Long term care insurance provides long term care benefits to eligible policyholders. So what is long term care? Long term case (“LTC”) is essentially extended nursing care and may include home care, nursing homes, and assisted-living centers.
LTC is designed to help people who cannot perform certain activities of daily living, such as bathing, eating, and dressing. Unfortunately, long term care can be extremely expensive.
A nursing home room can easily cost $100,000 a year. Home care can cost even more. At that rate, savings get depleted pretty quickly. If not planned for, long term care can easily decimate a person’s life or retirement savings and cause a person to become a burden to their family or a ward of the state.
A surprisingly high percentage of people will require long term care at some time during their lives. I recently read that 70% of people who live to be at least 65 years old will need long term care at some point in their lives. However, only about 10% of elderly persons own long term care insurance policies, making LTC one of the biggest uninsured financial risks that the elderly face today. Some people end up needing long term care for years.
Having a plan in place for potential long term care costs is an important part of any financial or retirement plan. There are far too many people who have not given any thought to long term care or simply ignore the risk and hope for the best. Don’t be one of them.
Long Term Care Insurance
Insurance is generally used to cover risks that are infrequent, but catastrophic when they occur (i.e. death, disability, serious car accident, house fire, etc). We purchase many types of insurance hoping that we will never need them, but with the knowledge that should something bad happen, we will be ok. Purchasing long term care insurance ensures that part or all of your needs will be taken care of should you ever require long term care.
Long term care insurance benefits generally kick in to help offset the high cost of nursing care once you are unable to perform at least two activities of daily living and your waiting period, if any, has passed. A waiting period is essentially a deductible, or the period of time when LTC costs are paid out of pocket before your coverage begins.
Many people don’t want to purchase long term care insurance because there is a chance they will never use it. Keep in mind though that long term care insurance is not an investment. Like most insurance products, you shouldn’t purchase it with the expectation that you will someday receive back more than you put in.
Do you purchase homeowner’s insurance or term life insurance because you think it likely that your home will burn down or that you will die prematurely? Of course not. You purchase them because those events could happen, not because you think it likely they will. We should have the same attitude about long term care insurance.
I will never complain if I never get a dime back from my homeowner’s insurance or term life insurance. Similarly, long term care insurance should be seriously considered because you could need it some day. Regardless of whether you get your money’s worth out of long term care insurance or any other type of insurance, it will bring peace of mind knowing that you are be protected if you do require it someday.
Factors Affecting LTC Insurance Premiums
Here are some of the factors that affect your premiums:
- Length of coverage
- Daily benefit amount
- Inflation protection (if any)
- Waiting period
- Carrier you choose
If you want to lower the premiums of a policy, consider lowering the inflation protection, decreasing the term of coverage, increasing the waiting period, or lowering the daily benefit.
It’s also important to remember that there can be very large price differences between insurers, so get quotes from a number of different companies to find the best deal for you. Once you have obtained multiple quotes, consider reviewing them with your financial advisor.
When to Purchase Long Term Care Insurance
Many advisers recommend purchasing LTC insurance earlier rather than later for the following reasons:
- The older you are, the more likely you will be ineligible to purchase it due to your health. LTC insurance underwriting is generally more stringent than life insurance underwriting.
- If you are in good health when you purchase a LTC policy, you may be entitled to a good health discount over the entire life of the policy, even if your health later deteriorates.
Long Term Care Insurance Disadvantages
There are a few disadvantages to long term care insurance.
- Long term care insurance can be quite pricey since the insurance company could potentially have to pay a lot of money if you ever require long term care. However, the cost of LTC insurance looks a little more fair when compared to the cost of an average three year stay in a nursing home.
- It has no cash value
- Underwriting can take a while
- Premiums may increase over time
Despite these disadvantages, long term care insurance continues to be the most reasonable way for most people to hedge against the risk of long term care.
Long Term Care Insurance Tips
- If you can’t purchase enough LTC insurance to fully insure against it, consider purchasing some LTC insurance and then using savings to supplement it. Some protection is better than nothing.
- Coverage periods generally range from two to six years. Since the average nursing home stay tends to be about 3 years, many advisors recommend purchasing coverage for 3 years with a generous daily benefit.
- With rising health and nursing care costs, having appropriate inflation protection could be very important to preserve the purchasing power of your policy. However, inflation protection does not come free.
- In some cases you may receive a tax benefit on your federal tax return for premiums paid on a LTC policy. Some states also offer tax benefits to policy holders. LTC insurance payouts generally are not taxable for federal income tax purposes.
- Many advisors recommend purchasing a policy with lower benefits but that you can definitely afford, rather than purchase a very expensive policy and potentially have to drop it in the future if you can no longer afford it. Create a budget to help figure out how much you can afford.
For additional information on long term care insurance (as well as other types of insurance) you might consider reading the below book:
What are your thoughts on long term care insurance? Leave a comment below!