Over half of all 65-year-olds will need long-term care at some point during their lifetimes. Long-term care needs often last up to two years or longer and costs often approach six figures annually, so long-term care can be a significant expense — the type of expense that drains your savings if you’re not covered.
Last posted by Eric Huffman | benzinga
Because long-term care insurance provides for many medical-related services, the cost of coverage has increased steadily in recent years and many insurers have left the long-term care insurance market.
Some life insurance providers now offer a hybrid policy that provides both a death benefit and living benefits that can be used to cover long-term care needs. You won’t find long-term care benefits with an inexpensive term life policy, but a whole life or universal life policy can be structured as a hybrid and serve as part of a comprehensive estate planning strategy.
What is Long-Term Care Insurance?
Long-term care refers to a broad range of services that may include both medical-related care and non-medical care. Services might include in-home care, nursing home care, hospice care or assisted living facilities. Homemaker services and personal care services are also covered.
Medicare helps cover the cost of many health and wellness expenses but does not cover long-term care expenses if custodial care or daily assistance is the only care you need.
Who Needs Long-Term Care Insurance?
Middle class households are the most vulnerable to the costs of long-term care and could benefit the most from long-term care insurance. Without coverage, a lengthy long-term care stay could force the liquidation of savings and investments or even the sale of your home.
Medicaid can assist with the cost of long-term care services. However, you must pass financial litmus tests to qualify and assets, including savings, stocks and bonds, vehicles, real estate and home equity generally need to be liquidated before Medicaid becomes an option. Medicaid can provide coverage in many cases of low-income households who don’t have significant assets or home equity.
If you have significant assets that can fund up to $100,000 per year for up to three or more years, long-term care insurance is optional, but be aware of the potential costs of care as you plan for retirement.
How Does Long-Term Care Insurance Work?
Long-term insurance policies help cover the cost of care from approved services or facilities if you are unable to perform two or more of the daily living activities:
- Transferring (moving into or out of a chair or bed)
- Maintaining continence
Additionally, many long-term care policies cover claims due to Alzheimer’s disease or cognitive disability.
Which Factors Affect Long-Term Care Insurance Cost?
A number of factors can affect the cost of your policy, some of which are actionable or based on the options you choose, and some of which are determined by market forces.
Rates are lower when you’re younger and in good health. While this may mean you pay premiums for a longer time period, you usually earn a much better premium that’s easier to sustain after retirement when income is limited.
By contrast, waiting until later in life can result in higher premiums based on higher risk and as common illnesses start to become more problematic. It should be noted, however, that rates are not guaranteed and can increase even if you bought your policy when you were younger.
Much like life insurance, long-term care insurance rates are affected by your health and medical history. An applicant in good health can expect a lower premium than an applicant with several health conditions, assuming all other factors are equal.
Long-term care insurance isn’t a lifetime policy. The coverage length (beginning with the first claim) ranges from one to five years, and longer policies often have higher premiums.
Many policies don’t provide coverage from day one. A waiting period (also called an elimination period) of 90 days or 120 days is common.
Any expenses you incur during this waiting period aren’t covered. In effect, the waiting period works like a deductible in other types of insurance. Expect lower premiums for policies with a longer waiting period.
Long-term care premiums are invested in safe investments before the reserves are used to pay claims. Because these investments often provide a lower return when interest rates are low, premiums to the consumer increase – but not proportionately.
A 1% point decrease in interest rates may lead to a premium increase of 10% to 15% for new policies. Interest rates are on the rise but are still near historic lows, making long-term care insurance a pricey purchase for many households.
Policy Coverage Limits
As you might expect, a policy with a higher coverage limit or a higher daily coverage limit commands a higher premium than a basic policy that may create more financial exposure.
Similarly, benefit periods may also be limited, meaning the policy only covers costs for a fixed amount of time.
If you own a policy for decades, what seemed like a reasonable coverage limit when the policy was purchased may not be enough to cover the rising costs of long-term care needs a few decades later.
A policy with inflation protection provides a better safeguard — but at a cost.
You may qualify for a discount if you buy more than one policy. Many insurers offer discounts of up to 30% if a couple purchases coverage together.
How Do Hybrid Life Insurance or Long-Term Care Insurance Policies Work?
While there are fewer companies writing long-term care insurance policies now, life insurers have entered the fray with a hybrid product that combines permanent life insurance with long-term care coverage. These hybrid policies make the death benefit or a portion of it available for some long-term care needs. The idea isn’t entirely new. Many life insurance policies have made accelerated death benefits available for some time to address the costs associated with critical illness.
Notably, hybrid life insurance policies with a long-term care rider don’t have a waiting period and can feature fixed premiums, whereas a dedicated long-term care insurance policy can become more expensive over time.
Additionally, if you never need the long-term care coverage, your policy works as a permanent life insurance policy and provides a death benefit for your beneficiaries. By contrast, with a long-term care insurance policy, if you never need long-term care, the insurer keeps the premiums you’ve paid and you get no benefit.
One limitation of hybrid life insurance policies is that the IRS limits the amount of the policy’s death benefit that you’ll have available for long-term care expenses each month.
Another product with a similar goal combines an annuity with a long-term care rider.
How Much Long-Term Care Insurance Do I Need?
You don’t necessarily need to purchase a large amount of coverage if you have significant savings. Some households choose a lower coverage amount expecting to cover some of the costs out-of-pocket if long-term care is needed. Here are some quick facts:
- The median cost of a private nursing home room is nearly $100,000 per year, and some states, like Connecticut, average nearly $150,000 per year. Texas is less expensive, at under $80,000 per year for a private room.
- A semiprivate room doesn’t cost much less than a private room, and the national median annual cost comes in around $85,000.
- The average length of years men will require long-term care is 1.5 years, while the average is 2.5 years for women.
- You can expect an annual cost of up to $100,000 per year for a length of about two years, on average, or about $200,000.
What to Look for in Long-Term Care Insurance
There are fewer long-term care insurers than in the past, which suggests that caution is important. You’ll want to choose an insurance provider that is financially strong and will be there when you need to make a claim.
Available options are also a strong consideration. There are a lot of adjustments you can make to a policy to make it more affordable, but some choices can work against your best interest, like choosing a policy with only one year of coverage or a one-year waiting period. Long-term care needs that extend beyond one year last an average of over four years.
Unless you’re in a strong cash or income position, these limitations can create a massive coverage gap. Look for a company that offers options to cover your financial exposure.
Also consider companies that offer a waiver of premium, which eliminates ongoing premium payments once a claim is approved. A “shared care” rider is another attractive option because it allows you to pool coverage for two people. If benefits from one of the individuals insured run out, the remaining pooled benefits are still available.
Original article can be found here.