Straight Talk on Long Term Care (LTC) Insurance in Retirement

Some of the greatest fears about retirement concern long term care (LTC).

Many people worry the need for long term care will deplete their retirement nest eggs and reduce or eliminate the legacy left for loved ones.

Though they worry about long term care, many people don’t want to talk about it, much less plan for it.

One of every four adults would rather go to the dentist than talk about LTC, according to a 2014 survey by Genworth, a leading issuer of long-term care insurance.

Another survey found that only 11% of American adults had discussed LTC with their doctors, and only 31% had discussed it with family or friends.

Not surprisingly, the lack of discussion about LTC results in a lot of misunderstandings about it and increases the probability of worst-case scenarios.

So, let’s look at some facts about long term care, and how you should plan for it. Long Term Care is defined as having a cognitive impairment or needing help with at least two of the six activities of daily living (ADLs).

The six ADLs are as follows:

Bathing, dressing, personal hygiene and grooming, eating, toileting, and transferring or mobility.

You qualify for LTC if you either have cognitive impairment or need help with at least two of the six of the activities of daily living (ADLs), or both.

Notice that, though it’s called long term care, the definition doesn’t say anything about how long the conditions last or the care that is needed.

If you have looked into long term care at all, you heard that about 70% of people will need some kind of LTC during their lifetimes after age 65. The statistic comes from a U.S. government report issued some years ago.

For many, the LTC won’t be needed for long. Someone who has major surgery, or a serious illness often goes into a hospital first or is confined to bed at home. Subsequently, they need help with some of the activities of daily living as they recover.

Some are sent from the hospital to a nursing home or rehabilitation facility, where they receive full-time care until they no longer need help with at least two of the ADLs.

The help isn’t needed long term, but it qualifies as LTC under the prevailing definition. That’s where the 70% number comes from.

Another stereotype is that LTC is delivered in a nursing home, often referred to today as a skilled nursing facility (SNF) or acute care facility. But today a minority of LTC is delivered in SNFs. Long term care can be received in adult day care, assisted living, memory care and at home. The American Association of Long-Term Care Insurers (AALTCI) says that about 73% of initial claims in 2021 under LTCI (long term care insurance) policies were for LTC received at home.

More and more LTC is received at home, and there’s a great preference to receive LTC at home, especially as COVID-19 keeps spreading.

Home care is covered under standard LTCI policies, and technology and other developments are making it easier to receive LTC at home. What about the potential of spending years in assisted living or other residential care?

The AALTCI data say that about 27% of claims are for one year or less. Benefits are claimed for one to two years by 19% of policyholders, and 14% claim for two to three years.

About 10% claim benefits for three to four years, 8% for four to five years and 6% for five to six years. Only 10% need LTC for more than six years.

While needing LTC for years is a low probability, it is high in cost if needed. The 2021 LTC cost survey by Genworth found that the median monthly cost was $4,957 for a home care aide and $5,148 for a home health aide. Assisted living cost $4,500 monthly, and nursing home care was $7,908. These are national median figures.

Costs are higher in areas with higher costs of living or not enough care providers. In addition, those are the basic monthly charge. Many people need services in addition to those included in the basic fee.

I’ve seen estimates that in assisted living residences and nursing homes the average person receives additional services costing about 20% of the basic daily fee.

Because of the potential for high costs, many people should consider obtaining long term care insurance to cover at least some of the costs.

There generally are two types of insurance available. In traditional long term care insurance, you pay an annual premium, and the policy pays benefits if you develop cognitive impairment or need help with at least two of the ADLs. The need is certified by a licensed health care professional.

The benefits will continue as long as you need the care or until the policy limit is reached. Traditional LTCI provides no benefits to you or your estate if you never need LTC or need only a small amount, just as with auto and homeowner’s insurance.

After 2008, many insurers dropped out of the traditional LTCI market. Those that remain charge higher premiums than in the past and offer policies with lower maximum benefits than used to be available.

Because of these changes, only about 49,000 traditional LTCI policies were sold in 2020, down from about 700,000 in 2000.

In 2021, a single male purchasing LTCI at age 55 with a lifetime benefit of $165,000 would pay an average annual premium of $950 when the policy had no growth in benefits, or inflation indexing, according to AALTCI.

With 2% annual growth in benefits, the median annual premium was $1,750, and with 5% annual growth in benefits, the annual premium was $3,685.

For a single female aged 55, annual premiums for the same policies were $1,500, $2,815 and $6,400.

For joint coverage of a married couple, the annual premiums were $2,080, $3,870 and $8,575. Premiums are higher for older insureds. Also, those are only the first-year premiums.

Insurers are likely to increase the premiums annually. Those are median premiums. The premiums differ considerably between insurers.

AALTCI found that there was about an 80% difference between the highest and lowest premiums for identical policies.

The alternative to traditional long term care insurance is known as hybrid LTCI, or asset based LTCI, combo policies and other names. Hybrid LTCI is an annuity or permanent life insurance policy with an LTC rider.

If the insured qualifies for long term care, the insurer will pay a monthly benefit amount. The benefit amount is determined when the policy is purchased but can increase with the growth of the annuity or life insurance.

The benefits first reduce either the annuity account or the life insurance policy benefit until that is exhausted. Then, the insurer continues to pay benefits until the insured no longer needs LTC or the policy benefit limit is reached.

The policies usually are purchased with a lump sum deposit, and the maximum lifetime LTC benefit is two to 10 times the deposit, varying with the type of policy and the insurer. In hybrid policies, the insurers guarantee the cost of long-term care insurance won’t increase after the contract is signed.

Another advantage is there’s something for your heirs if you never need LTC or need it only for a short time.

The beneficiaries you named will receive either the remaining annuity account or the life insurance benefit after you pass away. A third potential benefit is the ability to obtain cash from the contract during your lifetime.

You can take distributions from the annuity or the entire account value. There might be an early distribution penalty if the annuity hasn’t been open long enough.

With life insurance, you can take loans or distributions from the cash value account, or you can surrender the policy and receive all or most of your deposit back.