As an individual ages, a decision must be made about whether or not to buy long-term care insurance (LTCI).
Long-term care is the provision of personal services and medical care to someone who is cognitively impaired or can’t perform two or more of the six activities of daily living (ADLs). The ADLs are dressing, bathing, eating, walking, toileting, and transferring (such as moving from a bed to a chair without help). Despite the name, some people need long-term care relatively briefly, such as when they are recovering from surgery or an accident. Others need the care for months or years, such as when they have chronic disabilities or illnesses or are declining due to age.
As one ages, the probability of needing LTC increases.
LTC can be expensive. The cost varies by the type of LTC received and where it is received. The cost is higher in an expensive metropolitan area than in a lower-cost area of the country. But in either place it can be costly. Median costs around the country for different types of care can be found in the annual survey by Genworth, available at www.genworth.com. A sample of recent costs of LTC is in the table.
|Long Term Care Service||Average Annual Rate|
|Nursing Home Care (Private Room)||$100,379|
|Nursing Home Care (Semi-private Room)||$88,348|
|Assisted Living Facility||$46,350|
|Adult Day Health Care||$18,746|
|Homemaker Health Aide||$50,668|
What is Long-Term Care Insurance?
Long-term care insurance (LTCI) was created to reduce the out-of-pocket costs incurred by individuals and their families if the individual needs LTC during his or her lifetime.
In traditional LTCI, the insured pays premiums for years. If the individual needs LTC, no further premiums are required, and the insurer pays the benefits required under the policy. If the individual passes away before needing LTCI or after needing only a small amount of LTCI, the insurer pays no benefits for the premiums paid. Some people describe this as a use-it-or-lose-it nature of traditional LTCI. If LTC never is needed, the only benefit received from years of paying premiums is the peace of mind from knowing the coverage is available if needed.
The premiums of an LTCI policy vary based upon factors including age, health, gender, marital status, amount of coverage and the specific insurance provider. The average annual cost of LTC insurance for a single male age 55 is around $2,050 and a single woman age 55 around $2,700. This number is an average based upon data provided by the nation’s leading long-term care insurance providers to AALTCI. The premiums paid by an individual can differ considerably from the average.
“The best company for one person might not be best for another buyer. Insurers have different claims histories and databases. Some will consider one person to be a high claim risk, while another company considers the person less of a risk” said Bob Carlson, editor of RetirementWatch.com.
Premiums vary considerably among insurers. Premiums for identical coverage can vary by as much as 100%, according to the AALTCI. It is important to shop around and receive price quotes and specific coverage terms from various insurance providers before choosing one.
Deciding its Worth
As stated earlier, determining the worth of long-term care insurance is completely up to the circumstances and preferences of the individual. An LTC insurance policy taken out at 55 can save a person tens of thousands of dollars and probably much more should the individual need LTC at some point. On the other hand, a person might pay premiums for decades and never file a claim under the policy. They wouldn’t have access to the premium dollars during their lifetime, and their heirs wouldn’t inherit any of that money. Some people think they are better off holding on and investing the money so they’ll have a bigger nest egg and more money available to pay LTC if needed.
The first consideration is how much the LTCI premiums would reduce the individual’s standard of living. A person with a relatively low net worth and modest retirement income probably shouldn’t reduce his or her standard of living in order to pay for LTCI. Instead, the person should have a plan to qualify for Medicaid and have it pay for LTC if it is needed.
On the other end of the scale, someone with a net worth of $4 million or more might decide LTCI isn’t worth the cost. The person might have enough liquid assets available to pay for LTC if needed and still be able to leave an inheritance for loved ones, even if LTC is needed for a number of years. But well-off individuals should carefully evaluate their positions. They want to be sure a spouse has enough resources to maintain the standard of living if the other spouse needs LTC for a significant time. They also should be sure the assets can be converted to cash to pay for LTC. The person should not have to sell real estate or a small business at a discount because cash is needed to pay for LTC.
A person should always consider alternatives to traditional LTCI. Sales of traditional LTCI have declined since 2008 because premiums have increased and policy benefits have decreased. An alternative that’s much more popular is the hybrid, or asset-based, insurance product. These are annuities or life insurance policies that pay benefits for LTC if the insured needs care. Often the LTC benefits are a multiple of the money the insured put into the policy. The LTC benefits can be five times or more the amount put into the policy.
The best feature of the hybrid policies for many people is there is no use-it-or-lose-it feature. If the insured never needs LTC, the annuity or life insurance benefits go to the beneficiaries named by the insured.
For many people, the deciding factor of whether to purchase LTCI is the probability of needing LTC for one year or longer. Someone who doesn’t anticipate a long-life expectancy or the need for an extended time of LTC won’t want to buy insurance. Someone who reasonably anticipates a long-life expectancy, especially someone who already has physical issues that are likely to result in the need for LTC in the future, should be more inclined to purchase LTCI or a hybrid policy.
Valuable contributions to this summary of “Is Long-Term Care Insurance Worth It?” were made by Bob Carlson, editor of the Retirement Watch financial advisory service and chairman of the Board of Trustees of Virginia’s Fairfax County Employees’ Retirement System with more than $4 billion in assets.
Jaxon Kim is an editorial intern with Eagle Financial Publications.