While there's a lot of discussion about health insurance these days, another type of insurance that's becoming increasingly important is long-term care insurance. Many may wonder if they need to buy long-term care insurance.
Let's look at the facts, then consider the options.
Why You May Need Long-term Care Insurance
Ironically, one of the reasons why long-term care has become increasingly common is because people are living longer. As medical technology advances, people often live many years even with chronic health conditions.
Those conditions may, eventually, reach a point where you or your loved one will need to be relocated into a care facility.
According to the Office of the Assistant Secretary for Planning and Evaluation (ASPE), an agency of the US Government, the average man has a nearly 47% chance of needing long-term care at some point during his life. Additionally, he will spend an average of 3.2 years in that care.
The statistics are even higher for women, (probably because of longer life spans) but the average woman has an almost 58% chance of needing long-term care at some point during her life. She will spend an average of 4.4 years in that care.
There are different types of long-term care facilities. For example, if you're able to take care of yourself, but you prefer having assistance close by, you may stay in an assisted living facility. There, you can live independently, but have various services including meal preparation, housekeeping, laundry, and on-site medical staff.
However, if you're unable to care for yourself, you'll likely need to move to a nursing home facility.
The Determining Factor: Activities for Daily Living
A set of guidelines, referred to as Activities of Daily Living, or ADLs, can establish the need for a nursing home.
- Bathing – The ability to clean yourself and perform grooming activities like shaving and brushing your teeth.
- Dressing – The ability to get dressed by yourself without struggling with buttons and zippers.
- Eating – The ability to feed yourself.
- Transferring – Being able to either walk or move from a bed to a wheelchair and back again.
- Toileting – The ability to get on and off the toilet.
- Continence – The ability to control bladder and bowel functions.
If you're unable to provide two or more of these basic services for yourself, a nursing home may be necessary.
How Much Does Long-term Care Insurance Cost?
There's one unfortunate reality about long-term care: it's expensive!
How expensive depends on where you live and the type of facility you'll need. For our purposes, let's just work with national median costs.
According to the Genworth Cost of Care Survey 2019 the national monthly median costs of long-term care are as follows:
- In-home care: Homemaker services, $4,290 ($51,480 per year)
- In-home care: Home health aide, $4,385 ($52,620 per year)
- Community and assisted living: Adult day care, $1,625 ($19,500 per year)
- Community and assisted living: Assisted living facility, $4,051 ($48,612 per year)
- Nursing home facility: Semi-private room, $7,513 ($90,156 per year)
- Nursing home facility: Private room, $8,517 ($102,204 per year)
One fact that's critical to know is that these are just median costs on a nationwide basis. The cost can vary dramatically depending on where you live. In some of the higher cost states, you should anticipate much higher rates. For example, a private room in a nursing home in Connecticut averages $13,916 per month. That's $166,992 annually.
If you have a substantial six-figure investment portfolio, you may be able to comfortably afford most of the long-term care options as long as you live in a state where the cost is close to the median. However, if a nursing home stay is required, the cost can easily exceed $100,000 per year.
Since most people don't have several hundred thousand dollars in savings and investments, long-term care insurance becomes critical. Even if you do have substantial assets, a stay in a facility for several years could exhaust your savings quickly.
For example, a single four-year stay in a nursing home can easily cost more than $400,000.
How Does Long-term Care Insurance Work?
The growing necessity of long-term care – in combination with the astronomical cost – is where the necessity of long-term care insurance enters the picture. So, what is long-term care insurance, and how does it work?
Like all insurance policies, long-term care insurance provides certain specific benefits within well-defined limits. Put another way, it would be a mistake to assume you can purchase a long-term care policy that will provide unlimited payment for an unlimited long-term care stay.
For example, a typical long-term care policy will set a specified maximum daily allowance. You may be able to choose $100, $150, $200, $250 or more; but the higher the daily benefit, the higher the premium will be.
