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Long-Term Care Insurance: How It Works, and Should You Buy It?

Long-Term Care Insurance: How It Works, and Should You Buy It?

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Long-term care (LTC) insurance provides financial assistance for people living with chronic illnesses and disabilities, usually seniors who need help performing essential tasks such as eating, bathing, dressing and taking care of their homes. In most instances, long-term care insurance provides coverage for nursing home care, home health care and personal or adult day care.

How much does a long-term care insurance plan cost?

A 55-year-old male will pay about $79 per month for a long-term care insurance plan with $165,000 in benefits.

However, the costs of long-term care insurance vary widely, and rates can be as high as $600 per month depending on your situation, how much the policy is worth and how much coverage it provides.

The following factors all play a role in determining the cost of a policy:

  • Maximum daily benefits paid out
  • The extent of covered services
  • Your age and health status when purchasing the policy
  • The elimination period
  • Your gender

A policy's benefits can grow over time

With most policies, beneficiaries have the option of purchasing coverage with level benefits — benefits that stay the same during the course of the policy — or benefits with built-in growth rates that grow annually as a way to keep pace with inflation.

Policies with built-in growth rates cost more than policies with level benefits. For example, a 55-year-old male would pay about twice as much for a plan that has benefits that increase 3% annually.

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What’s the cost of long-term care insurance by age?

The monthly cost of a long-term care insurance policy will typically increase 24% if you delay enrolling from age 55 to 60, and will increase an additional 45% between age 60 and 65.

long-term care policy cost by age
Policy benefits
Age 55
Age 60
Age 65
Increase (age 55 vs. 65)
$165,000 in level benefits$79$98$14279%
With 1% yearly growth$115$133$18057%
With 2% yearly growth$146$167$21749%
With 3% yearly growth$185$294$26141%
With 5% yearly growth$307$317$35014%

Rates for a single male based on when the plan is initially purchased

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The age at which you enroll plays a significant role in determining policy costs. A single man purchasing a plan with $165,000 in level benefits could expect to pay $79 per month at age 55. If that man purchases the same policy at age 60, he will pay about $98 per month in premiums. That same policy climbs to $142 in monthly premiums if the man waits until the age of 65 to buy the policy.

For couples, purchasing a joint policy is a good way to save money on premiums.

A couple, both of whom are 55, can expect to pay about $173 per month for a policy providing $165,000 in level benefits. That would be about a $31 monthly savings as compared to individually purchasing a policy for a male and a female.

What is long-term care insurance?

Long-term care insurance helps pay for medical and nonmedical care when you’re unable to perform daily activities on your own.

Long-term care services are expensive and are not covered by Medicare or regular health insurance. This could mean you'd pay the full cost of these services unless you have additional coverage. A long-term care insurance policy is a way to protect your assets against the possibility that you may need these services as you age.

A long-term care policy helps with the cost of care provided in the following venues:

  • Your home
  • Nursing homes
  • Adult day service centers
  • Assisted living facilities
  • Alzheimer’s special care facilities

Some policies help pay for in-home care services, including housekeeping, cooking and cleaning support.

In a typical case, you’d purchase a long-term care policy while you're still healthy, choosing a set of benefits you think you’ll need and paying on the policy every month as you age. You could pay monthly premiums for years or, in some cases, decades before actually needing long-term care services and coverage.

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When will a long-term care insurance plan provide benefits?

With most long-term care policies, you qualify for benefits after a health care provider certifies you can no longer perform two of the following Activities of Daily Living (ADLs) without direct hands-on assistance. ADLs include:

  • Bathing
  • Eating
  • Walking
  • Dressing
  • Transferring (going from a bed to a chair)
  • Going to the bathroom

Beneficiaries may also qualify for long-term care benefits as a result of a severe cognitive impairment such as Alzheimer’s disease or dementia.

When should you sign up for a long-term care insurance policy?

The best time to purchase a long-term care insurance policy is in your mid-50s or 60s, when you are still in relatively good health.

The two most important factors to consider are your age and your medical condition.

Age

Medical condition

How old you are will affect how much you pay for a plan. As a general rule, the older you are, the more expensive your policy is. If you wait too long to purchase a plan, the high cost of coverage may make a plan unaffordable. And if you wait past a certain age to try to purchase a policy — usually your mid-70s — you are probably going to be denied coverage by the insurance company.

