Long-Term Care: Cost, Considerations, & Alternatives

Learn to navigate the cost, how to cover expenses, and what resources you have available to help when you need it.

No one likes to think about needing long-term care; it is a complicated and controversial topic and serves as a reminder that we may at some point be reliant on others to take care of us.  It is, however, an important conversation that needs to be had. 

The reality is that 70% of people over age 65 will at some point need some sort of extended care.  56% will need significant long-term care during their remaining years.  While some of these people will receive help from family members, about half will need some paid assistance. 14% of people will need more than two years of paid care.

Like any life altering event, you need to plan realistically.  You need to understand your options, the pros and cons of those options, and how to each option will ultimately impact your day-to-day life.

So, let’s start that conversation.  Let’s look at what Long-term care is, why you may need it, and how you can pay for it.  We will look also at the pitfalls that you may encounter if you don’t act soon, and what happens if you end up not needing this care but have the protection.

What is long-term care?

Long term care (LTC) refers to a variety of services and support that helps people who cannot perform basic daily activities on their own.  This support can be medical or non-medical, can be needed at any age, and can be provided by family, friends, or even other community members.

Most commonly we think of someone in a nursing home as an example of long-term care.  While that is an example, long-term care can include services such as grocery shopping and meal prep or meal delivery.  It may include adult daycare or in-home services to ensure that someone receives their medications.

Long-term care insurance is coverage for the cost of those services.  Normally, LTC insurance offers more flexibility and options than the public assistance programs such as Medicaid.

Common Terms used in a LTC insurance policy

Elimination Period

This is the waiting period.  It is the amount of time that needs to pass before LTC insurance coverage will start to pay.  During this time, the policy holder is responsible for paying for all services received.  The elimination period is similar to a deductible, except it is measured in time, not money.  Elimination periods can be an number of days, but usually start at around 30 days and go up to a year.  The longer the elimination period, the smaller the premium will be.

This is how much money the policy will pay each month.  It can also be written as a daily benefit.

This is maximum amount of money that will be paid out by the policy.

This is a calculation of the daily or monthly benefit and the policy limit.  For example, a 2-year policy with a $200 per day benefit would have a benefit multiplier of 730 x $200.

This is the MINIMUM amount of time your policy will last.  If a policy pays $300/day for 2 years, but you do not use all $300 each day, your policy will last longer than 2 years.

When can you use long-term care insurance?

CMS has broken all the things that independent people do each day into six categories.  Together, these six categories are called Activities of Daily Living, or ADLs.  ADLs are the most common trigger used by insurance companies to determine eligibility for long-term care insurance benefits.  The standard is that when an individual can no longer perform at least two ADLs without help, they then qualify for LTC insurance benefits.

What are the activities of daily living?

  • Bathing- This includes not only the ability to get in and out of the shower or tub & clean yourself, but also activities like shaving or brushing your teeth.
  • Eating- feeding yourself.
  • Dressing- The ability to put on clothes without struggling with common clothing accessories such as buttons or zippers. This also includes putting on and taking off things like braces and artificial limbs.
  • Transferring- this is the ability to stand up out of bed or a chair and walk around.
  • Toileting- the ability to use and get on and off the toilet and performing the associated personal hygiene.
  • Continence- being able to control your bladder and bowel, or, when unable to maintain control, the ability to clean yourself. This includes caring for a catheter or colostomy bag.

What is included in LTC insurance?

Long term care is broken into different stages; not everyone needs round the clock care, so the care spectrum is divided to better reflect the targeted care that each type of service provides.

Home Care

Home care refers to a wide range of services, such as assistance with any of the ADLs, medical care, or rehabilitation services.  Home care can be provided by family members, professional caregivers, or even volunteers.

The goal of home care is to help people remain independent for as long as possible.  Home care can be an attractive option for those that prefer the familiar and comfortable surroundings of their own home and things.