Long-term care policies also have a maximum number of years you can receive benefits. This can range between two years and five years, though three or four years is typical. Again, the longer the benefit payout is, the higher the premium will be.
Since long-term care costs are rising, as are virtually all healthcare related costs, most policies will also include an inflation protection provision. This is typically set at 3% per year. Depending on the actual inflation rate, that may or may not be enough.
For most people who will choose the most affordable long-term care policy, the plans may act more as a primary source of funding for long-term care but require some contribution out of the policyholder's personal financial resources.
How Much Does Long-term Care Insurance Cost?
It's close to impossible to generalize about the cost of long-term care insurance. Just to give you an idea what the ranges might be, we’re going to rely on admittedly dated information issued by the American Association of Long Term Care Insurance for 2012. You can be certain the premiums are significantly higher in 2020.
The Association provides the following sample scenarios:
Single person, age 55: With a daily benefit of $150, a benefit period of three years, and a 3% annual inflation protection rider, premiums range between a low of $1,764, and a high of $3,446. The average is $2,007 per year.
Married couple, each 55: With a daily benefit of $150, a benefit period of three years, and a 3% annual inflation protection rider, premiums range between a low of $2,080, and a high of $4,824. The average is $2,466 per year.
Married couple, each 60: With a daily benefit of $150, a benefit period of three years, and a 3% annual inflation protection rider, premiums range between a low of $2,794, and a high of $5,637. The average is $2,794 per year.
As you can tell from the description of each policy example, you won't necessarily be covered under all circumstances. For example, each policy provides a daily benefit of $150, which works out to be $54,750 per year. That will only cover about half the average nursing home cost of $100,000+. Also, each policy is limited to just three years. If you're in a facility longer, your benefits will expire, and you'll need to pay out of your own pocket.
When to Buy Long-term Care Insurance
Technically, the earlier in life you're able to purchase a policy, the less expensive the premium will be. That doesn't necessarily mean you should purchase coverage in your 20s or 30s. The longer you have the policy in force, the more premium dollars you'll spend to pay for it over a lifetime.
For most people, buying long-term care insurance happens around age 50. That may be in part because that's the age when you begin thinking about the need for long-term care insurance. Tt may also be because that's the point in life where the average person has the financial resources to afford the coverage.
You should get a policy if: a) you have the means to pay for it, and b) you believe there's a reasonable chance you'll need long-term care in the future.
As to cost, affordability is extremely important. If you're only able to afford to keep a policy in force for 10 years, and your need for long-term care occurs 15 years from now, the policy will have lapsed and will not pay benefits. You must be certain you'll be able to keep the policy in force for the rest of your life.
It's not as easy to determine if you'll have a need for long-term care. Much can be determined by the current state of your health, as well as the health of your family members. This is easier to determine as you get older. However, the risk of waiting much past age 60 or 65 is greater, since the potential to develop a chronic illness increases with age.
Where to Buy Long-term Care Insurance
Due to the unpredictable future costs of long-term care, the number of insurance companies offering policies has declined significantly in the past two decades. Where about 100 companies offered policies in 2000, the list has since dwindled down to about 15 companies.
Since the number of companies is limited, and acceptance is hardly guaranteed, the best option is to work with an insurance broker that specializes in long-term care insurance policies.
A broker can determine both your need and any limitations you might have. Armed with that information, he or she can work to submit your application to the company or companies most likely to approve it. It may also be the best way to get the most cost-effective combination of benefits and premium level.
Should You Buy Long-term Care Insurance?
Long-term care insurance is completely optional. But there's no question, having it is highly desirable. The cost of long-term care is not only high, but it's getting higher. As the Baby Boom generation – the largest generation in US history – moves into advanced age, demand is likely to increase.
Having a policy in place will at least ensure that you will be taken care of at a time when you may not be able to care for yourself.
It's a tough call, and not one most people relish making. Carefully assess your ability to afford the premiums as well as the likelihood you may need care. If you can afford it, and you think you're likely to need it, you should certainly get a policy.