Long-Term Care Insurance: Is It Right for You?

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Living to 100 was once a milestone that few Americans reached. Today, there are more than 50,000 Americans aged 100 or older, according to the Census Bureau, and the number of centenarians is forecast to swell to nearly 400,000 by 2050. Living longer means many Americans will get to a point where they need some assistance with routine activities, such as bathing, cooking, or even getting dressed. Nearly 7 in 10 of today's 65-year-olds will need long-term care at some point, according to the U.S. Department of Health and Human Services, whether at home or in a nursing or assisted-living facility.

Those services are expensive: The median cost ranges from $17,900 a year for adult day care to more than $91,000 for a private room in a nursing home, according to Genworth Life Insurance Company's 2015 Cost of Care Survey, and Medicare generally doesn't cover long-term care. Medicaid pays the cost for eligible, low-income Americans, but for many other consumers, the most viable option is long-term care insurance.

What is it?

Long-term care insurance isn't health insurance. Rather, it covers services such as home care or rent at an assisted living facility, Alzheimer's care unit, or nursing home. It takes up the slack when savings and assets are insufficient to cover such services. Also unlike health insurance, eligibility for long-term care insurance depends on the health of the purchaser. Those with chronic health issues may not qualify.

Consumers typically purchase long-term care insurance policies from age 55 to 65. The policy kicks in when an elderly person requires help with at least two "activities of daily living," or there is proven cognitive impairment (as would be the case with Alzheimer's disease). Consumers choose the duration of benefits provided by the policy.

What is covered?

A typical long-term care insurance policy covers the cost of:

  • Home healthcare
  • Home aides, who help with cooking and housecleaning
  • Occupational and physical therapy
  • Adult day care
  • Assisted living facilities
  • Skilled nursing facilities (nursing homes)
  • Alzheimer's special care units
  • Hospice care

The amount of coverage consumers need depends on the type of care but also varies considerably from state to state. For instance, the Genworth survey puts the current annual median cost of a nursing home in Louisiana (semi-private room) at $56,575, while in Connecticut it's $146,000.

One notable feature of long-term care policies is the ability to hedge against inflation. While options vary widely depending on the carrier, consumers generally can opt to have their benefits adjusted based on simple or compound annual percentage increases, or have the increase tied to the federal government's annual inflation gauge, known as the Consumer Price Index.

Limits.

There are many other options that affect the cost of long-term care insurance and the amount of care that's covered. Ordinarily, there is a daily limit on the payout. Some policies give different limits for different services, such as $100 for home healthcare and $150 for nursing home care. Others offer a specified daily dollar amount, called "pooled benefits," for any necessary service.

There is also a time limit on how long a policyholder can expect to receive benefits. This maximum usually ranges from two to five years. While only 12 percent of nursing home stays last more than five years, according to the American Association for Long-Term Care Insurance, facility care for Alzheimer's patients can last several years longer than average.

Keeping Your Assets.

For those with few or no assets, Medicaid generally pays for either home healthcare or care at a nursing facility. Eligibility requirements for Medicaid vary from state to state, but in general consumers can have about $800 in monthly income and $2,000 in savings. While it's possible to give assets away to qualify for Medicaid, particularly to a child who will use them to help pay for care or rent or anything else, there is a five-year look-back period for nursing homes. That is, if the assets were given away less than five years ago, the nursing home is entitled to take those assets as payment.

One of the reasons people buy long-term care insurance is to hold on to their assets for as long as possible. Currently, 40 states have "partnership qualified policies," which means patients can keep more of their assets when seeking to qualify for Medicaid after the limits have been reached on a long-term care insurance policy. Therefore, anyone who has too many assets to qualify for Medicaid should consider long-term care insurance.

The Cost.

Each insurance company sets its own rates, which can vary by $1,000 a year for exactly the same coverage. The American Association for Long-Term Care Insurance reports an average rate of $1,390 a year for a 55-year-old woman in 2015 and a range of $890 to $1,829 a year depending on the provider. Prices rise based on the client's age, health, application as a single person vs. a couple, and sometimes gender (some states allow higher rates for women, who have longer life expectancies). The higher the daily limits and the longer the benefit period, the more expensive the insurance.

Customers choose a waiting period or "elimination period" of up to 100 days between the time when care is required and when benefits begin. The longer the wait, the cheaper the policy. Premium costs also rise with the amount of inflation protection that's built in, and premiums themselves aren't locked -- that is, they can rise along with inflation. The good news is that, for some people, the premiums can be tax deductible.

The Decision.

Ultimately, it is up to consumers, after weighing their own assets, needs, and expectations, to decide whether they need long-term care insurance. The expense is often worth it for those with significant assets and enough income to afford the coverage they need based on the costs of care in their state (including rises in premiums). The National Association of Insurance Commissioners recommends spending no more than 7 percent of income on this type of insurance.

Before turning to long-term care insurance, consumers should find out what services are available to seniors in their state, regardless of income or assets -- there is some overlap between what insurance covers and what government programs provide. The elderly are often entitled to services such as meal delivery, transportation assistance, and short-term respite for a regular caregiver, even if they don't qualify for Medicaid.