The idea of planning for one’s own incapacity is, for most people, frightening. Most people do not realize that long-term care (LTC) insurance offers good value. In contrast to the old nursing home policies that many of us still have in mind, long-term care insurance has evolved into a product that supports people staying at home, as long as it makes sense for the insured, or living in a facility when full-time care becomes appropriate. The majority of long-term care that takes place is not in nursing homes. Long-term care is defined as needing either assistance or supervision from someone when you are unable to care for yourself as a result of a chronic illness, physical injury, cognitive or mental impairment, or the mere aging process.
What Will Long-Term Care Insurance Pay For?
In addition to paying nursing home fees, long-term care policies can pay the following: homemaker and companion services, modest home renovations to facilitate handicapped living, adult day care, and assistance (either in the insured’s home or in a facility) with bathing, dressing, eating, continence, toileting, and transferring.
Unfortunately, it is difficult to decide if you need long-term care insurance and even harder to decide which policy is the correct one for you. If you’re looking into long-term care insurance, there are three major questions to consider.
Does LTC insurance make sense for your financial situation?
LTC insurance works best for people who have saved a good deal of money and do not want their financial stability threatened by nursing home costs. It’s also a good option for those concerned about leaving money to a remaining spouse or children.
Can you afford this type of insurance?
LTC insurance generally isn’t a good option for people with modest incomes or limited assets. If your assets will be spent down after nine to 12 months (at $2,000-$3,000 per month) in a nursing home, then LTC insurance probably isn’t the right choice.
Can you meet the eligibility requirements?
Most individuals between 50-79 years old are eligible for LTC insurance, but some policies have restrictions on pre-existing conditions, including age or previous medical ailments.
What Are The Types Of Long-Term Care Insurance Policies?
There are two types of long-term care services: skilled and non-skilled care. An example of a skilled care provider would be a therapist (physical, speech or occupational). An example of a non-skilled care provider would be a nurse’s aid or general caregiver. There are many different types of LTC policies, including:
- Indemnity policies, where individuals pay a fixed dollar amount for every day care is received.
- Policies that cover a fixed percentage of costs for care services.
- Policies that pay a dollar amount to cover actual charges for care.
Each of these types of policies has three basic options:
Daily Benefits are the amount of money received on a daily basis for care.
Benefit Periods are the length of time a policyholder receives payments when care begins. The most common options are two, three, four, five years, or a lifetime. (When considering benefit period options, remember that the average nursing home stay is three to five years.)
Elimination Periods (deductible) are the number of days a policyholder must pay for long-term care before the insurance company begins payments. While some policies feature one-time eliminations, many have periodic eliminations, which usually occur every 30-90 days.
Some policies include home health care coverage. While this allows more choices for receiving care, it also increases the monthly premium.
Often times, group employer offers may be somewhat limiting, as they do not offer some of the riders (like a survivorship rider) that are quite important. Because policies differ from one company to another, it is highly recommend that you look at several options.
When Should Long-Term Care Insurance Be Purchased?
As America’s population ages, more people are purchasing of long-term care insurance. Although many people don’t investigate long-term care insurance until later in life, the best time to purchase a policy is during middle age, because the cost of LTC insurance increases with age. The current trend is pointing to purchasing earlier rather than later—for instance in one’s 40s and 50s rather than at the more traditional purchase ages of 50s to 70s. Purchasing earlier rather than later not only captures a relatively lower premium, it also protects against the possibility of becoming uninsurable. Potential tax advantages support paying premiums when earnings are high, which is usually before retirement age. Furthermore, long-term care insurance can be an important complement to disability insurance.
Who Should Or Should Not Buy Long-Term Care Insurance?
Like so many things, this will depend on your personal feelings on the subject. It is more important for people who will not be able to self-fund long-term care. Obviously, the higher the net worth of an individual, the better chance that you can self-fund. However, high net worth people can purchase policies as well. Good policies will pay for caregivers at home so you can avoid the nursing home issue. If you have the financial ability to pay for your own long-term care expenses (i.e., self-insure) should it be necessary, you may not need to purchase long-term care insurance. A rule of thumb is to consider buying long-term care insurance if your net worth is between $150,000 and $1,000,000. This may be a broad generalization, but it points out that if you do not have much money, or you have ample wealth, you should not buy long-term care insurance. The principal reason to buy insurance is to cover catastrophic events. Normally, you should not insure items or events that you can pay for yourself. If you are able to self-insure by having sufficient funds to pay for long-term care expenses should the need arise, you can direct the funds that would be spent on the annual premiums elsewhere, such as building your investments.
Women are more likely to need long-term care than men for several reasons. First, women tend to have more chronic conditions like osteoporosis and arthritis, while men have more acute health conditions that often lead to quick death, like heart attacks. Secondly, women have a longer life expectancy than men. Finally, many times, women will marry men older than themselves. It is very common for women to care for their older husbands at home.
