is dependent on your financial and personal situation, your preferences and your anticipated needs. Some factors to consider when deciding whether to purchase a policy are:

  • Your age and health. For individuals that are young and in good health, these policies are often affordable. For those that are older or in poor health, they tend to be prohibitively expensive or unavailable. Most people that purchase policies in their mid-50s to mid-60s.
  • The cost of premiums. The cost of your annual premium will be dependent on a few factors including your age, health, gender (women pay more as on average they live longer), marital status, amount of coverage and insurance company.
  • Your support system. The annual expense might not be worth it if you have a strong network of family or friends who are able and willing to provide care if needed. In contrast, if you do not want to rely on such a support network, a long-term care policy might be a good choice.

What other factors should you consider when looking at long-term care insurance?

Beyond some of the personal factors that you need to consider, there are some other issues to consider when trying to decide whether to invest in such a policy:

  • There are tax advantages to some long-term care policies. The federal government and some states let you count a portion of your premium as deductible medical expenses. Note: you must have a “tax-qualified” policy to qualify for this deduction, so make sure you ask your agent about this.
  • The National Association of Insurance Commissioners suggests that individuals should not spend more 5% of income on a long-term care policy. If the premium is going to be more than this, it might not be a good choice for you.
  • Some insurance companies offer a shared care option for couples that both have a policy. This means that you can share coverage and pull from your spouse’s benefits if you exhaust your own.
  • Some states offer state partnership programs that are meant to encourage individuals to purchase long-term care policies. If you purchase such a policy, it will make you eligible for Medicaid benefits sooner, protecting more of your savings.

Long-term care insurance policies are complex and vary widely. However, for some individuals they are a prudent way to prepare for the time in life when such care is needed. Before purchasing a policy, do plenty of research at sites like the American Health Care Association and Longtermcare.gov. It’s also a good idea to talk with a financial advisor to determine whether this is a good investment for you and your family.

Alliance America can help

An Alliance America financial advisor can assist you in maximizing your retirement resources and help achieve your retirement goals. Alliance America’s planning process is focused on personalized retirement income planning. As fiduciaries, our advisors are required to act in your best interest, and we are dedicated to helping you achieve the retirement lifestyle you seek. You can request a no-obligation consultation by calling 888-864-2542 today.

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