Insurance is a means to protect yourself and your loved ones against financial loss. If you’re reading this, you are probably someone who understands the importance of having health insurance, homeowners insurance, auto insurance, and life insurance, but have you carefully considered the possibility that you might need long-term care insurance?
By the time you reach retirement age, the chance that you will need long-term care is probably higher than you think. Approximately 50% of adults will become at least partially disabled, or lose the ability to fully care for themselves, requiring some form of assisted living or healthcare aids during their lifetime. (1)
But despite the high likelihood that long-term care will be needed, most people have not planned for the financial risk the need for long-term care presents. As a result, many older adults struggle to afford the care they need.
What is Long-Term-Care Insurance?
Long-term care insurance helps to cover the cost of services that aren’t covered by regular health insurance. This may include assistance with needs such as bathing, dressing, using the restroom, eating meals, and other basic daily routine activities.
With a long-term care insurance policy, you can be reimbursed for the care given at home, an adult day care center, a nursing home, an assisted living facility, or a memory care facility.
The cost of a long-term care insurance policy is determined by the amount of coverage you want. Typically, policies are based on the amount paid out per day for care and the total amount paid out during your lifetime. So you will need to do your research to estimate what those costs might be.
Most long-term care insurance policies state that you are eligible for benefits once you show measurable signs of dementia, cognitive impairment, or you are unable to perform at least two out of six ADLs (activities of daily living), on your own. ADLs include eating, bathing, getting on and off the toilet, getting in or out of a chair or bed, dressing, or taking care of incontinence needs.
You will need to submit documentation from a doctor, and the insurance company will likely require a nurse visit and plan of care document before they will approve your claim. Then the policy will usually require that you pay for services out of pocket for an elimination period of generally 30-90 days, before the insurer starts to reimburse you for care costs.
In sum, long-term care insurance is like a supplement for medical insurance to cover the care that will be needed should you find yourself unable to care for yourself, outside of a hospital.
Should I buy long-term care insurance?
Whether or not long-term care insurance is the right choice for you depends on your financial situation, health circumstances, and timeline.
Your policy application will take into account your age, health status, and other risk factors. Once you’ve been approved for coverage, a policy will be issued, and you will begin paying premiums. Keep in mind, the premiums can be high, so you will want to do a cost-benefit analysis to determine whether or not long-term care insurance is the best choice for your personal circumstances.
For example, if you are a relatively healthy person in your 50s, you might be paying approximately $2,000 per year for 20 years before you possibly need to use the policy, at which point the policy could pay out hundreds of thousands of dollars in coverage over several years. However, you could also overpay substantially in comparison to what you ultimately need, especially because premiums are not locked in and can go up, so planning to pay out of pocket might make better financial sense.
As a rule of thumb, you should consider buying long-term care insurance if you want to protect your savings or if you want more choices for care when you need it.
The annual costs for long-term care assistance can range from $18,000 for minimal adult daycare to more than $250,000 for top private care. Most people will need support for a year, but many will need care for up to five years or more. In other words, the costs of long-term care are unpredictable and can deplete even a hefty retirement nest egg quickly. (1, 2)
Medicaid does not kick in until you have completely depleted your savings, and the care options for Medicaid recipients are limited to nursing homes that accept government payments. So if your retirement savings are minimal, long-term care insurance can make up a significant gap. But if you have substantial retirement savings and end up needing prolonged care, that money will have to be used before your last-stop option of government insurance will protect you.
How to buy long-term care insurance
If you are seriously considering buying long-term care insurance, remember that the costs will go up every year as you age. If getting a policy is on your to-do list, you will be penalized for putting off taking action.
When you are ready to get a policy, you can buy it directly from an insurance company, through an agent, or possibly through your employee benefits package at group rates.
It’s best to work with an experienced independent insurance agent who can provide quotes from multiple carriers. Rates vary widely, so you should shop around for quotes and compare prices and policies to best meet your needs.
You might not need long-term care insurance, but you do need a plan for how to cover your care if the need arises. Talk to your financial advisor to get guidance on whether or not a long-term care policy is a good fit for you.
Kevin Stoddard is a LPL Financial Advisor with Stoddard Financial in Quincy, Massachusetts. Stoddard helps clients throughout New England to identify, plan, and execute strategies designed for securing their desired financial future. With their Financial Wellness @ Work program, they engage, educate, and empower employees by helping them to understand and appreciate the value of their benefits package.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Please keep in mind that insurance companies alone determine insurability and some people may be deemed uninsurable because of health reasons, occupation, and lifestyle choices.
State insurance laws and insurance underwriting rules may affect available coverage and its costs. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information.
Guarantees are based on the claims paying ability of the issuing company.
Sources:
1 – https://www.nerdwallet.com/blog/insurance/alternatives-long-term-care-insurance/
2 – https://www.aarp.org/caregiving/financial-legal/info-2018/long-term-care-insurance-fd.html
