Long term care insurance: is it worth it?
Understanding long term care insurance and why its important.
with input from Derek Wolf, Founder | Senior Field Specialist (date)
Last updated: December 15, 2022 | Article published: December 15, 2022
Let us first understand what long-term care insurance is. LTC provides coverage for the costs of long- term care associated with the activities such as of daily living, eating, bathing, dressing, and other needs. The need for long-term care may be due to a chronic illness or injuries that require extended rehabilitation and care. There are three main types of long-term care insurance: traditional long-term care insurance, hybrid long-term care insurance and life insurance with a long-term care rider. Individuals see the hefty premiums of insurance and leaves many policyholders wondering if LTC insurance is worth it?
Let’s simplify the question: If you were to need care, how would you pay for it? Here are the average annual costs of Long-Term Care services in the U.S. according to Genworth: *1
|
In-Home Care Homemaker Services |
Community and Assisted
Living Adult Day Health Care |
Nursing Home Facility Semi private room |
| $53,768 | $19,240 | $93,075 |
| Home Health Aide | Assisted Living Facility | Private Room |
| $54,912 | $51,600 | $105,850 |
Individuals might have enough money saved up in their savings or through investments that would allow them to pay for care for the rest of their life. However, by the time you pass, you may leave nothing for your loved ones. A LTC insurance policy can be a viable option if you are wanting to leave money for your loved ones while covering for your LTC needs. So if you think you will not be able to afford the cost of care for your expected lifetime or you are just unsure, then a good long-term care policy may be worth it.
Why is the cost of the premiums so high? While life insurance carriers have years of historical and actuarial data about life expectancies to help influence their premium rates, the Long-Term Care industry only goes back a few decades. Only being able to go back so far, insurers had to make some estimations about the LTC policyholders’ behavior in 15 to 20 years, such as whether you’ll file a claim, how long you’ll live after you file and how many policies will lapse due to no payment. Sadly many of these estimations were not accurate. When policies were issued in the 1990s and early 2000s, companies estimated a 4% lapse rate, but as years when on, only 1% dropped their policies.*2
We also have to take into effect that the life expectancy of people has increased with the advances in medicines and technology, which results in more claims being paid out in benefits and generally for a longer period of time than the companies initially anticipated. As a result, the insurance companies aren’t earning enough in premiums to pay all the claims being filed, so they raised the rates.
Insurers gave themselves the right to raise rates in your contract. But to impose a rate increase, they must get the state insurance commission’s approval. Regulators often reduce or reject price increases, so if an increase is approved, the commissioners believe it’s necessary.
So what else can affect your premiums? Well your family medical history can affect your premiums in the matter of when determining whether the cost of Long-Term Care insurance is worth it. For example, Alzheimer’s patients live longer in nursing homes than other patients, which could drive up lifetime costs substantially. According to the U.S. Department of Health & Human Services, women are more likely to need care longer than men. So you may not want to gamble that your assets will be sufficient for your care needs over your lifetime.
When choosing a policy, we suggest reviewing your family health history and connecting with a planner who can review your financial situation comprehensively.
What are hybrid policies?
Because traditional LTC coverage today is more expensive than ever, hybrid policies that combine the benefits of whole life insurance and LTC benefits are becoming more popular. One key advantage is that money is returned to you if you cancel the policy without having received benefits, or to your heirs if you die without receiving benefits.
One important though to consider is do not buy a hybrid policy solely because of the death benefit. Buy it for the LTC value. While LTC premiums might cost you a few thousand dollars a year, they could prove worth it by helping you handle tens or even hundreds of thousands of dollars per year in medical expenses.
So who should buy a LTC policy?
About 7 in 10 people turning age 65 today will need some form of LTC either in their home or in a facility, according to the Administration for Community Living, a part of the Department of Health and
Human Services. Your health insurance doesn’t cover the cost of nursing home care. Neither does Medicare. This is where LTC insurance comes into play. The following three groups of people are generally the ones considering if to buy it:
Individuals who are interested leaving assets to their heirs and beneficiaries. Those who can afford it but who wish to transfer the risk to an insurance company. Those who can’t afford to pay the cost of care on their own.
What you should look for in LTC policies and coverage
The cost of LTC policies and coverage can vary widely from carrier to carrier. Here are some of the key features within a LTC you should look for.
- Your coverage amount should at least equal the cost of a private room in a nursing home in your area. The current average cost nationally is $290 per day, or $105,850 per year, according to Genworth’s annual Cost of Care Survey.
- A 90-day waiting period for benefits to kick in. Having this options can reduce the cost of the policy. You also must have enough in cash reserves to afford paying the bills during the waiting period.
- Designate the right gatekeeper who certifies that you need substantial assistance to perform daily living activities or that you have severe cognitive impairment. This should be your doctor. Also, how disabled must you be to receive benefits? Choose a policy that offers the most liberal definition to allow flexibility within the policy.
- At least three years of coverage for the first spouse. Five or six years is better – or even more if you have a medical history of chronic health issues such as Parkinson’s or Alzheimer’s disease or dementia.
- If you choose to forego a long benefit period, consider a shared-care rider, which lets you use the benefits of your spouse’s or partner’s policy if you exhaust your own benefits. For example, if each of you buys four years of coverage, the rider gives you a total of eight years you can share. You could use five years and your spouse three years, for example.
- Inflation protection. Because the cost of care increases over time, make sure you get at least a 3% annual cost-of-living increase in benefits.
- Home health care. This covers home visits by a nurse or home health aide to assist you with medication and essential activities such as bathing and preparing meals. Make sure the coverage for this is the same as that for facility care – not a fraction of it.
Now in some situations, if an individual can not afford the level of care needed, a family member generally takes on the role of their caregiver. Caregiving can significantly impact the lives of your loved ones, and in some cases you may want the situation to be avoided. According to Genworth*3:
- 43% of caregivers said caregiving negatively affected their relationship with their spouse/partner. 51% of employed caregivers said caregiving negatively affected their ability to do their jobs.
- 51% said they’re health and wellbeing were impacted.
- 66% paid for care with their own savings or retirement funds.
Long-term care insurance can not only give you the necessary funds to receive the care you need, it can save your family precious time, money, and stress. So is it really worth it?
Long term care insurance is worth it in most cases. It can be difficult watching someone who needs some form of care, deplete their cash reserves in a few years and then go with out the proper care. If
you feels your current policy is unaffordable you can see if the insurance company will let you reduce the benefits amounts in exchange for lowering the cost.
1 Genworth. (2021). Cost of Care Survey. Retrieved on December 13, 2021 from genworth.com
2 American Association for Long-Term Care Insurance. Long Term Care Insurance Policy Rate Increases. Retrieved on December 29, 2021 from aaltci.org
3 Genworth. (2021, November 16). How Caregiving Impacts Families, Communities and Society. Retrieved on December 14, 2021 from genworth.com