Long-Term Care Insurance

As expected lifespans continue to rise with medical improvements, the need for long-term care continues to rise as well. Typically, if a family member requires long-term care assistance it is feasible for the healthier spouse, as well as family, to help take care of the member in need. With that being said, what if the other spouse has already passed away or ends up requiring assistance of their own? Families can try to rely on their children, but with an increasing trend of dual-earning families (families with both spouses working) this is not always a viable option.

Many families now turn to nursing homes, assisted living facilities, or in-home care providers to tend to a loved one’s needs as they reach the point when they can no longer live alone. While these alternative options can provide peace of mind and relieve stress on family members, they can be extremely expensive and quickly deplete the assets of even the best savers. 

According to a Genworth report, the median yearly cost of a private room in a nursing home in the United States in 2019 was $102,200. This is up from $65,185 in 2004. If you end up requiring long-term care assistance, the increasing costs could put you at risk of outliving your money. Luckily, purchasing a long-term care policy could greatly hedge your risk against both running out of money and the high costs associated with the assistance your loved one’s may need in the future.

Long-term care insurance helps provide for the cost of services and support for people who need assistance with some of the basic activities of daily living (ADLs). ADLs refer to specific functions most of us perform every day: eating, bathing, using the bathroom, dressing, transferring in and out of a bed or chair, and maintaining continence. You may need assistance with these activities due to a physical inability or a mental impairment such as Alzheimer’s. In either case, the purpose of long-term care insurance is to help protect your assets by covering certain expenses, assuming you require long-term assistance.

Most long-term care policies pay a fixed benefit up to a certain amount each day that benefits are provided, regardless of what the care costs. This means if your policy pays $150 per day and your care costs $200 per day, you will still need to provide the additional $50 out of pocket. If your care only cost $125 per day you would receive the entire $125. These benefits usually last for 2 – 5 years, but can extend for life depending on the policy characteristics. 

Some policies provide a specified total dollar amount of coverage (ex: $150,000 total) where payments will last until the pool of money is completely spent, but this is not as common. For reference, according to the same Genworth report, the daily rate for private nursing home care ranges from $185 in Oklahoma to $994 in Alaska. Please note, this is in reference to private nursing home care and not all long-term care assistance options. There are assistance options available that could cost less than private nursing home care.

An elimination period is also typical for long-term care insurance. The elimination period is the amount of time you must wait after becoming eligible for benefits before the insurance company begins to pay you. This acts as a deductible, making you pay the first portion of expenses for your long-term care. Elimination periods can vary from 0 – 100 days, so it is important that you determine how many days you can afford to pay on your own before coverage begins. The shorter the elimination period, the higher the premiums you will have to pay to own the policy.

The premiums for long-term care insurance can be expensive, so how do you know when you should think about purchasing a policy? If you purchase a policy at a younger age the premiums will be lower, but in this scenario you’ll be paying premiums for an extended period of time prior to needing any assistance. Depending on your situation, this could significantly impact your current cash flow. On the other hand, if you wait too long you’ll run the risk of premium payments being too high to afford, or you may no longer qualify for a policy. 

Unfortunately, there is no clear cut answer as it depends on your unique situation and needs. With that being said, it is common to start thinking about implementing a policy as you’re nearing retirement (age ranges of late 50’s into your 60’s). By the time you reach age 65 the need for care assistance increases drastically.

There are many factors you must ultimately consider when determining if a long-term care insurance policy is a good choice for you. What is your family medical history? What assets do you have in your name? What will the costs be if you require long-term care? Are you disqualified from Medicaid? What is your risk tolerance? What is the cost of the premiums? What is the opportunity cost for the money you will be paying for premiums? 

If you have a higher risk tolerance and are not expecting to need long-term care insurance for a long time, you may be better off investing your expected premium payments, letting the money grow, and self-insuring against the risk of long-term care. But if you have a poor family medical history or a low risk tolerance it may be better to pay the premiums for the guaranteed coverage. There is no “one size fits all” answer to needing long-term care insurance; it truly depends on your own personal situation.

Derek and Ben

Co-Founders and Owners of Aspire Wealth

*Please note, this is not intended to be advice. We are not insurance experts and you should work with your financial planner prior to implementing any strategies we’ve discussed.