While it is often less expensive than other types of long-term care, the challenge comes in finding qualified and trustworthy caregivers.  Additionally, family members and loved ones may feel overwhelmed by the responsibility of needing to provide home care while also needing to continue their lives.

Assisted Living

This is the next stage in LTC.  It is typically a combination of housing, personal care, and support services.  Assisted living communities, such as senior communities or retirement communities, bring together independent living quarters with the medical benefits of a nursing home.  Those living in these communities often share recreational rooms and communal amenities, allowing them to choose the activity they want to partake in, ultimately still maintaining a sense of control over their life.

Assisted living communities aim to provide a homelike environment that provides support and care to those that may no longer be able to live independently.  The goal is to support individuals in maintaining their independence and dignity while also ensuring their safety and well-being.

Skilled Nursing Care

This is a type of care that provides 24-hour medical and nursing care for those with complex health needs.  This care is usually provided in a nursing home or rehabilitation center and is designed for people with a high need of medical support and attention.

Skilled nursing care may include administering medications, managing chronic health conditions, or providing rehabilitation services.  It can also include physical, occupational, or speech therapy.  Skilled nursing care is always led by licensed medical professionals, such as registered nurses.

This is typically the most expensive type of long-term care.

LTC insurance helps to cover expenses related to any of these types of care and more.  Out-of-pocket payments nursing homes are expected, but you can also use a LTC insurance policy to pay for in-home modifications such as wheelchair ramps or bars, or payments to an in-home aid that assist with grocery shopping.

Ultimately, LTC insurance is designed to keep you in your home as long as possible.

How does LTC insurance pay out?

LTC insurance pays out in a few ways, depending on the policy.  Generally, you are eligible for benefits once you can no longer perform two or more of the ADLs.  At this point you trigger a waiting period that is built into your policy.  Once that waiting period is over, coverage kicks in.  This coverage is typically capped at a certain dollar amount per day or month, up to a lifetime maximum.

Depending on the policy, you may be paid directly as a reimbursement, or the insurance company can pay the facility directly.  You will receive an explanation of benefits each time a payment is made.

What if I spend less than my daily limit?

What happens if you only need a few hours of in-home care and not the entire $300 that your policy pays each day?  What if you want an adult day care, but only twice a week?

All LTC insurance policies list a daily limit, but that only applies to the maximum.  If you don’t spend the money, it just stays in your policy so that you can use it when you need it.  At the same time, just because you use some benefits one day doesn’t mean that you are required to continue using the benefits until they have all been used up.

Cost of insurance

Like all insurance, the most expensive kind is the one you need and didn’t buy.  That said, there are few things that really determine the monthly premiums.

Elimination Period-The longer the elimination period, the less you’ll spend each month

You age- Purchasing a policy while young will result in a lower monthly premium, but you’ll spend more over your lifetime.

Benefit Period- This is how long the insurance company will continue to pay out.  The longer the benefit period, the more you will pay each month.

Daily/monthly Limit- This is how much the insurance company will pay out each day.  Like the benefit period, the more you want paid back to you, the more you will need to pay into the policy.

Inflation Protection- This is a method to add compounding interest to the daily limit, allowing your policy to future proof itself against inflation.  This is an expensive option but can be very beneficial if you are buying a policy at a young age.

 

With all the possible combinations for a LTC policy, it is difficult to give an estimate for every scenario.  Below is a very rough look at estimated cost for a single policy over a couple of different factors.

LTC Insurance Cost by Age

Cost of care

Cost varies depending on where you are living.  The higher the cost of living, the more expensive a care facility will be.  On average though, you can expect to spend around $6,000 a month for in-home care and around $10,000 a month for nursing home care.

Inflation affects the future cost of care.  Most of us reading this will not need care this year and the cost will continue to rise at about 3% per year across the board.

The image below shows the monthly median cost of care in the Indianapolis are of Indiana.  It compares 2023, 2033, and 2043 to give an idea how prices will rise in the years to come.