Age

How old you are will affect how much you pay for a plan. As a general rule, the older you are, the more expensive your policy is. If you wait too long to purchase a plan, the high cost of coverage may make a plan unaffordable. And if you wait past a certain age to try to purchase a policy — usually your mid-70s — you are probably going to be denied coverage by the insurance company.

Medical condition

Additionally, you have to qualify based on your health status when applying for a long-term care insurance policy. This means you are going to have to answer a battery of questions about your health. You are probably going to have to take a physical examination as well.

Long-term care policies are typically only issued to relatively healthy people because they represent a high risk for insurance companies. It should be stressed that qualifying for a policy is not automatic. There are only about 12 companies in the United States selling long-term care policies, and these companies routinely reject applicants based on health status or preexisting conditions.

Is a long-term care insurance policy worth it?

A long-term care insurance policy is usually worth it for most people because it protects against the risk of paying for nursing home, assisted living or custodial care.

Without coverage, your out-of-pocket expenses for long-term care could be more than $54,000 per year.

Long-term care service
Annual cost
Assisted living facility$54,000
In-home care homemaker services$59,488
In-home care health aide$61,776
Private room nursing home$108,408

National median costs

  • 70% of people 65 and older will need long-term care
  • 48% of people older than 65 will receive paid long-term care at some point in their lives

The costs of long-term care services are staggering, easily outstripping many household budgets and depleting retirement savings in some cases. Because of this, long-term care insurance can mean the difference between solvency and bankruptcy, ultimately determining whether you are able to access life-sustaining and lifesaving care in many cases.

While it's common for family members to provide unpaid care, the extent of care will vary from a few months to several years.

When is a long-term care insurance policy not worth it?

While long-term care insurance has its uses and purposes, it is not for everyone. A plan may not be worth it in the following situations:

  • If your payments exceed 7% of your monthly expenses
  • If you're in your 30s or 40s
  • If you have significant financial resources
  • If you're willing to leverage other assets

Even when you buy a plan, there is always the chance you will never need to use your coverage, making long-term care insurance a true use-it-or-lose-it proposition. If you don’t use it, you don’t get benefits from it, aside from knowing that you are insured against the risk of needing expensive long-term care.

Example: Larry, a single 60-year-old earning more than $150,000 a year, wants financial protection in case he needs long-term care. He takes out a long-term care insurance policy:

  • Policy: $165,000 in benefits with a growth rate of 2% a year
  • Cost: $275 per month ($66,000 over 20 years)

Uses insurance

Does not use insurance

In this potential scenario, when Larry turns 80, he develops Alzheimer’s disease and moves to a nursing home that costs $100,000 a year. Larry spends two years in the nursing home, running up $200,000 in bills before dying of Alzheimer’s at the age of 82. But fortunately, Larry has a long-term care insurance policy with benefits that have been growing at 2% a year. This provides him with $231,000 in covered benefits, more than enough to meet his nursing home bills.

Uses insurance

In this potential scenario, when Larry turns 80, he develops Alzheimer’s disease and moves to a nursing home that costs $100,000 a year. Larry spends two years in the nursing home, running up $200,000 in bills before dying of Alzheimer’s at the age of 82. But fortunately, Larry has a long-term care insurance policy with benefits that have been growing at 2% a year. This provides him with $231,000 in covered benefits, more than enough to meet his nursing home bills.

Does not use insurance

In another scenario, Larry buys the same policy at age 60, paying on the policy well into his 80s. But in this situation, Larry does not develop Alzheimer’s disease and lives until the age of 85 before dying of natural causes. He pours more than $82,500 into a policy he never uses.

How are long-term care insurance benefits paid?

Most long-term care policies pay out on a daily basis, paying the facility or provider a daily amount to cover the costs of your care.

Please note that the federal government will tax long-term care insurance benefit amounts that exceed $390 a day in 2022. So, for example, if your policy pays out $500 a day, you will have to pay taxes on the $110 over the $390 daily limit.

This is known as a reimbursement policy, and daily amounts range anywhere from $50 to more than $500 depending on the policy.

Some policies pay out through a cash indemnity, sending you a check or depositing money into your account, usually on a monthly basis so you can then pay the health care facility or health care provider. If the monthly amount exceeds $390 a day, then the federal government will tax the amount over the $390 nontaxable limit.

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Understanding your options when choosing a plan

Level benefits vs. growth

One of the first things to look for in a policy is protection against inflation. And that means buying a policy with a built-in growth rate to mitigate the effects of rising prices. That added protection costs money, doubling or, in some cases, tripling the cost of certain policies.

