Long-Term Care Insurance

Published On: December 17, 2020

Written by: Ben Atwater and Matt Malick

This is the fifth and final essay in our series on healthcare.  We began with a general survey of the healthcare environment, explored health savings accounts, introduced Medicare and dove deeper into the implications of Medicare and work.  Today, we turn our attention to long-term care insurance. 

As Americans live longer and the population ages, more and more people worry about outliving their assets, especially given the risk of an extended stay in a nursing home or a long period of in-home assistance. To address this concern, the insurance industry devised long-term care insurance. According to the National Care Planning Council, insurance companies created the first long-term care policies more than 30 years ago and today eight million Americans have long-term care insurance. 

More than a third of our clients are retirees and many more are approaching retirement. As such, we often field inquiries about long-term care insurance. While the product protects against an important risk, it does not come cheap. Clients should carefully weigh the cost and benefits within the framework of their personal circumstances before purchasing a policy.

Because we do not sell insurance products, we can offer independent advice. If you are considering long-term care insurance, we strongly suggest that you contact us as policies are frequently complex and sometimes opaque. In the meantime, the following is a general overview of the product category.

Most health insurance policies, like Medicare, cover medical needs during predetermined periods of time, but exclude benefits for long-term services such as an extended nursing home stay. Companies design long-term care insurance to address longer benefit periods.

Typical Coverage Items

• Skilled nursing care
• Occupational, speech, physical and rehabilitation therapy
• Personal care (bathing, dressing, meal preparation, etc.)
• Nursing homes
• Assisted living facilities
• Hospice care
• Special care facilities (e.g., Alzheimer’s)

Benefit Eligibility

When a policyholder makes a claim, the insurance company retains a social worker or nurse to assess the policyholder’s eligibility for long-term care insurance benefits. They will look for impairments to the individual’s activities of daily living (ADL) or cognitive abilities. The five standard ADLs are personal hygiene, continence management, dressing, feeding and ambulating.  Insurance companies trigger coverage when a cognitive impairment is severe, or a person cannot perform a certain number of ADLs. 

Clients are advised to purchase long-term care insurance before they need it because insurance companies will likely deny coverage for pre-existing conditions. However, each company’s criteria are different – one company could deny an applicant, while another company could approve an applicant.  Pre-existing conditions sometimes used to deny coverage include:

• Already using long-term care services
• Already needing help with ADLs
• Presence of certain diseases: metastatic cancer, dementia, Parkinson’s, multiple sclerosis, AIDS, etc.
• Suffering a stroke

Elimination Period

After a patient claims benefits, they must wait a certain period before coverage starts. This is called the elimination period.  You can compare it to a deductible, but insurance companies measure it in time, rather than a dollar amount. The elimination period often lasts 90 days. During this time, insurance companies do not pay and will not later reimburse you.

Policy Payouts

• Most policies pay up to a daily limit until the lifetime maximum is reached.
• Some policies pay a pre-determined amount every day clients qualify for benefits whether they receive services that day or not. These plans are usually more expensive.

Purchasing Considerations

• Do not over-purchase: After assessing potential long-term care costs, clients may just need a small policy, particularly if income, savings or family assistance can help offset some of the expenses.  For purchasers, it is also a question of opportunity cost.  In other words, do you have to give up savings to pay premiums? 
• Do not under-purchase: Long-term care services can potentially create a financial hardship for a client if they do not purchase enough insurance to assist them. Generally, though, it is better to buy too much insurance rather than too little. You can decrease insurance coverage much more easily than you can increase it. 
• Examine each policy carefully, particularly the benefit triggers and elimination periods as these are subject to change from plan to plan and can greatly affect premium pricing.
• The younger a client is, the cheaper insurance policies generally are.
• Keep in mind how your monthly income may change approaching or during retirement to ensure that insurance premiums are financially feasible over the long-term.  Getting a premium quote on long-term care insurance often provides a “gut check” on the reasonableness of acquiring a policy.  Premiums on policies can increase annually (sometimes dramatically).

Estimated Insurance Costs

The average long-term care insurance premium for a 55-year-old couple is $3,050 according to the American Association for Long-Term Care Insurance. Prices vary widely (ranging from less than $3,000 to upwards of $6,000 per year), for the same couple.  Underwriters base premiums on: 

• Age at the time of purchasing the policy (industry recommended age is mid-50’s)
• Policy type (e.g., set period vs. lifelong)
• Coverage options (e.g., elimination period, daily benefit, specific services covered, etc.)
• Traditional or hybrid policy (a hybrid policy is a life insurance policy that allows you to draw from it for long-term care purposes, typically more expensive but growing in popularity). 

Estimated Costs of Care in the U.S.

Understanding the expected costs of care is important in deciding an appropriate level of coverage. Costs vary greatly by state, and, of course, provider, but below are the most recent national average costs for the most frequently used long-term care services. 

• Personal services / Home health aide: $21 per hour ($40,320 per year)
• Adult day health care: $70 per day ($25,200 annually)
• Assisted living facility: $135 per day ($48,000 annually)
• Nursing home (private room): $290 per day ($105,852 annually)

Obviously, these expenses are a serious matter and quite difficult for many folks to “self-insure” against.  For mass affluent families, creating a significant nest egg is the best protection against long-term care contingencies.  Supplementing that savings with a long-term care policy to pay for these unpredictable expenses is certainly reasonable. 

It is wise for people in their 50s or 60s to explore long-term care options.  In our experience, seeing the premiums and understanding the coverage is the best way to decide if long-term care insurance is right for you.  Lastly, for those with a goal of leaving an inheritance, another strategy to consider is life insurance to replace wealth spent on long-term care.

And finally, with newer hybrid long-term care / life insurance products on the market, combining all three strategies – building wealth, obtaining long-term care insurance and life insurance – is a viable strategy.