There are many misconceptions and misunderstandings about long-term care (LTC), including who needs it and how to pay for it. It’s essential to break down the main components of long-term care insurance to find what is right for you.
What does long-term care mean?
If you’re already on Medicare or researching it, you know that Part A covers in-patient hospitalizations and skilled nursing. You might be wondering why people buy policies to cover LTC if Medicare already pays for it.
But Medicare does not pay for LTC, which is not skilled nursing. It’s home help for someone who can’t perform several of the Activities of Daily Living (ADLs) for themselves: toileting, transferring (for example, from bed to chair), dressing, bathing, feeding, and walking or ambulating. You might also see these referred to as the Basic Activities of Daily Living or BADLs.
Patients can receive LTC in a facility such as a nursing home or their own homes.
Why should I consider setting aside funds to cover long-term care?
According to the US Department of Health and Human Services, if you’re approximately retirement age now, you have a 70% chance of needing some LTC. About 1 in 5 of those who will end up receiving long-term care will need it for more than five years.
Depending on how long you need it, the expenses quickly add up. LTC’s costs range from $3,600 per month for someone who is mostly independent in a facility to about $7,700 in a nursing home.
Home health care aides cost approximately $21 per hour on average. The average American who needs this help during the day would spend roughly $5,000 a month. Whether in a facility or at home, typically, women need care for a more extended period than men do.
It costs a little bit more than average here in California to receive LTC in a facility. The median cost for help with assisted living is about $4,500 and goes up to over $10,600 in a nursing home.
Some families are willing to self-insure or pay out of pocket should they ever need this kind of assistance. Family members can also provide care, which reduces the cost as well.
However, some people would prefer to be independent for as long as possible. They’d rather hire someone outside the family to help them go to the bathroom or get dressed.
Those who choose to hire for this type of care often want to set aside funds for this purpose. They don’t want to be a burden on their loved ones.
Long-term care insurance (LTCI)
These policies pay a certain amount for a specified period if a doctor diagnoses the insured as unable to perform two or three ADLs, depending on the policy.
Unlike life insurance, there is no medical exam for LTCI. However, the companies use questionnaires, and you may respond with answers that disqualify you. For example, they will typically reject people who are already showing symptoms of cognitive issues such as Alzheimer’s and dementia.
Although LTCI has been around here in the US since the 1970s, Americans started to purchase them in the 1980s. The insurers at that time made two significant errors in their pricing.
They didn’t know how fast the cost of health care would accelerate (faster than CPI inflation) and didn’t realize how much longer people would live. These factors led to substantial underpricing on the policies, and in some cases, the insurers even refused to pay for legitimate claims.
As a result, fewer insurance companies are in the market for LTCI today. However, policies still are being sold.
The contracts usually stipulate limits on lifetime benefits paid out, the monthly maximum, and potentially a deductible. They also offer inflation riders for additional fees. Most policies today don’t discriminate between facility or in-home care.
Ways to purchase LTCI
The original policies were usually use-it-or-lose-it. If you paid for the policy and never required the care, you couldn’t get a refund. Though so much of the population is likely to need it these days, it might not be such an issue for potential buyers.
Anecdotally the “sweet spot” for purchasing such a policy was around 55 years old. You wouldn’t have too many years of payments if it turned out you didn’t need it, and you were still young enough that some of the disqualifying medical conditions probably hadn’t appeared.
These contracts are still available, though their popularity has dropped sharply. Premiums can undergo rate hikes at any time in the future.
The insurance company can’t increase the amount you pay just on your policy, but it can raise the premiums on the entire class of people who purchased the same insurance as you. They now have other premium payment options, so you don’t continue to pay for life.
Rather than take a use-it-or-lose-it policy with the potential for future premium hikes, some LTCI users purchase a hybrid product. These can be life insurance or annuity products that also allow you to use the money for long-term care.
In the hybrid with life insurance contracts, typically, the cost of whatever care you use is deducted from the face amount that’s payable at death. Different companies offer different ways to structure the policy.
When you combine LTCI with an annuity, you usually need to purchase the annuity with a lump sum. There are no premiums for the LTCI, and what you’ll receive is based on how your insurer sets up your contract.
Although the hybrid products are often more expensive than a plain-vanilla life insurance or annuity policy, they can be a good alternative. Especially for someone who suspects they may need the care but is not interested in a stand-alone policy they might not use.
No matter what type of long-term care insurance you buy, make sure that you understand what triggers a claim and what the policy promises to pay.
If you’re considering LTCI, make sure you check with your company, associations, and groups. Some offer group LTCI plans with relatively attractive premiums.
If you want help determining whether you need to buy some LTCI, give us a call at 619.255.9554 or email us to set up an appointment.