The cost for a private room in a nursing home averages about $92,000 per year in the U.S. but ranges as high as $160,000 in Connecticut. Meanwhile, the average cost of daily home care is $48,000 but jumps to nearly $175,000 nationally assuming 24-hour service.1 Depending on the location and level of care, we find that some families pay well over $200,000 annually, with costs growing every year. Given these imposing figures, it’s not surprising that the topic of funding such custodial care, and in particular the use of insurance for that purpose, is a popular topic of conversation. What are the issues to consider? Is insurance “worth” the price? What policy options are out there? Here are some basics to keep in mind as you sort through the decision process.
What is ‘long-term care’?
Everyone understands the concept of long-term care, that at some point many of us will need support with even the most basic tasks as we go about our lives. But for insurance purposes, the trigger point for coverage of “long-term” care is fairly specific. Indeed, long-term care insurance benefits are triggered when an individual requires care for cognitive impairment or requires help with at least two of the following six activities of daily living: dressing, transferring, bathing, eating, continence or toileting. An individual who fits this description may require both custodial care and skilled nursing care. This article focuses on custodial long-term care.
Doesn’t Medicare cover this?
Medicare does not cover custodial long-term care. It will cover up to 100 days of care after a hospital visit of at least three days, but only under specific circumstances. The patient is also responsible for a copayment for the majority of those days.
What about Medicaid?
The vast majority of wealthy individuals are unable to qualify for Medicaid, which requires you to demonstrate very low income and asset levels and includes a five-year look-back period related to spending down or gifting away financial assets. Medicaid also institutes strict trigger points before benefits kick in, and care options are more limited.
What are my options for receiving care?
Aside from receiving care from a loved one, the three primary choices are to have professional care provided in your home, to move to an assisted living facility, or to move into a nursing home. Increasingly, individuals are choosing to receive care in their own home—which is often the costliest option. Those who buy into assisted living facilities typically move there while still healthy. The facility may offer various levels of living solutions to enable couples to remain together for as long as possible. It’s important to find out whether long-term care insurance would cover such care, and under what circumstances it might not be accepted.
What is the likelihood of requiring long-term care custodial services?
The likelihood that someone who buys a long-term care policy at age 60 will use the policy is 50%, assuming benefits begin on the same day the care begins (a.k.a., a zero-day elimination period).2
How should I think about long-term care insurance?
By purchasing a long-term care policy you are essentially transferring the risk, or a portion of the risk, that you will have to pay for care to the insurance carrier. Long-term care policies have evolved a great deal over the last few decades and there is now a greater variety of products through which to attain coverage. The options available today include traditional long-term care insurance plans, hybrid plans and state partnership programs.
What stands out about the different policy and program options?
Traditional long-term care policies may offer more coverage for the same amount of premium than other types of policies, such as hybrid policies, but those premiums can increase over time. Traditional policies can also qualify for state tax deductions and credits, and can enable the use of a state partnership program, discussed below, where applicable. Traditional policies used to offer the option of paying premiums over a 10-year period (called a 10-pay option), after which your policy would be paid in full for life. That is no longer the case. Today you must pay premiums for life to continue coverage.
Hybrid policies, which combine long-term care with life insurance or annuities, may offer certain benefits over traditional long-term care policies. Compared with traditional policies, hybrids tend to have a simpler underwriting process and are easier to qualify for medically. If you pay with an up-front premium or pay premiums for a fixed number of years (10-pay, for example), you are immune from future rate increases. Hybrids also provide a death benefit to heirs if you don’t use the long-term care coverage during your lifetime.
There are some potential drawbacks, however. You typically receive less coverage for the same amount of premium as a traditional policy because you’re also paying for the cost of life insurance; ideally, you would have a separate need for life insurance before putting such a policy in place. Further, these policies may underperform in a rising interest rate environment because the cash value may be locked into today’s rates. Hybrid policies also do not qualify for your state’s tax deduction/credit.
State Partnership Programs. Some states offer a partnership program that enables you to qualify for Medicaid after depleting your long-term care benefits without having to spend down all of your assets. Consider educating yourself on your state’s partnership program as you learn about the various options available to you.
What if the premiums on my existing policy increase?
Think carefully before terminating your policy. Frequently the new, higher premium will still be cheaper than the going rate for policies in the marketplace today. If you can afford the new higher premium, it may be worth keeping the policy, particularly if your health circumstances have changed. Typically, the decision is not simply one of keeping or canceling the policy; the carrier may make other options available such as reducing the daily benefit, changing the inflation rider or reducing the benefit period.
At what age would I buy long-term care insurance?
Typically people buy long-term care insurance between the ages of 50 and 70, with the bulk obtaining coverage between ages 55 and 65. The level of the premium is a function of the applicant’s age and health at the time of application. The younger you are when you buy, the lower the premium; that being said, younger policyholders will pay premiums for a greater number of years. Remember that underwriting requirements for long-term care insurance can be stringent, so it is better to apply for a policy while still in good health.
What else should I keep in mind?
Should you decide to explore your long-term care insurance options, note that insurance carriers each have a “sweet spot” in terms of an applicant’s age and health. An experienced insurance agent will help you to navigate the carriers based on your particular circumstances. You should be able to prequalify before submitting your full application so that, if the carrier determines you’re ineligible, you won’t be formally denied coverage. A denial from one carrier can make it harder to subsequently qualify with another carrier.
Some individuals hesitate to purchase long-term care insurance because they are concerned the premiums may be raised at a future date. While this is of course a possibility, carriers have evolved in their understanding of the risks and are pricing the policies accordingly. Likewise you may know a family member or friend whose policy did not pay out when needed. Your insurance agent should be able to provide you with rating information on the insurance carriers. You can request information on each carrier’s claims paying history.
There are individuals who are fortunate enough to have sufficient assets to pay long-term care costs out of pocket. Some of these individuals conclude that they don’t need to purchase a policy while others decide that the insurance will provide them with peace of mind. As with most complex financial decisions, no one solution is right for all individuals or families. Taking the time to educate yourself on your options and going through the prequalification process can help you make an informed decision.
1 Genworth 2016 Cost of Care Survey, conducted by CareScout®, April 2016. Daily home care is based on 44 hours of service per week. We extrapolated the 24-hour care figure based on the same hourly cost.
2 Source: American Association for Long-Term Care Insurance.