LTC Cost of Care

You can determine the cost of care in your area using the calculator found on this site.

How to pay for long term care

Insurance or not, the odds are that you will need to pay for some sort of care at some point.  There are four different ways to pay for long-term care; government programs, traditional long term care insurance policy, a hybrid LTC policy, and personal savings.  Which is best for you really comes down to your personal financial circumstances and what you expect for your standard of care- now and in retirement.

Government programs

Veterans can receive extended care through the VA.  You can read more about how the program works, eligibility, and what is included here.  For those that are not eligible for veteran benefits, Medicaid is the other government program available.  To be eligible for Medicaid, you need to qualify based on an income and asset test, as Medicaid is designed for people with lower incomes.  Benefits and eligibility vary based on your state, and the choices you have for where and how you receive care are limited.

For a lot of people who have a lifetime’s worth of things, this can be quite the process as you are limited in what you can own.  Assets such as second homes, IRAs, 401(k)s, and other investments are counted as assets and count against you in this case.  You can read more about the spend down program here.

Medicaid spend down is not something I would ever wish anyone to go through and this should always be a last and final option.  If this is something that you are considering, ask a financial advisor for help with a MAPT, a trust set up for people who need Medicaid LTC coverage but also have substantial assets.

Traditional Long-Term Care Insurance Policy

Lots of options here, but it can get costly.  You can choose the amount of coverage, how long it last, and how long you need to wait before you can receive benefits.  Typically, you pay a premium for life until you start drawing on the benefits.

Some insurance companies have stopped offering traditional polices, and those that still do are looking to raise annual premiums after purchase like an age-rated health insurance policy.

Hybrid Policy

This is a LTC insurance coverage that is bundled with another type of coverage, typically life insurance or an annuity.

For life insurance, you can draw down or accelerate the death benefit amount to pay for your care, up to a monthly maximum amount.  This option needs to be opted into and paid for when you sign up for and purchase your whole life insurance.  If you can qualify for it, this is a great way to get both a substantial life insurance policy and protection against long-term care needs.

An annuity is insurance coverage against running out of your life savings.  The money that you give to the insurance company is invested and allowed to grow, tax-free, at a fixed rate.  If you qualify for long-term care benefits with your annuity, the coverage will draw down both the account value.  However, a lot of companies are finding it difficult to provide annuities with LTC coverage given today’s interest rates.  As such, they have not gained a lot of traction and may not be available everywhere.

Personal Savings

This one is straightforward; save your money and when you need to pay for long term care, use the funds you have stashed away.  This option can provide a lot of flexibility, but there is risk.  You need to consider if your retirement plan can withstand the expenses of long-term care.  You need to consider if you have enough time to save for this in addition to continuing your current retirement plan. 

Even a few years of paying for LTC through your savings can put a big dent in your retirement nest egg, leaving less money to live off.  LTC insurance can also help protect your other assets and allow you pass on wealth to loved ones.

Always make sure to speak with your financial advisor before considering this option.

Other Options

Most life insurance policies have what is called an ‘accelerated death benefit.’  This allows the policy owner to take some of the death benefit from a permanent life insurance policy and use it before they die.  This money can be used for anything, but to access this money you will usually need a doctor to sign off saying that you are suffering from an incurable disease and only have a few months left to live.  The money provided comes directly from the death benefit listed on the policy.

Selling your permanent life insurance policy is also an option.  This process is called a viatical settlement, and you usually get a bit more money than the surrender value of the policy.  The money you get from this sale can be used for anything at all, but you no longer have life insurance.

Finally, you can rely on friends and family members.  This is not a long-term option.  I personally would not want my kids having to take care of me in my final days, I would rather them remember the good times we had together, not me at my worse and most frail.  But this is an option a lot of people consider.

When is the best time to buy LTC insurance?

