Long-Term Care Insurance: Solution for Shielding Assets

As the cost of long-term care services continues to outpace the U.S. inflation rate, even affluent Americans are concerned about affording such care in their later years. One annual study found that the median cost of a private room in a nursing home now exceeds $100,000 a year. Further, nearly half of current retirees worry that they will not be able to afford long-term care costs.

One potential solution to this common concern is long-term care insurance, particularly for individuals who have assets they want to protect.

The Evolution of Long-Term Care Insurance

Long-term care has evolved over time to better serve the needs of older Americans and those with disabilities.

In the 1950s and 1960, long-term care was synonymous with institutional—i.e., nursing home—care as families looked for care options outside the home. Services were funded largely by state and federal governments.

In the 1970s and 1980s, home and community-based services emerged. Changing needs and affordability issues caused the market to react with a new type of insurance that focused on providing targeted assistance with activities necessary for daily living.

From the 1990s on, long-term care has become a standard financial planning tool for individuals and families. Today, more than seven million people are covered by long-term care policies, which offer a wide array of services and service settings including home health care, respite care, hospice care, services provided in assisted living facilities, adult day care centers, and other community facilities.

And the evolution continues. As the U.S. population ages, the need for long-term care services will undoubtedly rise. Some 350,000 Americans purchased long-term care protection in 2018, yet just 16% of those policies where traditional, standalone LTCI. The vast majority (84%) of products sold were so-called “combo” or “hybrid” policies which include a blend of life insurance and/or annuities with long-term care protections. (Contact your financial advisor for more product specifics.)

Justifying the Need

Why might you consider long-term care coverage?

First, there is the potential need for it. According to the U.S. Department of Health and Human Services, on average, individuals who turn 65 today have a 70% chance of requiring long-term care at some point in the future.

Second, is the potential risk to your finances. For the most part, long-term care services are not covered by Medicare, Medicare supplemental, or standard health insurance policies. Further, in order to qualify for services that are covered by government programs, individuals generally must meet stringent financial eligibility standards that require them to deplete nearly all of their personal assets and property paying for care. That leaves most individuals with two options: pay out-of-pocket for services rendered or purchase a long-term care policy.

Before you begin comparing policies on a feature-by-feature basis, it is important to understand some of the basics.

What Long-Term Care Insurance Is – and Is Not

Long-term care insurance is not life insurance, disability insurance, or health insurance. Instead, long-term care policies cover a range of nursing, social, and rehabilitative services for people who need ongoing assistance due to a chronic illness or disability. Long-term care insurance can be used by anyone at any age who suffers an accident or debilitating illness, but it is most frequently used by older adults who need help performing one or more basic activities of daily living, such as bathing, dressing, and eating.

Policy Structure

Most long-term care insurance policies are classified as either “reimbursement” or “indemnity” policies. In general, reimbursement policies pay for actual expenses incurred and limit payment to those expenses stated specifically in the policy. Indemnity policies typically pay a fixed dollar amount directly to the policyholder each month and do not require bills or receipts to be submitted as documentation.

Since premiums increase depending on your age, the younger you are when you purchase a policy, the less you’ll pay overall during the life of the plan. Using industry data as an example, in 2019, a single 55-year-old male would pay an average annual premium of $2,050 for a traditional long-term care insurance policy, a female would pay $2,700 annually, and a couple would pay a combined total of $3,050.

Your Long-Term Care Insurance Shopping List

Here is a partial list of “must-haves” that insurance regulators and industry overseers recommend that you focus on when evaluating policies.

• Reputation and rating of the insurance company – Make sure the insurance companies you consider are licensed in your state and carry favorable financial ratings from respected credit rating agencies such as A.M. Best, Standard & Poor’s, and Moody’s Investors Service.
• Maximum benefit payout – How much will the policy pay per day or per month for care? You can choose the level and frequency of benefit when you enroll. Benefit amounts can vary significantly depending on the insurer and the policyholder’s unique circumstances. Typical benefits might range from $50 to $500 per day; $1,500 to $10,000 per month.
• Waiting or elimination period – How long must an insured person wait before he or she can begin receiving benefits? Again, this feature is typically determined by the policyholder at the time of purchase. Waiting periods can range from 30 days to a year, during which time the full cost of any long-term care services used will be paid by the policyholder. The longer the waiting period you select, the lower your premiums will be.
• Inflation protection – A must to ensure benefits keep up with rising care costs. This is especially important if you are on the younger side when you buy a policy that you may not use for 20 years or more. With an inflation rider, maximum daily/monthly/lifetime benefits increase a fixed percentage every year for a predetermined number of years.

Given the likelihood of eventually needing some form of extended care services, long-term care insurance may provide the asset protection many middle and upper-income individuals seek. Because of the many, complex variables involved it is important to do your homework before shopping for a long-term care insurance policy.