Is long-term care insurance worth it? How to decide
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Updated September 18, 2020: Long-term care insurance is complex, but the underlying dilemma is very basic: Will someone care for you when you’re old?
Jill Sawyer became motivated to get serious about long-term care planning back in 2015, while discussing health issues with a friend.
“She had purchased a long-term care insurance policy in her 40s, which is unusual,” says Sawyer, a business owner and writer in Oberlin, Ohio.
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Her friend’s reasoning was, she didn’t have children or a spouse, and she had watched older relatives struggle to obtain care. She worried about the risk of getting Alzheimer’s disease some day, since the neurological disorder was present on both sides of her family. She wanted to insure against exorbitant expenses, so she bought a policy with three years’ worth of long-term care benefits.
“She had to go with three years because longer timeframes are so much more in terms of cost. She would have preferred five or 10 years, as her mom is already past three years and most of her friends’ parents are in the same situation,” says Sawyer.
The friend encouraged Sawyer to look into coverage too, and to do so quickly to lock in a less expensive rate.
“The idea of looking into it sooner rather than later was a big revelation,” says Sawyer. “It really got me thinking, and I worried that it was already too late. Because I was buying it in my early 50s, would it be really expensive?”
Sawyer was actually right in line with insurance trends. Most people (76.4%) who purchase such policies are between the ages of 50 and 69, according to the American Association for Long-Term Care Insurance (AALTCI), an industry group in Westlake Village, California.
It’s true that younger buyers generally obtain lower premiums. They are also at less risk of being ineligible for coverage because of health conditions like heart disease or stroke. About 22% of applicants in their 50s are unable to get coverage, compared to much higher decline rates for folks in their 60s (30%) and 70s (44%), according to AALTCI.
Nearly 70% of Americans age 65 or older will need some type of long-term care during their lives, according to LongTermCare.gov, a website of the U.S. Department of Health and Human Services. Long-term care takes many forms but is essentially help someone may need with “activities of daily living,” such as bathing, eating or dressing — whether it’s needed due to injury, health conditions or cognitive disorders such as Alzheimer’s. Long-term care also sometimes refers to assistance with everyday tasks like taking medication, housework or managing money, called “instrumental activities of daily living.”
Long-term care is not medical care, so it’s not typically covered by Medicare or other health insurance, except in limited cases. Long-term care services can be received in a nursing home, assisted living facility or adult day care. You can get it in your home, from a home health aide or homemaker service. It can include in-home skilled nursing care from a registered nurse, licensed practical nurse or licensed vocational nurse.
Long-term care costs vary greatly, with care in the home generally costing less than services in a nursing home or assisted living facility.
Here’s a look at national monthly median costs for different types of long-term care:
Homemaker services, $4,290
Home health aide, $4,385
Adult day care, $1,625
Assisted living facility, $4,051
Nursing home, semi-private room, $7,513
Nursing home, private room, $8,517
Nursing home prices vary by geography. A private room in a nursing home costs just $185 per day in Oklahoma compared to $994 per day in Alaska, according to Genworth, an insurance company.
Bear in mind that by the time you’re likely to need these services, the prices will have increased. Long-term care costs rose between 1.71% to 3.64% a year, on average, between 2004 and 2019.
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Long-term care insurance is a large expense that doesn’t necessarily make sense for every household. Many families could afford a short nursing home stay if it was needed, but would struggle if they had to pay for years. A third of seniors may never need any long-term care, but 20% will require services for longer than five years, according to LongTermCare.gov.
The most suitable demographic is 50- to 55-year-olds with a net worth of $1 million to $3 million, says David Demming, a certified financial planner in Aurora, Ohio. For those folks, “the cost of the premium is less than 0.5% to 0.99% of net worth.”
Learn what to do if your net worth drops.
“People with deeper pockets can probably afford the cost without much damage to their asset pool. People with lower assets probably can't afford the cost and might take the risk of becoming Medicaid recipients,” says John Power, a certified financial planner in Walpole, Massachusetts. Medicaid covers long-term care services but it has strict income and asset eligibility requirements set by each state.
The cost of the long-term care premium depends on many factors, including age, health and the amount of coverage. Higher benefit amounts, longer coverage periods and options like inflation protection all add to the cost.
There can be considerable price variation among different insurance companies selling similar policies. Premiums for a couple, both age 55, ranged from $3,000 to $6,300 at the start of 2020. Despite the price differences, some of the cheaper and more expensive plans provided “virtually identical insurance protection,” according to a cost survey from AALTCI.
The average annual premium is $2,675 for a single woman, $1,700 for a single man, and $3,050 for a couple.
To avoid overpaying for a policy, it’s important to work with a knowledgeable insurance broker or financial professional and compare quotes from several companies. It can be helpful to discuss the topic with a financial planner in the context of retirement planning to make sense of it all.
For a quick premium estimate to use as a reference point in your insurance shopping, you can check online long-term care insurance calculators from large insurance carriers like Genworth or Mutual of Omaha.
Where to get a policy You can buy LTC policies from an insurance agent, financial planner or insurance broker. You might also find coverage through an employer, or possibly a state partnership program. (Policygenius can also help you compare quotes.)
