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What is long-term care insurance & how does it work?

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Imagine spending the equivalent of your annual income just on health care.

It may sound like a bad dream, but it could become a reality. Consider that, according to Genworth Financial, the average monthly cost of long-term care services in 2018 ranged from $4,000 for assisted living to more than $8,000 for a private room in a nursing home. That’s $48,000 to $96,000 annually.

That’s the cost of care today. Imagine what it will be if you need nursing home care 10, 20, or 30 years from now. Few people can bear that cost on their own.

What’s more, health insurance won’t help and neither will Medicare. The same goes for long-term disability insurance or Social Security.

But there is a way to prepare for the possible expense of long-term care. In this guide, we'll cover everything you need to know about long-term care insurance, including:

Read on to learn more.

Long-term care insurance definition

Long-term care insurance provides coverage for the various expenses associated with long-term care services if you become unable to take care of yourself.

The policy is designed to pay you, the policyholder, benefits if you are unable to perform multiple activities of daily living (ADL): bathing, dressing, eating, walking, and using the bathroom.

Buying long-term care insurance is ideal for individuals later in life who no longer work and recognize the need to plan for a situation in which they could need financial assistance to pay for the costs of long-term care.

What does long-term care insurance cover?

Long-term care insurance helps cover the cost of a nursing home, assisted living facility, or home health aide if you become unable to care for yourself. It provides a benefit amount intended to help you pay for the necessary care facilities.

Without this type of coverage, the cost of long-term care can quickly erode your retirement savings or your home equity. You may have to pay for care using debt, or your family may have to shoulder part of the cost.

How does long-term care insurance work?

Buying long-term care insurance is similar to buying life insurance and disability insurance both in price and process. There is an application to fill out and health questions to answer. The insurer may ask to see medical records.

You choose the amount of coverage you want. Policies usually cap the amount paid out per day and total benefits paid during your lifetime.

Once you are issued a policy, long-term care insurance is guaranteed for as long as you pay the premiums, regardless of your age or health condition.

Typically, you qualify for benefits if you are unable to perform several of the activities of daily living (ADL), which include bathing, dressing, eating, walking, and using the bathroom.

Long-term care insurance policies will pay benefits in one of two ways:

  • Expense-incurred policies reimburse policyholders for long-term care expenses they incur, up to the maximum benefit amount. The person receiving care will submit claims based on what they have spent.
  • Indemnity policies pay a set dollar amount regardless of the cost of the service you receive. You will begin receiving insurance payments once you receive long-term care, after the waiting period.

How much is long-term care insurance?

According to the American Association for Long-Term Care Insurance (AALTCI), the average annual premium for LTC insurance in 2019 was:

  • $2,050 for a 55-year-old male
  • $2,700 for a 55-year-old female
  • $3,050 for a couple that is both age 55

These rates were for a policy with an initial pool of benefits of $164,000, which compounded annually at 3 percent to total $386,500 at age 85.

In addition to your age, health, and gender, premium rates will be based on how long the policy will pay benefits. The longer the benefit period, the more you will pay in premium. Most people who need long-term care require it for about two years, though about 14 percent need it for five years.

Another factor is the policy’s elimination period, also known as a waiting period. This is the amount of time between when you require benefits and when the first payment is made. The shorter the waiting period, the more your policies will cost.

Long-term care insurance policies also offer optional features, known as riders, that can enhance your coverage. One example is a cost-of-living adjustment rider, which increases the available benefit to take inflation into account.

Keep in mind that what you pay today may not be your premium amount years from now.

Unlike other types of insurance where your premium stays the same for the life of the policy, LTC policy premiums can be raised after you have purchased the policy.

Insurance companies cannot single out just one or a few policies for increases, but they can raise the rates of all policies within a specific rate class with approval from state regulators.

Learn More: How Much Does Long-Term Care Insurance Cost?

Who needs long-term care insurance?

According to the AALTCI, about 76 percent of LTC insurance buyers are between the ages of 50 and 69.

Still, one of the challenges of knowing exactly when to buy long-term care insurance. Commit too early and you could needlessly spend thousands of dollars on the early years of a policy. About half of 65-year-olds today will eventually require long-term care, according to the U.S. Department of Health & Human Services.

LTC insurance typically isn’t necessary at a young age. Only 4.5 percent of long-term care claims started in 2018 were for people under the age of 70. Over two-thirds of claims began for insureds who were at least 81 years old.

At the same time, you don’t want to wait too long to buy LTC coverage. The older you are, the more expensive the policy will be. In addition, the chances of being denied coverage increase the older you get.

According to AALTCI, only 16 percent of applicants under the age of 50 were denied a policy in 2019. That percentage increased to:

  • 21 percent for applicants in their 50s
  • 24 percent for those between 60 and 64
  • 32.5 percent for people 65 to 69
  • 44 percent for applicants age 70 to 74
  • 51.5 percent for those 75 and over

When to buy long-term care insurance

Buying long-term care insurance in your 50s is often advantageous because it’s the peak earning years for many people. If they’re on pace for retirement savings and other expenses, such as raising children or paying certain debts, are in the past, these individuals likely have the funds for LTC insurance.

People may also want to buy earlier if they have a family history that required nursing home care in their 60s.

On the other hand, people in good health with strong family histories may want to wait. If you buy a policy in your 50s but don’t use it until you reach age 90, you’ll be paying out premiums for 30 years or more.

The bottom line is that there really is no ideal age to buy long-term care insurance. Every person’s situation and needs differ.

Learn More: Is Long-Term Care Insurance Worth It?

The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.

— Published April 22, 2020
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