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Protecting Your Golden Years: A Long-Term Care Insurance Guide

Long-Term Care Insurance

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​Key Takeaways
  • With medicine advancing rapidly, thus increasing the average lifespan, living longer presents potential concerns for individuals outliving their income and assets.

  • As individuals age, they may require services to meet their needs because they lack the capacity to care for themselves. This is why long-term care planning is an essential component of overall financial planning.

  • The four most common ways in which individuals afford long-term care are:

    • Personal assets and savings (self-insuring),

    • Long-term care insurance,

    • To a limited degree, Medicare, and

    • For those modest means, Medicaid.

  • There are several factors to consider when deciding whether long-term care coverage makes sense for you, including: your age, amount and duration of benefits, health characteristics, geographical region, family history, wealth transfer goals, etc.

  • Long-term care insurance is not the only option. Other alternatives include: life insurance policies with long-term care riders, annuities with long-term care riders, longevity annuities, and much more.


It is no secret that people are living longer. As medicine advances rapidly, thus increasing the average lifespan, this presents potential concerns for outliving your income and assets as you may require prolonged medical and custodial care assistance. Understanding that the duration and level of long-term care you will need varies from person to person, here are some statistics:

  • Someone age 65 today has a 69% chance of needing long-term care services (at home or in a facility) at some point, with 65% receiving care at home and 37% receiving care in facilities.

  • On average, women need care longer (3.7 years) than men (2.2 years).

  • About one-third of 65-year-olds today may never need long-term care, but 20% will need it longer than five years.


Figuring out how to afford long-term care can be challenging and stressful. This post will cover long-term care, the most common ways to pay for it, general things you should know about it, and some alternatives to long-term care insurance.


What Is Long-Term Care and How Does it Work?

Long-term care services range from various personal and supportive care services you might need should you be unable to do so yourself due to illness, disability, or cognitive impairment. In short, these services meet the needs of individuals, generally later in life, who lack the capacity to care for themselves.


Long-term care services differ from traditional medical services because the latter attempts to treat and cure illness. In contrast, long-term care services generally help to maintain your lifestyle. As the recipient of the long-term care services, you will receive assistance with managing routine activities of daily living (ADLs) and instrumental activities of daily living (IADLs). These include...


ADLs vs. IADLs

Activities of Daily Living (ADLs)

Instrumental Activities of Daily Living (IADLs)

  • Eating

  • Bathing

  • Dressing

  • Transferring

  • Toileting

  • Continence

  • Medicine Management

  • Shopping

  • Preparing Meals

  • Housekeeping

  • Doing Laundry

  • Using Transportation

  • Handling Finances

  • Communicating via telephone

Long-term care services may be provided in a variety of settings, including:

  • At home by a home health agency, family member, or friend,

  • In a community (e.g., adult day care center),

  • In a residential setting (e.g., assisted living communities), or

  • In an institutional setting (e.g., nursing homes).


Remember that many stays in facilities are relatively short, and often, family members provide long-term care services at home. Therefore, there is a wide array of costs for long-term care services – they may be enormous for some and minimal for others. Costs can vary depending on the amount and type of care you receive, the length of time you receive care, what kind of medical professional provides the service, and what geographical location the care is received. Here are some national median costs for various long-term care services...


Monthly National Median Costs for Long-Term Care (2023)

In-Home Care

Community and Assisted Living

Nursing Home Facility

Homemaker Services: $5,720

Adult Day Health Care: $2,058

Semi-Private Room: $8,669

Home Health Aide: $6,292

Assisted Living Facility: $5,350

Private Room: $9,733


Four of the Most Common Ways to Pay for Long-Term Care Services

For most people, long-term care often begins with an unpaid caregiver, such as a family member or friend.  However, this individual may have to work or otherwise be unable to provide the level of care you need. Therefore, in many cases, you may need to pay for service. The four most common methods for paying for long-term care services include:

  1. Personal assets and savings (self-insuring), and

  2. Long-term care insurance

  3. Medicare,

  4. Medicaid,


Personal Assets and Savings (Self-Insuring)

If you have a high net worth, you may have accumulated enough assets over your lifetime that you do not need coverage to meet your long-term care cost needs. Additionally, you can choose the care you want without needing to meet the insurance company's requirements to qualify for coverage.


To determine if you have enough assets to meet your fixed annual costs and have enough left over to afford long-term care services, you will need cash flow projections considering your life expectancy. This is a pivotal component of retirement planning. As financial planners, we help with these projections, utilizing rate of return assumptions on assets, inflating expenses due to rising annual costs, and building in a cushion for long-term care needs and unexpected events. After the analysis, you will be left with a probability that you can meet those expenses and not outlive your income and assets.