“Long-term care insurance is complicated. If the employer has a group rate, that is probably the best deal. Otherwise, I'd recommend an insurance specialist who understands product differences,” says Power.
About a third of employers offered long-term care insurance in 2018, up from 22% in 2017, according to The Society for Human Resource Management’s 2018 Employee Benefits survey. Some offer it as a voluntary benefit while others cover some or all of the premium cost.
You may even be able to buy it through a family member’s employer, if your own doesn’t offer it. Many employers that offer the benefit allow spouses, parents, grandparents — and sometimes siblings — of their employees to buy coverage through their programs, according to a recent article from the Society for Human Resource Management.
People who may qualify for Medicaid in the future can check whether there is a long-term care partnership program in their state. Almost all states have these collaborations between insurance companies and Medicaid. Purchasing a long-term care policy through a partnership program has certain benefits, such as allowing people to shelter certain assets, like a house, from Medicaid’s usually strict requirements to spend down almost all resources to get benefits. You can learn more by contacting your state’s department of insurance.
Sawyer worked with an insurance broker that she found online, who helped her purchase a three-year long-term care policy from MassMutual.
“I may not have gotten as good a rate as my friend who bought it in her 40s,” Sawyer says, but she is satisfied to have an annual premium of $1,800. “Nobody wants to write a check for $1,800, but it’s worth it for the peace of mind, because of the benefits later,” she says.
Daily benefit amount
This is the dollar amount you’ll be entitled to once the policy is triggered. Like many aspects of the insurance, choosing the right level is a balancing act between getting adequate protection while keeping the premium affordable.
Sawyer’s policy will give her a daily benefit of $120, a level which should at least partially cover many care options. In her area in northeast Ohio, the median cost of a home health aide is $144 per day, while assisted living is $143. A semi-private room in a nursing home is $230.
The benefit will help her pay for in-home or in-facility care if she needs it someday. An experience with her father when he was a resident in a retirement community made Sawyer aware of how important it is to have flexibility with care options. While his facility had nurses on call continually, they had to monitor a large number of residents. Her family decided to pay out-of-pocket for daily visits from an independent caregiver to provide extra personal attention. The additional care was meaningful, in part because her father was able to enjoy more time outdoors and at community events than he would have otherwise. “This insurance will cover a lot of those things” for herself, Sawyer said.
Read our guide to caring for aging parents.
An inflation rider, typically 3% to 5%, protects against losing buying power over time due to inflation. It adds to the cost of the premium, but nursing home and in-home care costs will certainly increase by the time you may need the services. Sawyer’s policy has the 3% inflation protection option.
“It's best to select a compound inflation rider of 3% or 5% when the client is in the 40 to 60 age range and when a long-term care need is projected to be 20-plus years down the road,” says Matthew Sweeney, a life and financial services specialist at Coverage, an insurance agency in Chantilly, Virginia. “This allows the compound interest to work its magic over a long duration and maximize their long-term care benefit for later on.”
“These products are not designed to be investments, but with features like the inflation rider, over time have a steady increase in the benefit for their plan without an increase in the premium,” says Sweeney.
The waiting period on a long-term care insurance policy is kind of like a deductible on your home or auto insurance, except it is a number of days rather than dollars. Basically, it’s the period of time before benefits kick in, after the need for care is established. Choosing a longer waiting period, like 60 or 90 days, results in a lower premium.
Sawyer chose “first day benefits,” a pricier option with no waiting period.
During the waiting period, you’ll need to pay for your own expenses. When thinking about this, consider whether family members or friends are likely to be available during the first days that you need care, or whether you have other funds set aside to pay for that initial care. If so, you might be somewhat safe to choose a longer waiting period with a more affordable premium.
Experts say three to five years’ worth of coverage is a good bet. On average, women need services longer than men — 3.7 years for women and 2.2 years for men. Women accounted for nearly two-thirds of all long-term care insurance claims paid in 2018, according to AALTCI.
Sawyer’s policy has a benefit period of three years.
These days, more than half (52.4 percent) of people buying long-term care insurance choose coverage for three years or less, according to AALTCI. Most buyers select a benefit period of two to four years.
Years ago, long-term care policies with lifetime benefits were popular. But many insurance companies hadn’t priced the policies adequately to account for increasing life expectancies, leaving some on the hook for more financial liability than they bargained for. Many carriers subsequently raised their pricing, changed their product offerings or dropped out of the long-term care insurance market altogether.
“Fewer people are dying of heart attacks, and due to advances in medicine more are dying slowly — thus needing potential long-term care benefits. This is why none of the LTC insurers offer ‘lifetime’ benefits any longer,” says Larry Ginsburg, a certified financial planner in Oakland, California.
In the big picture, long-term care insurance can only mitigate your risks for a small number of variables. There’s no guarantee that you definitely get your money’s worth for the years of premiums that you pay — after all, there’s no guarantee you’ll even get to grow old. But putting a policy in place can ease your worries and might mean you have more options later in life, when you’re at your most vulnerable.
Image: Leo Patrizi (Getty)
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