Cases where a long-term care policy may be appropriate:
- Those trying to protect themselves and conserve funds for their heirs;
- Couples where one spouse is unwell and wants to preserve funds for the healthy spouse;
- Executives in their peak earning years who have adequate disability insurance but not so much that they could pay for their own care in a nursing home and still maintain the family’s standard of living;
- Those worried about managed care and who do not want to pay out of pocket;
- Those able to afford the monthly premium;
- Those who want to ensure control over their assets and the quality of care received;
- Those who want to protect loved ones from the burden of providing direct long-term care, and/or
- Those who have an income too high to qualify for Medicaid, and do not want to spend down to meet the qualifications.
Cases where a long-term care policy may not be appropriate:
- Those who have few or no assets to protect;
- Those who have no heirs for their estates;
- Those who can not afford the monthly premium;
- Those already disabled or have serious health problems;
- Those who have an income level that meets Medicaid eligibility limits and are willing to spend down to qualify, and/or
- Those who have enough assets to self insure.
Deciding The Amount of Coverage
To estimate the amount of coverage you might need, investigate the cost in your area, or the area you intend to retire and live. How much coverage to purchase is a judgment call, but most people only insure a portion of potential expense. As you decide how much coverage to purchase, keep in mind that most of your income will still be available to pay for care. The amount you pay in income taxes will likely be partially available if you need care, as custodial care expenses are tax-deductible medical expenses to the extent that they exceed 7.5% of adjusted gross income. In full-time care, the result is that funds formerly used for income taxes are in effect often redirected to long-term care costs. Also, if you move to an assisted-living or nursing home facility, the proceeds from the sale of your home will be available to pay for care.
There is no way to accurately predict how much care a person will actually need. Statistically, the majority of long-term care is for less than five years.
What To Look For In Long-Term Care Insurance Policies
Insurance Company Rating
An evaluation of company strength should include the financial strength of the insurance company, a high rating by A.M. Best.
Benefits and Restrictions
Make sure you understand the conditions and benefits stated in the policy, as well as the elimination or waiting period.
The inflation protector increases the benefit from the first day of the policy, not from the first day that benefits are received. The usual inflation factor is 5% per year.
The Cost of Coverage
The cost of long-term care is a function of age, health, coverage options selected and amount of coverage for each of the options selected. Costs also vary depending on geographical location. Premiums increase with age and also vary by health status (usually not by gender). Buying coverage earlier rather than later not only captures a relatively lower premium, it protects against the possibility of becoming uninsurable.
Examples of costs*:
- At today’s costs, the minimum cost of LTC for a couple, receiving five years of private long-term care each, will be between $254,000 and $735,000.
- In 15 years, the minimum cost of LTC for a couple, receiving five years of private long-term care each, will be between $527,000 and $1,500,000.
- In 20 years, the minimum cost of LTC for a couple, receiving five years of private long-term care each, will be between $671,000 and $1,900,000.
- In 30 years, the minimum cost of LTC for a couple, receiving five years of private long-term care each, will be between $1,095,000 and $3,100,000.
*Numbers reflect ranges, based upon the average cost of care in various areas across the country. The actual numbers in your area may vary. (Henssler Norton Insurance)
A person can buy inflation protection by purchasing an inflation rider that will make the benefits grow. Premiums are not scheduled to increase from year to year; however, there are strong inflationary pressures in the insurance industry. Insurers do have the ability to raise rates by class of insureds; therefore, insured persons should anticipate the possibility of a price increase during their lifetimes. Policies are guaranteed renewable. Once you are insured, the company cannot change the benefits.
Medicaid pays the majority of long-term care cost after you have spent your assets and meet strict income criteria. After Medicaid, the next largest payer of long-term care is the individual that pays for long-term care from personal assets.
There are some potential income tax-advantaged ways to purchase long-term care insurance. There is no tax liability on the benefit payments. Usually, there is a waiver of premium once care begins and a spousal discount for couples.
The smallest tax advantage is that premiums can be deducted as a medical expense on Schedule A, of your federal tax return. The premiums must exceed 7.5% of adjusted gross income and after being capped by the IRS maximums. These IRS maximum figures are adjusted annually. Premiums may be also be deductible in full or in part on your state income tax return.
There are means of deducting premiums for people currently employed, depending on the type of firm. For example, sole proprietors and partners can get full deductibility of premiums if they offer coverage as an employee benefit to their staff and have their spouses employed in the business. C corps can deduct premiums paid in full as ordinary and necessary business expense.
LTC premiums can be paid from an HSA. However, you cannot deduct them on your Schedule A if you pay premiums from a HSA.
When deciding about LTC insurance, it is important to gather as much information as you can. You should investigate multiple policies and state regulations, make a list of questions, and visit a licensed insurance or financial professional. Be sure to have your questions answered by a professional who is not promoting the policy before purchasing LTC insurance. In addition, some assistance can be found through the local Area Agency on Aging. A well-structured policy will serve as a valuable asset-preservation tool, as well as provide peace of mind. Long-term care insurance, while still evolving, can offset the costs for care associated with an accident, illness, or the aging process. It is part of the standard insurance coverage that an individual should consider to prudently manage personal finances.
If you would like more information on long-term care insurance, call the professionals at Henssler Norton Insurance at 770-429-9166. As an independent insurance agency, their agents can quote your long-term policy with several different providers, ensuring you get the best combination of value and appropriate coverage.