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Long-term care (LTC) insurance is sometimes viewed as a costly form of protection that has little perceived value at a young age. But as one ages and healthcare costs rise, perspectives tend to change. People are increasingly turning to long-term care insurance as a strategy to protect their retirement.
47% of men and 58% of women 65 and older will need long-term care at some point.1
Statistics suggest that most Americans turning 65 will need long-term services at some point in their lives.3 Yet only about 7.2 million Americans have LTC insurance, which helps to cover many of the costs associated with care, including nursing home costs, assisted living or in-home care, which are not covered by Medicare.2 Those who haven’t saved or procured insurance therefore, will be forced to pay long-term care costs from their savings, and sometimes, the sale of their home.
In 2018, long-term care insurance companies paid or reimbursed long-term care benefits for over 300,000 people at a cost of $10.3 billion.4 That’s an average payout of more than $34,000 per person.
According to the Genworth Cost of Care Survey, a private room in a nursing home costs an average of $100,375. A semi-private nursing home room costs the average person $89,297.5
Genworth found that individuals with a private one bedroom apartment paid an average of $4,000 per month for care in an assisted living facility. Those who could stay at their own home paid home health aides $22 per hour. Add that to a $21-per-hour fee for a homemaker and $72 per day for an Adult Health Care Center,5 and costs can quickly rise.
Of course, there’s more to the conversation than the cost of care, such as the cost of a long-term care insurance plan and calculating the potential return in an uncertain future.
Unfortunately, there’s no way to assign a one-size-fits-all price to long-term care insurance, since premiums are based on a person’s age, health and the policy features.
According to AARP, the average annual premium for a long-term care insurance policy costs $2,700, putting it out of reach for many Americans. However, there are commonly discounts for couples—typically 30 percent off the price of separately bought policies.2
Those figures go up or down, depending on how many years of coverage people select. And if they choose to have inflation protection, costs can rise by as much as 40%.
Your employer may offer group LTC insurance as a benefit which may be an affordable option. However, there are usually limitations on those employer-offered policies. Be sure to carefully read and understand exactly what is being offered, and that it meets your projected needs. For example, group policies may limit or exclude some benefits that are found in individual LTC policies, like limited or no coverage for home care, assisted living or hospice. Additionally, inflation protection—that adjusts the benefits with the times—may be limited or not offered.
Because long-term care costs are so high, insurers have strict underwriting policies that can make it difficult for individuals to even get approved for insurance. In fact, it’s estimated that between 30% and 40% of all long-term care insurance plans are denied on individual applications.
Purchasing through a group program can be a good alternative, as applicants generally have a higher likelihood of approval. Still, there’s a cost parity regardless of the option they choose.
Traditional LTC policies are non-guaranteed, use-it-or-lose-it vehicles that offer lower cost of entry. Whereas asset-based policies offer guaranteed LTC plus the return of principal to your estate. Naturally the upfront costs for these policies are higher, but you are locking in valuable benefits.
An asset-based program is also an attractive approach for insurers. With those programs, insurance is tied to another investment vehicle, like an annuity or life insurance policy. If long-term care insurance isn’t used, or only a portion of it is tapped, the remaining portion can be moved to the annuity or life insurance policy.
However, an asset-based program can be expensive and are typically purchased with a single premium that could cost up to $100,000.
A partnership policy allows for the combination of the long-term care insurance policy with Medicaid. Only traditional LTC qualifies for partnership planning—asset-based policies do not. The amount covered under the insurance policy would be equal to the amount of an individual’s assets protected from Medicaid claims.
Importantly, partnership plans are state specific with some reciprocity—but not all—because every state has different minimum requirements. The minimums are tied to the full monthly risk of the average nursing home expense in your state.
For example: a New Yorker retiring in Florida to get away from state tax (and the winter) won’t benefit from a NYS partnership plan unless Florida accepts the New York plan or they come back to New York for their LTC needs.
Medicaid is largely a state-run program, with varying types and degrees of LTC coverage. Broadly it covers custodial care in nursing homes, which is care when you can’t perform some or all of the activities of daily living (ADL). It is designed to assist those near or below the official poverty level. It is important to understand the limitations inherent in Medicaid. For example, not all nursing homes will accept Medicaid patients, and staying in your own home with assistance is not always an option. Be sure to carefully compare the services offered by LTC and Medicaid.
Every long-term care insurance solution is unique and must be evaluated on a case-by-case basis.
While long-term care insurance can safeguard retirement savings, it also requires a significant upfront cost for something that may not be required in the future. And for those with adequate means, self-insuring for long-term care might be a viable option.
Knowing that health care costs can become significant in one’s later years, long-term care insurance might ultimately make the best economic sense over the long term. Your financial advisor can provide you with a perspective that reflects your individual situation.
175 Must-Know Statistics About Long-Term Care: 2018 Edition, Christine Benz, 2018, Morningstar, https://www.morningstar.com/articles/879494/75-mustknow-statistics-about-longterm-care-2018-ed.html
25 Things You Should Know About Long-Term Care Insurance, Ellen Stark, March 2018, AARP Bulletin, AARP, https://www.aarp.org/caregiving/financial-legal/info-2018/long-term-care-insurance-fd.html
3Who Needs Care?, LongTermCare.gov, last modified 11/14/2017, U.S. Department of Health and Human Services, https://longtermcare.acl.gov/the-basics/who-needs-care.html
4Long Term Care Insurance Industry Paid $10.3 Billion in Claims in 2018, 01/14/2019, American Association for Long-Term Care Insurance, http://www.aaltci.org/news/long-term-care-insurance-association-news/long-term-care-insurance-industry-paid-10-3-billion-in-claims-in-2018
5Genworth Cost of Care Survey 2018, Median Cost Data Tables, 10/09/18, Genworth Financial, Inc., https://pro.genworth.com/riiproweb/productinfo/pdf/282102.pdf
Updated for tax year 2022