Continuing over the next decade, approximately 10,000 baby boomers will become of retirement age every day and approximately 70% will most likely require long-term care. The result of so many seniors retiring has been a sharp increase in the cost of long-term care (“LTC”) insurance. Over the past few years, the cost for long-term care saw annual increases of 4.5% and climbing. LTC costs have left many seniors wondering how they will pay for it if needed.
Will Long-Term Care be Needed?
Let’s begin by understanding what long-term care is. LTC is not traditional healthcare but care that assists with the activities of daily living.
Activities of daily living include:
• Eating: Able to feed oneself
• Bathing: Able to bath/shower, brush teeth, and groom
• Getting Dressed: Able to dress and undress
• Mobility: Able to sit, stand, and walk
• Continence: Able to control bladder and bowel functions
Traditionally LTC services have been provided in nursing homes or assisted living facilities, however, in recent years, many seniors choose to have care administered in the home.
The question becomes, should you purchase a LTC insurance policy? Let’s consider some questions that should be asked when considering this coverage. If you believe that you will most likely need LTC, the most fundamental factor is your income. If you are currently receiving Medicare benefits or would qualify for Medicare, then it is probable that a LTC policy may not be cost prohibitive. However, if you qualify for Medicaid as senior that may help pay for the cost.
When is the Right Time to Purchase LTC Insurance?
As with most insurance, the rule of thumb is that the younger you are, the lower the premium. However, the number of extra years you are paying the premium may not save much and you may possibly pay more overall. There are limitations in many states regarding purchasing LTC insurance before you are 30 years old or after 75 years of age. The average age for people to begin looking into LTC coverage and purchasing a policy is in their mid-50s. The reason for this is to try and find the right time to purchase a policy based on premiums. If you buy too early, you may pay too much, and if you wait until you are too old, the premiums may be too expensive, or you may be denied because of your health.
Whether you decide to purchase earlier or later, there are two factors to consider. Medical history and sex. Females will most likely pay more than males due to their longer life spans. Because of this, you might consider purchasing an LTC policy later on in life. Conversely, those with a history of medical conditions and/or family disease will likely undergo testing by the insurance company before being approved for coverage. If you have any long-term illness, you will potentially be denied coverage.
Tip: If there is any family history of disease in your family, it is recommended you get coverage when you are younger.
How Much Does LTC Insurance Cost?
As mentioned earlier, LTC insurance can be expensive and continues to increase annually, often faster than inflation. Currently, the cost of private rooms at an assisted living facility and private nursing homes will average about $45,000 to $90,000 per year, respectively. Cost of care is the primary driver of the expenditure of LTC policies and why most people decide not to purchase LTC insurance.
How do LTC Insurance Policies Work?
One of the major factors contributing to the cost of your policy is the amount of time you are covered, which is also known as “the benefit period”. Benefits are often paid out as a daily benefit, typically about $150, or paid monthly ranging from $1,500 to $3,000 per month. The longer your policy covers you, the more benefit value your long-term care policy pays, which will could also result in higher premiums.
The typical benefit period has been three years. Studies show that about two-thirds of Americans will need LTC for less than two years, and about 40% of those who enter nursing homes are there for less than three months. This means that most Americans are purchasing too much insurance, i.e., too long of a benefit period and are therefore paying too much for their policies. Many people decide against purchasing LTC coverage due to the cost, not realizing that they could pay lower premiums by reducing the benefit period.
Another driver of cost is the amount of time you have to wait before your benefit period begins. This is known as “the waiting period” or “elimination period”. This is essentially a form of self-insurance where during the elimination period, you pay for your LTC out of pocket. The typical elimination period is 90 days. Unlike the benefit period, which increases in cost with increased length, the waiting period reduces your premiums the longer it is. Ultimately, your personal circumstances and family medical history will determine the length of your benefit period. For example, if you have a family history of cognitive illness, you may want to opt for a longer benefit period as your stay in an assisted living facility may be longer.
Protection from Inflation
Inflation should always be taken into consideration. This means that inflation will erode the purchasing power of your benefit over time. The good news is that most LTC policies have inflation riders which can increase your benefit amounts by a fixed percentage to offset the effect of inflation. Unfortunately, inflation protection riders come at an additional charge. The trade-off for the additional cost is that paying for that protection today may amount to a significant increase in your benefit amount of 15-30 years from now when you may need long-term care and can’t afford to pay the difference out of pocket.
You can anticipate based on your age when you may need LTC and therefore, how long you will be paying premiums. If you believe that you may need your policy in 10 years or less, you could opt not to pay for inflation protection and reduce your premiums. Historically, however, the cost of all medical care, including LTC, has gone up year over year. If cost is a concern, even a reduced amount of inflation protection can make a significant difference over ten years and is recommended.
The other cost variable for LTC policies are insurance rate increases. As long-term care costs continues to rise, insurance policies typically include contract language that the insurance company has the right to raise their rates over the life of the policy.
The main concern most people have with purchasing LTC insurance, in addition to cost, is whether or not they will ever need it. In hindsight, if you didn’t use your policy, you will have paid a significant amount of money and received nothing in return.
Many life insurance companies have encountered issues with the LTC insurance market and developed a flexible or hybrid life insurance product as an alternative solution to LTC rider policies. This product uses a traditional whole life policy that builds cash value while giving the owner the ability to use that cash to pay for LTC. If the policy owner never needs long-term care, the cash will be paid to the beneficiary as part of the death benefit. This flexibility does, however, come at a higher price than traditional whole life insurance but eliminates the risk of paying for a policy that you may never utilize.