Long-Term-Care Insurance: Myths, Misunderstandings, and Considerations

It may seem like a remote possibility, but the likelihood that you—or someone you love—will need long-term care is high. The Life Happens blog compiled a list of long-term-care statistics, some of which might surprise you:

  • According to the Centers for Medicare and Medicaid Services, 70% of people over the age of 65 will need long-term care.

  • At a median daily rate of $240, the average nursing home stay of 835 days currently costs over $200,000, making it virtually unaffordable for many Americans.

Long-term-care insurance is expensive, but it can be money well-spent. Without insurance, the unexpected costs of in-home assistance or nursing home residency could take a huge bite out of your retirement savings.

Only about 8% of Americans have purchased long-term-care insurance, but as our life expectancy increases, more people realize that they need to plan for a long life, which may include a long-term-care policy.

What Is Long-Term Care?

Long-term care refers to care needed over a period of time because of a chronic illness or disability. The type of care can range from simple help in your home to skilled services in a nursing home or hospital. To cover costs, some people decide to buy long-term-care insurance, by far the youngest form of insurance on the market. Young or not, there is no question about its potential value since it can cover most costs for nursing homes, assisted-living facilities, and home health care.

Won’t Medicare or Medicaid Pay for Long-Term Care?

Although many people believe that Medicare covers long-term eldercare, the federal program pays for only short stays in skilled nursing homes or a limited amount of at-home care, and it has strict conditions on such care. In other words, Medicare might pay for you to receive assistance while you are recovering from surgery, but it will not cover the costs of indefinite care.

The joint federal-state Medicaid program does provide for long-term care, but only for those who meet its low-income and asset requirements, which isn’t many of us. A person needs to be practically destitute to qualify for Medicaid, which means wiping out your savings, investments and any other assets you might own. Some states exempt a person’s home when determining eligibility, but in many instances, the heirs have to sell the property to pay back the government after the homeowner dies.

Additionally, Medicaid recipients often have little choice about the type of care they receive. While they may be capable of living in an assisted living community, government programs won’t pay for such arrangements. Consequently, those receiving Medicaid could be forced into a nursing home prematurely because that is all their plan will cover.

The Changing Face of Long-Term-Care Policies

From premium costs to qualifying criteria, long-term-care insurance policies are changing. The FreeAdvice Legal website recommends that before you buy a policy:

  • Make sure you understand what the policy covers and what it does not.

  • Buy policies only from insurers with a solid financial background.

  • Check into how many complaints about nonpayment have been filed against the company.

Agencies such as A.M Best, Standard & Poor’s and Moody’s rate insurance providers, so you can research a company’s standing before committing.

Whether you own a policy or are shopping for one, below are some important factors to consider.

Increasing premiums: When you buy a policy, your premium is not fixed. Premiums increase over time, and since your income is likely to decrease during retirement, you will need to factor in today’s costs as well as the future costs of keeping the policy active. The average price of long-term-care insurance is around $3,000 to $6,000 per year. Rates are not guaranteed and usually increase 3 to 5 percent annually, but some vendors have recently requested increases as high as 85 to 95 percent. The reason for this is that many insurance providers did not predict the dramatically rising costs of health care or declining interest rates.

Changing qualifications: Because of the financial instability faced by long-term-care policy providers, insurance is increasingly sold to people who present less of a liability. Prospective policyholders are being turned down for relatively common health conditions, such as arthritis and diabetes. And to qualify for benefit payouts, they must require assistance with at least two of the following activities: bathing, dressing, eating, maintaining continence, toileting and transferring from bed to chair.

The “crystal ball” factor: While people were once able to buy unlimited lifetime benefits, policies now restrict purchasers to a fixed period and payout amount. As a result, you may be forced to guess how much coverage you will need. You can wind up overpaying for coverage you do not use or underestimating and falling short financially. Because you buy insurance in advance of the time that you would need the benefits, policy selection can boil down to a guess.

The rise of the hybrid policy: In response to increasingly pricey and exclusionary traditional long-term-care insurance, hybrid plans are growing in popularity. For example, some life insurance policies, many of which promise no rate increases for the duration of the contract, allow benefits to apply to long-term-care costs. Single-premium modified endowments may also allow you to ensure care for a predetermined period in exchange for a lump-sum payment, eliminating the risk of premium hikes. Some providers even offer returns on the unused benefits if you cancel the policy.

The Bottom Line

When selected carefully, long-term-care insurance can deliver peace of mind and ensure your comfort later in life. And while it may seem as though the need for benefits is a long way off, itis best to plan as early as possible. If you buy your policy while you are younger and in good health, the cost will be lower. Also, although many of us will end up needing long-term care, because of advanced medical services and healthier living, the average stay in a nursing home has become shorter, meaning lower overall costs.

With the growing availability of more flexible and accessible insurance policies, traditional long-term-care insurance is no longer a one-size-fits-all solution. Choosing the best insurance policy for your situation can have significant financial benefits over time. If you decide to buy a policy, take the time to review your options carefully. Since future care is unpredictable, consider purchasing a policy with flexible options, if possible. And because policy details can be confusing, it is wise to consult with a financial advisor before buying.