Your costs

There are other considerations when purchasing a policy — how much insurance you are interested in purchasing, for example, and how much you are willing to spend on a policy.

Exclusionary period

Most policies impose a 90-day waiting period between the time you qualify for a policy and when coverage actually begins, forcing you to pay for the coverage during that exclusionary period.

Preexisting conditions

You may also be offered a long-term care insurance policy with an exclusion for preexisting conditions. This could be a temporary exclusion, not covering the costs of the preexisting condition for a certain amount of time, usually six months. Or it could be broader, and for example, an insurance company could not pay any costs associated with a preexisting condition such as heart disease.

As a general rule, long-term care policies will not cover costs resulting from alcoholism or drug addiction.

Shared care

With some plans, couples can purchase a shared care policy, which costs more but allows one spouse to tap into the plan benefits of the other spouse if needed.

Let’s say, for example, that a husband and wife take out separate long-term care policies worth $500,000 each. The husband develops Alzheimer’s disease and spends three years in a nursing home that costs $150,000 a year, depleting the husband's long-term care benefits.

The wife remains relatively healthy and does not use her benefits, leaving her $500,000 worth of long-term care benefits intact. Under a shared care policy, the husband can become a "rider" on the wife’s plan, tapping into her benefits to pay for the nursing home.

Hybrid insurance policies

Not surprisingly, many beneficiaries do not like the use-or-lose-it premise of long-term care insurance. As a result, some beneficiaries turn to hybrid insurance policies linking their life insurance policies with a long-term care policy that can be used to pay for long-term care expenses as well as a death benefit when the insured beneficiary dies.

With these life insurance policies with a long-term care rider, the insured is able to leave some money for their beneficiaries at the time of death, recouping some of the costs of the policy even if the insured does not use the long-term care benefit. These types of policies tend to be more expensive than traditional policies.


Long-term care insurance vs. other types of insurance

People often confuse long-term care insurance with regular health insurance and disability insurance even though these types of insurance policies are vastly different.

Health insurance

Regular health insurance covers medical care, helping to pay for medical bills resulting from sickness and injuries as well as physician and hospital visits. It does not pay for long-term care in most instances.

In contrast, long-term care insurance is more about maintenance, assisting beneficiaries with the support costs for daily activities.

Long-term disability insurance

Long-term disability insurance pays for lost income, replacing a portion of income forfeited because you are unable to work as a result of an injury or sickness.

Medicare

Medicare does not provide a benefit for long-term custodial care or care for chronic conditions. Medicare, available to seniors and those who have disabilities, provides limited benefits for nursing home stays, paying only for acute, temporary conditions immediately following hospitalization. If your disability is chronic rather than acute, long-term services are not covered under Medicare.

Medicaid

Medicaid does provide assistance for long-term care needs, but only for those who meet strict income and asset limits. Eligibility for Medicaid varies by state, and for example, an individual would need to earn less than $18,754 per year in a state with expanded Medicaid.

In order to qualify for Medicaid's long-term care benefits, you may need to liquidate your assets to meet your state's requirements. You may also need to pay for a portion of your long-term care out of pocket and use the Medicaid spend down program, which is designed for "medically needy" individuals as a way to use medical expenses to help you qualify.

There are sometimes risks to using Medicaid to pay for long-term care. Depending on your state, if Medicaid pays long-term care benefits, officials may be able to seize your assets after your death or the death of your spouse if your spouse survives you.

Frequently asked questions

How much does long-term care insurance cost?

A 55-year old male pays an average of $79 per month for a $165,000 long-term care policy with level benefits, and the same policy costs an average of $142 per month if purchased at age 65. However, costs vary depending on the policy and how much it covers.

What’s the biggest drawback of long-term care insurance?

The biggest drawback of traditional long-term care insurance is that you could pour thousands and thousands of dollars into a policy and never use it, leaving you without any tangible financial benefits. Another major drawback is that your initial policy application could be denied based on your health status.

What’s the best age to buy a long-term care insurance plan?

The best time to buy a plan is between your mid-50s and your mid-60s when you are still relatively healthy and can qualify for a policy. This is the so-called "sweet spot." Purchasing a policy within this time frame will help ensure that you don’t pay too much for a policy, which is likely to happen if you purchase a policy in your 30s or even 40s and don’t need coverage until you are in your 80s.

Sources

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