Do you need long-term care insurance (LTC) or custodial care insurance? This is a question that everyone needs to be asking themselves when they are younger and in relatively good health. Because the question is most likely not if you will need LTC but when and for how long. And when that happens, the $64,000 question is will you be able to afford the LTC you need? In this post, we will examine some of these issues and take a look at what LTC care is and what its costs are.
What is Long-Term Care?
Many people think that when they turn age 65 that Medicare will handle their potential LTC needs. This assumption could not be further from the truth as Medicare is an insurance that covers medical issues only, not LTC. So, what is LTC? LTC is the care someone requires when they cannot perform certain daily living activities such as being able to dress, feed oneself, or is not mobile. In these instances, Medicare or other health insurance policies will not assist in the care you or a loved one needs. Typically, one would need LTC due to a prolonged illness, a serious injury that resulted in the need for LTC, or in most cases, the onset of dementia or Alzheimer’s. According to several studies, approximately 70% of people age 65 can expect to use some form of LTC during their lives. A portion of this that most do not realize is that 40% of users of LTC are under the age of 65.
Features of LTC Most Plans
LTC insurance is fairly complex, and often the policy will have many different features and rider that may or may not be included. It is best to read and ask questions when looking into LTC policies as they may seem similar but, in reality, be very different. But most policies will cover the need for the insured to reside in a LTC facility or more commonly known as a nursing home. The care you receive in these facilities, while it may have a medical component, is centered around caring for one’s daily needs, but it does offer the most skilled assistance of the options. When the insured is no longer able to be cared for in their home, an assisted living facility is one option. Here one can expect limited custodial care and a social component to the facility. If someone is cared for at home, but for some reason, there is a period where care is needed, adult day care may be an option. Here someone can be brought to a facility for a set number of hours for care while the primary caretaker is unavailable. But if the person can live at home but requires care, these policies will also pay for care in the home of the insured to limit the disruption in their lives.
Some other features that you may want to be aware of or consider when purchasing a policy are that they are portable, meaning they are good in any state where you need assistance. Some companies offer discounts if you and your spouse obtain coverage simultaneously, often up to a 30% discount. The discount will vary from insurance company to insurance company, so make sure you check with them before purchase. But regardless of other things, as with life insurance, the financial stability of the issuing company is extremely important as the payout may not be for decades. Premiums paid for LTC insurance may be deductible on your income taxes, provided they combined with other unaccounted for medical costs exceed a percentage of your income. And finally, try to ensure that your premiums are waived in the event you utilize the policy for care.
What to Consider in a LTC Policy
One of the first things you will have to consider when purchasing a LTC policy is the benefit amount. Generally speaking, in most LTC policies, you will be purchasing coverage for a certain number of years. Typically, policies are good for one to three years, where older polices were for up to five years and even for the life of the insured. These longer coverage periods proved to be extremely expensive for insurance companies, and they have reduced most to a maximum of three years for today’s purchaser. In addition to the limitation of the number of years it will pay is the amount in dollars that you can expect the insurance company to pay. I recently purchased a two-year policy that will pay up to $250 a day or $146,000 over the two years. According to many studies, the average cost of LTC is approximately $200 per day. An important rider that needs consideration is obtaining an inflation protection rider meaning your benefit will increase as inflation does. Most policies will offer a 3% rider, and some older policies offered a 5% rider, which many have dropped, again due to the costs associated with maintaining the policy.
The final thing that needs consideration when purchasing a LTC policy is the elimination period. This is how long you will be responsible for paying for your care before the LTC policy will begin to pay benefits. In the policy, I purchased a 90-day elimination period meaning I would be responsible for paying the first 90 days of my care needs. An elimination period is comparable to the deductible with your car insurance. The longer the elimination period, the lower your premium will be. So, if all things are equal in a policy, someone with a 30-day elimination period would pay more than someone with a 90-day elimination period. Just like with your car, a $250 deductible is more expensive than a $1,000 deductible. Here the key is to ensure you purchase a policy you can afford while minimizing the costs to you. Risk management is what these and all insurance policies are about.
Long-Term Care Insurance, like many insurance policies, is one you purchase and hope you never have to use. But as alluded to previously, it can be costly not to purchase unless you plan on self-insuring the costs associated with LTC. Unless you can afford upwards of $80,000 annually for what could be multiple years, you may wish to consider LTC insurance. But do shop around and compare policies from one insurance company to others. But make sure you compare plans that are the exact same as otherwise, you will not be doing a good job with your comparisons. A feature that some companies offer is where they will pay a designated beneficiary a portion of the premiums paid if the policy is not used for the insured.
Like many aspects of our financial lives, LTC is but one piece of a puzzle that needs examination in its entirety for proper financial planning. If you have questions about LTC, I suggest contacting a LTC insurance specialist after consulting with a fee-only Registered Financial Consultant to see what the policy would need to include to be an effective tool in your financial planning.
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