The older we get, the more likely a medical event will result in us needing long-term care, or that we’ll develop a health issue that prevents us from getting insurance coverage.  Most people buy this type of insurance in their 50s; they are old enough to think seriously about long-term care and they see the advantage to making the decision now instead of kicking the can down the road.

Not only do policies cost more the older we are, but the odds of being denied increase with each year.  Medical issues that many people encounter in the later years also disqualify them from getting to purchase a new LTC insurance policy.

What about buying a policy before that?  Wouldn’t buying a policy in your 20s cost a lot less?  Yes, but most people will not need this type of coverage until later in life.  Evening buying a policy in your 50s, you might pay premiums for decades before filing a claim.  Paying into a policy longer than you need to can cost you thousands over an extra 20 or 30 years.

Additionally, younger people often have different priorities; they have just begun to fund retirement accounts, they might have children’s tuition to consider or maybe they want to buy their first home and need to save all the can.

There is not a magic age, but in your 50s seems to be that sweet spot where you can still get covered while not having to pay an exorbitant amount.

Regardless, consider your family history.  Conditions such as Alzheimer’s, heart disease, or cancer can all prevent you from getting approved by underwriting for a LTC policy, so you may want to buy at an earlier age.

*This applies to standalone Long-Term Care insurance policies.  For hybrid policies bundled with life insurance, there is not magic age.  I like putting this rider with a Universal Life, which benefits greatly from being overfunded from an early age (while still in your 20s & 30s)*

Drawbacks & controversies of LTC insurance

Like annuities, people are polarized by long-term care insurance; they either swear by it or consider it a scam.  These policies were first introduced in the 1980s and even then, insurance companies struggled with the cost of premiums in relations to paying out benefits.  This cause premiums to increase drastically over just a few years while insurance companies cracked down on benefit payouts.  It essentially squeezed consumers from both ends.

To stabilize the benefits, premiums have continued to go up.  In 2010, the increase in premiums was 1.3%, a still significant amount.  Today, the increase is 3%.  This increase accounts for an almost doubling of cost over the next 25 years, a cost that is passed on directly to consumers.

By far, the biggest drawback to long-term care insurance is the cost combined with the use it or lose it feature.  If you don’t need LTC coverage, you can’t receive the benefits, despite paying in to a plan for many years.

Additionally, some plans only pay for care in a facility and will not cover at-home care.  Other plans will deny coverage for pre-existing conditions.

In all, there are a lot of things to be wanted when considering LTC insurance, with the cost being the biggest factor.

Long-Term Care Partnerships

Over the past decades, more and more people are relying on Medicaid to front the bill for their long-term care.  This has caused quite a few issues financially for state’s Medicaid budget, which is not designed to handle caring for an aging population.  Two things are being done to combat this. 

First, some states have implemented (and others are considering) a tax levied on all workers that would fund programs that provide long-term care services.  In Washington state, 58 cents on every $100 is taxed to those that do not have a qualifying long-term care insurance policy.  Those that do not have a policy, and have paid the tax, will have their lifetime benefits capped.

The second way states are combating this is called a Partnership policy.  In short, it is a private insurance policy that is part of a collaboration between a state’s Medicaid program and a private insurance company.  By partaking in the partnership policy, you have asset protection from Medicaid’s asset limits when seeking to qualify for Medicaid.  Additionally, for every dollar that you paid into coverage, the dollar amount paid out will not count against your assets and will instead be disregarded.

These policies are designed to incentivize people to act sooner rather than later, increasing the number of people who have private LTC insurance, which further reduces the burden on Medicaid.

Not every state has a partnership policy.

How to decide if long-term care insurance is right for you

This is complex and complicated and ultimately, cannot be answered by anyone other than you.  These are the things that you need to consider.

