What is long-term care insurance?

The phrase “long-term care” encompasses a variety of services intended to improve the quality of life of people with chronic illnesses, disabilities, or debilitating injuries. Providers of long-term care help their patients maintain a certain level of independence by assisting them in accomplishing daily activities, like bathing, eating, or dressing, over short or long periods of time. These services can be provided at the patient’s home, or in a nursing or assisted living facility.

While people of all ages may require long-term care for various reasons, it is most commonly utilized by seniors. It is estimated that 70% of people over the age of 65 will need some kind of long-term care over the course of their lifetime.

Here is a breakdown of a few of the most common long-term care costs seniors incur as of 2016:

  • The median annual cost of a private room in a nursing home is $92,378
  • The median annual cost of an in-home health aide is $46,332
  • Premiums for long-term care have historically risen about 2-4% per year for people in their 50s and 6-8% per year for people in their 60s; but the rate can be higher

These costs are typically not covered by employer-based health plans, and while Medicare does cover short-term hospital stays, it will only cover at-home care in rare and very specific circumstances.

For these reasons, many people consider purchasing long-term care insurance as they get closer to retirement age, especially if they do not have friends or family members who can help with any potential long-term care needs in the future.

There are a lot of factors to consider before you buy, so let’s start with the basics.

Coverage

Most long-term care insurance policies are comprehensive, covering a range of services in a setting of your choice. Insurance policies will refer to different types of care as skilled or non-skilled.  It’s easiest to think of skilled care as medical care—typically delivered at home or in a nursing facility. This might include rehabilitation, medication administration, and other therapies.

Non-skilled care is assistance with activities of daily living that can include bathing, feeding, and getting around the house. Some policies may also include coverage for services like meal prep, housekeeping, or home modifications.  

Costs and Considerations

As with most insurance policies, it’s important to find the right set of benefits to match your needs. Policies will define when coverage can begin, how long coverage can last, and the types of services covered. Policies will often have an elimination period, which acts like a deductible that’s defined by a number of days instead of dollars. Most policies have an elimination period of 0-100 days. Similarly, policies will have a defined daily coverage limit that you can choose when purchasing the policy. Policies will also pre-determine how long coverage can last; typically, companies offer 3-, 5-, or 8-year policies. On average, people need long-term care assistance for 2-3 years, but your own personal circumstances should be taken into account when evaluating and comparing policies.

Choices about coverage length, elimination periods, and daily limits will all influence the monthly premium cost. People who choose to buy a policy at a younger age will generally have lower premiums than those who buy later. Premiums vary due to health status and age, but the average premium in 2016 was $2,480/year.

When considering how your long-term care premiums will fit into your budget, be sure to think about the long term rather than the short term. If your premiums become unmanageable in the future, and you have to forfeit your coverage, you will have essentially wasted all of the money you had previously invested in your coverage.

Choosing a Policy

Some companies offer long-term care policies as a benefit to their employees. When offered as a group policy through an employer, medical underwriting is usually not required. In most cases, when you leave your employer, you’ll have the option to retain the plan.

For individuals, long-term care policies typically require that you go through underwriting, meaning applicants must go through a medical review. Any pre-existing conditions found will likely not be covered, and applicants must meet certain criteria (such as not being able to perform certain key daily living functions) before their benefits kick in. Be careful in reviewing these criteria as they can vary between policies; performing an activity with or without supervision can be a key distinction for people with cognitive impairments.  Many policies also have certain diseases or conditions that they do not cover, so be sure to review those conditions before purchasing, as well.

Once you’ve purchased a plan, it is guaranteed renewable, meaning it cannot be canceled as long as you pay your premiums, regardless of age or health status. Most policies will include a nonforfeiture option that offers some minimal coverage if you can no longer pay your premiums. Some states require nonforfeiture provisions, so check with your state’s insurance department. 

A Changing Market

Long-term care insurance has been undergoing significant changes in recent years. Policy sales have dropped precipitously in the last 15 years, with only 89,000 policies sold in 2016. Large insurers have had to impose steep premium hikes to cover costs, and a large carrier went out of business in 2017. Some people are choosing to include long-term care provisions in life insurance policies or annuities rather than buying them separately. This has left many wondering whether it’s worth the investment of thousands of dollars and the risk of forfeiture at some point in the future.

Deciding whether long-term care insurance is good fit for you and your family will depend on your individual situation. The American Association of Long-Term Care Insurance is a good source of additional information if you’d like to learn more.

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