How to decide about LTC insurance

You don’t want to think about needing long term care someday. Yet situations with your parents or friends’ parents may be forcing you to think about it. Now’s the time to decide about LTC (Long Term Care) insurance.

LTC insurance is costly and can be hard to find. But most people who buy LTC policies do so in their mid-50s and early 60s. In a word: no more procrastination. You need to do the analysis and make a “go or no-go” decision. 

This post will outline the basics on LTC insurance and point you toward resources for more information.

LTC Insurance gets more expensive and harder to find

There’s not much to celebrate about LTC insurance. Maybe that’s why only 11% of people over 65 have LTC policies, and only 5% of people ages 55-60. Negatives include:

• The average premium costs about $3000 per year, which increases as you grow older
• There’s not much competition among insurers for your business (100 companies sold LTC policies in 2000, but by 2018 only 12 did)
• Policies often cap benefit amounts (for example, payments might be made for a maximum of 4 years)
• Policies may exclude home care and require you to live in an institution in order to receive benefits

But it hedges against even greater costs

As anyone whose parent has lacked LTC insurance but needed long term care can tell you, the cost of such care can wipe out your savings. According to Genworth’s 2018 Cost of Care Survey, median LTC costs are staggering.

• Private room in nursing home: $100,374 per year
• Assisted living: $48,000 per year
• Home health aide: $50,000 per year
• Adult day care: $18,720 per year

Note that these figures are median costs for the United States. A metro area like San Francisco runs 35-40% higher. 

The average amount of time for which people claim LTC benefits is 2.5 years.

Other reasons you may decide to buy LTC insurance

For many people, the prospect of facing huge LTC bills and not knowing how they’ll pay causes them lots of anxiety. This is especially true for single women, who often feel they need to plan for self-sufficiency in their later years.

Even if you have children or others who may be able to assist you, you may not want to burden them. If you’ve experienced financial strain from caring for your own parents, you may especially want to avoid a similar situation with your kids.

In all, a big reason to buy an LTC policy is for your own peace of mind. You should take this into account alongside the numbers as you decide about LTC insurance.

LTC insurance benefit basics

Benefits typically kick in once your “waiting period” (typically 60-100 days) has passed. During this period, a company representative reviews medical records and may visit to certify that you’re unable to perform 2 or more Activities of Daily Living (ADLs). ADLs referenced by most policies include:

• Bathing
• Dressing and grooming
• Eating
• Toileting
• Continence
• Transferring (moving from bed to wheelchair, etc)

Additionally, most policies include coverage for people with dementia severe enough that they aren’t able to live in a normal environment.

Coverage is set at a dollar per day amount per policy. As I said above, most policies now also have a lifetime limit on what they’ll pay out.

What about Medicare and Medicaid?

A common mistake is for people to assume that Medicare will pay for long term care as long as they’re 65 or older. Medicare, however, doesn’t pay for non-skilled help with ADLs. And this is exactly the type of care that accounts for most of LTC needs.

Medicaid will cover the cost of long term care if your income and assets fall below certain levels. Complicated fomulas that vary by state spell out what you can and can’t exclude from the income/asset test.

If you run out of money, Medicaid will cover your long term care costs. Be aware, however, that not all facilities accept Medicaid payment. So your long term care options under Medicaid will be limited.

Types of LTC insurance

There are two main types of LTC insurance and some variations.

Traditional LTC insurance 

Traditional LTC insurance involves annual premiums and coverage that varies by policy. You may purchase a higher daily benefit, shorter waiting period, more inflation coverage, and so on. 

As mentioned above, you can claim benefits once you are unable to perform two or more ADLs or have major cognitive impairment.

Hybrid life and LTC policies

This type of insurance combines life insurance with LTC coverage. You can access the life insurance’s death benefit while you are still alive to cover LTC costs. If it turns out that you don’t need the LTC coverage, the death benefit goes to your heirs.

Personal finance expert Dave Ramsey recommends against hybrid policies for several reasons:

• They should be a last resort when you don’t qualify for traditional LTC insurance
• Premiums are usually paid upfront in full, requiring thousands of dollars you otherwise could be investing for retirement
• Unlike traditional LTC insurance, premiums are NOT tax-deductible

Annuity-based policies

Other financial products address the need for LTC coverage. For example, you can purchase a deferred annuity or an annuity with an LTC rider.

Be cautious. Many financial advisors recommend against annuities. Work with someone you trust to assist you in planning for your specific situation.

Rule of thumb to help you decide on LTC insurance

Taking the median figures from above, you can do a rough calculation of expected LTC costs. Then you can compare them to what you’d have to pay in premiums. For example:

• 1 year private room in nursing home $100,374
• x 2.5 years = $250,935

We’ll assume that you have to pay an inflation-adjusted average annual premium of $3000/year for 20 years. That would cost $60,000.

So in simple terms, buying an LTC policy under this scenario makes sense. At the same time, you have to consider:

• What is likely to be the cost of care in your home area?
• How rapidly will care costs and premiums rise over time?
• Do you anticipate (based on family history or otherwise) needing care for more than 2.5 years? What if you need it for less, or not at all?
• What would you do with the money if you weren’t spending it on LTC insurance premiums?

Factors to remember

You can run all the numbers you want to run. Insurance company actuaries with far more training and data are running them, too. Maybe you have reason to believe you’re an outlier. That you’ll need far more or far less long term care than the median person of your age.

Consult with a fiduciary financial advisor, but also trust your intuition. Even if your personal financial situation suggests you should self-insure, go ahead and buy an LTC policy if it will increase your peace of mind.

It’s hard to quantify the benefit of not worrying about becoming a burden to others, or of becoming destitute and having no safety net. In other words, take note of the trees, but do your best to evaluate the entire forest. You have to choose the best option for yourself.

Actively decide – don’t decide by not acting

Whatever you do, don’t put off making a decision. Failing to decide about LTC insurance essentially means you’re deciding to self-insure. 

Self-insuring may be the best option for you anyway. But this is your time to evaluate your options and choose what works best for you.

My husband and I signed up for a modest group LTC policy offered through his firm. Otherwise, however, we determined it was better for us to self-insure. 

See what works for you.

Resources for further reading:

• Excellent primer on LTC by personal finance guru Dave Ramsey
• Intro to LTC that includes an interactive feature to determine costs in your state
• Administration on Aging (government agency) site
• LTC policy checklist from the Wall Street Journal

Images via: Shutterstock