A fact of life: Someday you may need long-term care.
That means you might need help at home with such basic daily activities as bathing, dressing and eating; community services like adult day care and transportation; or ongoing care in a nursing home, assisted living residence or other facility.
One option to pay for such services is long-term care (LTC) insurance. But before you sign up for a policy, you have a lot to learn. The market has changed greatly in recent years.
Most notably, many of these policies have gotten more expensive for both new and existing policyholders, and the options have changed. More people are choosing policies that combine long-term care with other benefits.
Here’s what you need to know.
Why plan for long-term care?
About 49 percent of men and 64 percent of women reaching age 65 today will need significant long-term care during their remaining years, according to a 2022 study from the federal Department of Health and Human Services (HHS). About 14 percent will need more than two years of paid care and the average cost will be $120,900, HHS says.
But individual costs will vary greatly, depending on how long you require care, where you live and how intense your needs are. The ways to pay for services vary too.
Traditional Medicare, the public health insurance program for people 65 and older, doesn’t cover long-term care beyond some skilled care right after hospitalization for an injury or illness.
Veterans may access long-term care through the U.S. Department of Veterans Affairs.
Some may qualify for help through Medicaid, the joint federal and state program that covers low-income Americans. Although income limits vary by state, you typically can’t get Medicaid unless you have exhausted most of your savings and other assets beyond your primary home and vehicle.
Who pays for long-term care?
Confusion about who pays is common: Nearly half of adults age 65 and older incorrectly think Medicare would pay if they needed a long stay in a nursing home. In the same survey, 90 percent of adults said paying for one year of nursing home care would be impossible or very difficult for them or their families.
The gap between potential needs and ready money is where long-term care insurance comes in. But it’s not the only solution.
“Everyone needs a long-term care plan,” says Ryan Graham, a managing adviser at Altfest Personal Wealth Management in New York City. “That doesn’t mean everyone needs long-term care insurance.”
What is a hybrid policy?
The majority of long-term care policies sold since 2010 combine coverage for long-term care with another benefit, usually life insurance or, less often, an annuity, according to the Congressional Research Service. These are known as hybrid or linked-benefit policies.
While in some cases, you’ll pay an ongoing monthly premium for such policies, many work like this: You pay one lump sum or a fixed amount broken into several annual payments, eliminating the risk of rising premiums.
In return, you get long-term care coverage, along with some amount of life insurance that will go to your heirs if you never use the long-term care benefits. The life insurance payout is reduced or eliminated if you do use long-term care benefits.
The policy may also allow you to take back your full payment within the first few years if you decide you no longer want the coverage.
The hybrid policies “address a nagging concern for a lot of people, … which is that I could pay into this thing for years and never need it,”. One way or another, you get a benefit. But that guarantee costs you. Hybrid policies are more expensive than traditional, and the life insurance payouts tend to be modest unless you attach long-term care to a larger, more expensive permanent life insurance policy,
How does long-term care insurance work?
LTC policies may limit what conditions they cover. For example, denying care for alcoholism, drug addiction or war injuries is not unusual.
A preexisting condition, such as heart disease or a past cancer diagnosis, may not stop you from getting a policy. But the policy may not cover care related to that condition for some period after it goes into effect.
Generally, you are eligible for benefits once you can no longer perform a set number “Activities of Daily Living – such as bathing, dressing, eating, using the toilet, getting in and out of bed and chairs, and managing incontinence — or become cognitively impaired.
One more hurdle to clear: a waiting period that starts when you first need or use care. Benefits most commonly start after 90 days, but you might pay higher or lower premiums to adjust the waiting, or elimination, period.
Once coverage kicks in, it’s typically capped at a certain amount daily or monthly, up to a lifetime maximum or a certain number of years. Different amounts may be allowed for care in your home, a nursing home or elsewhere.
The bumpy history of long-term care insurance
The earliest LTC insurance policies, sold in the 1980s, covered only nursing home care. But through the 1990s and early 2000s, insurers started covering home care services, assisted living, adult day care and other options. Some promised lifetime benefits.
Insurers underestimated how much they would pay in claims and overestimated how much they would earn in investments. The result: They got into financial trouble and, with the permission of state regulators, substantially raised premiums on existing customers.
Many companies stopped selling traditional long-term care insurance. Just a few companies sell the policies today with more limited coverage periods at higher prices.
Historically, 70 percent to 80 percent of people with traditional policies have seen premium increases. Companies selling newer policies have retooled them to avoid repeating that history.
What to know if you have a policy
People who already own traditional policies should know that if they face a premium increase, they have options. One possibility is to pay the increase and keep the benefits you signed up for — an often-attractive choice for people who can afford the price hike and have generous older policies.
Another option is to accept reduced benefits at your old premium rate. Dropping a policy and seeking out new coverage when you are older and less healthy will almost certainly cost you more, experts say. As long as you keep paying, insurers can’t legally drop you.
Your overall financial condition. Some people will look at their assets and spending and decide they can cover long-term care without insurance. Some may plan to sell a second home, downsize from a family residence or get a reverse mortgage to cover such expenses, according to advisers.
Others may set up a longevity fund to cover not only long-term care but also all the costs that come from living longer than average. One advantage of self-funding: total flexibility in how you spend your care dollars.
The full range of insurance options. Talk with agents authorized to sell policies from multiple companies and with financial advisers who can put your options into the context of your overall financial plan.
Your age and health. The older you are when you buy long-term care insurance, the more it will cost. Health problems also will make it more expensive or, in some cases, impossible to get coverage.
Turndown rates rise steeply with age. If you already have memory loss or trouble with daily self-care, you are unlikely to qualify.
In general, traditional policies have more stringent health requirements than hybrid ones. While experts used to suggest shopping for long-term care insurance by your early 60s, many now suggest starting in your 50s or even your late 40s.
Ways to pay for your policy. You may be able to cover premiums, tax-free, with money from a health care savings account, available only to consumers in certain health plans. Or you can explore the tax advantages of exchanging an existing life insurance policy or annuity for a long-term care policy.
Other options. Group policies offered through employers may be more affordable than individual policies, particularly if you have health problems. Buying individual policies as a couple, rather than as a single person, often reduces premiums. Couples also may qualify for “shared care”: If one of them exhausts their pool of benefits, they will be able to draw from their partner’s pool.
And in most states, you can shop for a limited number of policies that participate in partnerships with the state’s Medicaid program. These partnership policies will allow you and your survivors to keep more of your assets if you ever need Medicaid. The protected amount is based on what your policy has already paid for your care.
Content provided by AARP