  • Your budget– How much can you afford each year? If you can’t afford the premiums, you shouldn’t buy the coverage.  Premiums should not be more than 7% of your annual income.
  • Your assets– Long-term care insurance is not only financial protection, but also protection for the things you have accumulated over your life. While the cutoff amount is contested, if you own less than $75,000 to $30,000, excluding your home,  LTC insurance may not be your best choice as you’ll pay more in premiums than the insurance cost.
  • Your overall financial condition- Some people will look at their assets and spending and decide they can cover care themselves without insurance. Some may decide to sell a second home when the time comes, or get a reverse mortgage.
  • Your ultimate financial goals- Do you want to money behind for loved ones? If so, a LTC policy can help protect what you intend to leave for family and friends.
  • Your other options- This varies greatly depending on where you live, but look into Annuities, Life Insurance, and even Critical Illness policies as they all have ways to help cover you other than a single LTC insurance plan.
  • Your age & health- if you are young and healthy, it may be in your best interest to hold off purchasing in LTC insurance until later in your life. Just don’t wait too long or you may not be able to qualify for coverage.

Frequently Asked Questions

How old is too old to buy LTC insurance?

Past a certain age, the monthly cost of a LTC insurance policy just does not seem worth it.  Insurance companies will not usually extend an insurance policy to people over 79, but once you’re past 70, the cost become staggering.

Sort of.  With short term care (STC), the benefit period and elimination period are much shorter.  Most STC policies only last for a maximum of 1 year.

Because coverage is the same, many people purchase a STC policy with a 360-day benefit period and a LTC policy with a 360-day elimination period.  This essentially allows the person to be covered for a greater amount of time than a single policy would normally allow while spending less each month on the LTC policy.

STC is much easier to qualify for.

No.  Page 55 of the Medicare and You book states in big bold letters that Medicare does not cover extended care.  There are exceptions to this, but generally, you are on your own.

Typically, LTC policies will not cover any needed care stemming from alcoholism or drug addiction (except in the case of some prescription medications), injuries sustained during war (declared or not), or injuries from attempted suicide or intentional self-harm. 

Yes.  The IRS has set limits on the amount that can be deducted, which can be found here.  Additionally, the benefits paid out are generally not taxable.

You will need to itemize your taxes each year to take advantage of the deductions and make sure that the policy you purchase is tax qualified.  Business can also deduct the premiums they pay for employees.

Takeaways

Long-term care insurance is not for everyone, but covering this type of care is something that everyone needs to have a realistic conversation about.  It is not something that you can ignore and figure out later; it will be too late at that point.

If you’re ready to have that conversation and would like to weigh your options, give us a call and we can figure out a time to talk.

Sources

https://aspe.hhs.gov/sites/default/files/documents/08b8b7825f7bc12d2c79261fd7641c88/ltss-risks-financing-2022.pdf

https://www.bls.gov/ooh/healthcare/home-health-aides-and-personal-care-aides.htm

https://acl.gov/ltc/basic-needs/how-much-care-will-you-need

https://www.census.gov/library/stories/2019/12/by-2030-all-baby-boomers-will-be-age-65-or-older.html

https://www.bls.gov/ooh/healthcare/licensed-practical-and-licensed-vocational-nurses.htm

https://www.bls.gov/ooh/healthcare/nursing-assistants.htm

https://www.genworth.com/aging-and-you/finances/cost-of-care

https://apps.irs.gov/app/vita/content/00/00_25_005.jsp

https://www.medicare.gov/coverage/long-term-care

https://www.va.gov/health-care/about-va-health-benefits/long-term-care/

https://www.dfs.ny.gov/system/files/documents/2023/06/dfs_ltc_report_20230607.pdf#:~:text=In%20sum%2C%20when%20first%20writing,than%20expected%20due%20to%20lower

https://23149698.fs1.hubspotusercontent-na1.net/hubfs/23149698/Presentation23AAB567ActuarialAnalysisAndNextSteps.pdf

https://www.insurance.ca.gov/0500-about-us/03-appointments/upload/AB567OliverWymanFeasibilityReport2022.pdf

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