It is worth noting that just because you may have the funds available to afford long-term care costs, it does not mean you should completely rule out long-term care coverage. For example, high net worth individuals who are likely able to self-insure may want to purchase coverage to protect assets for wealth transfer and legacy goals. In other words, if you want additional assurance that you have money left over to pass on to your family, long-term care coverage can help. However, you may decide that the cost of coverage is too high and not worth it. A financial advisor can help you with this analysis and help guide you through this decision-making process.


Long-Term Care Insurance

Medical insurance plans may cover a short stay in a facility for rehabilitation purposes after surgery or a hospital stay; however, they do not cover the costs of extended stays. Also, neither medical insurance nor Medicare covers the cost of custodial care – that being personal assistance services, including assistance with activities of daily living, taking medicine, and similar personal needs. Long-term care insurance is one product that can cover the cost of in-home care, community and assisted living facilities, and nursing home facilities that exceed the coverage provided by medical insurance and Medicare.


Policies may pay different dollar amounts for various services and usually pay benefits by the day, week, or month. If the policy covers home healthcare, it may pay a percentage of the benefit for skilled nursing home care. Depending on the policy contract, benefits may be paid in one of three ways:

  1. You will cover expenses out of pocket and then submit receipts to the insurance company for reimbursement,

  2. A per diem method whereby you receive a flat daily or monthly amount for each period you qualify, or  

  3. Once you meet the eligibility criteria, you receive the full daily benefit until death or the benefits are exhausted.


Additionally, most policies limit the total amount of benefits that can be paid out over the policy's life. This limit is referred to as the maximum lifetime benefit or the total plan benefit and may be stated in terms of a maximum number of years or the maximum dollars that can be paid out.


An insured individual must generally be classified as "chronically ill" to receive benefits. In some policies, a terminal illness may trigger benefits for at-home hospice care or in a facility. A chronic illness is usually determined by a health care professional and can be either:

  • A physical impairment in which the insured individual cannot perform at least two activities of daily living without substantial assistance, and/or

  • A cognitive impairment involves a loss or deterioration of intellectual capacity that requires substantial supervision to prevent the individual from posing a danger to themselves or others.


You may be able to select coverage terms of 1, 2, 3, 5, 7, 10 years, or even lifetime benefits. Keep in mind that the longer the term of benefits and the higher the lifetime benefit dollar amount, the greater the premium cost.


Medicare

Medicare is a federally funded health insurance program for people 65 or older and those under 65 with disabilities. Unfortunately, Medicare does not generally cover long-term care services, but there are a few exceptions.


If you meet specific criteria, Medicare will help pay some of the cost of a short stay in a skilled nursing facility, hospice care, or home health care.  However, Medicare payments are limited and probably inadequate for extended care needs.

NOTE: the criteria you need to meet for Medicare to help with the cost of these services are beyond the scope of this blog post. Talk with a Medicare specialist or your financial advisor if you have questions.

Medicaid

Medicaid is a federal entitlement program administered by individual states that pays for medical assistance for low-income individuals. It is the primary payer across the U.S. for long-term care services. Medicaid policies for eligibility, services, and payment can get complicated and vary considerably from state to state. However, generally, a person must have limited income and assets to meet the financial requirements for Medicaid.


Each state's Medicaid program differs in what it covers, so there is too much to unpack in this blog post. If this may apply to you, visit your state's Medicaid website to learn more.


Factors to Consider Before You Purchase Long-Term Care Coverage

The primary use of long-term care insurance is to help pay for and protect your accumulated assets against the risk of the high costs associated with extended long-term care needs. Consider whether long-term care coverage makes sense if you want to leave assets to your heirs or spouse.


Variables that affect long-term care premiums include age and gender, benefits (amount and duration), health characteristics, geographical location, elimination periods, inflation protection, and additional riders. Premiums may also be lower for married applicants because one spouse may be able to provide care for some time and, therefore, have a shorter duration of claims submitted to the insurance company.


Long-term care premiums may be unaffordable if you have a low income and net worth. In that case, you will likely qualify for Medicaid. However, children with higher incomes or net worth may want to pay long-term care premiums to provide protection for their parents. If you have a moderate income and net worth, you are likely a good candidate for long-term care insurance, especially if you have wealth transfer goals to your heirs or want assurance that you can afford a care provider or facility. You can self-insure and utilize your assets and savings to pay for care if you have a high net worth. However, if you want additional asset protection for your wealth transfer goals, you may wish to purchase long-term care insurance.


Considering your family history when purchasing long-term care insurance is also a good idea. If you have relatives or immediate family members who have lived well into their 90s, it may put unneeded stress on your assets and savings to self-insure. Supplementing the assets you have accrued over the years with a long-term care policy could be a good idea.


Lastly, like any insurance policy, long-term care insurance concerns risk management and individual risk tolerance. If you are a risk-averse individual, having coverage is probably more prudent and could help you sleep better at night. If you are more price-sensitive and feel willing to retain the risk or use all your assets during your lifetime, then a long-term care policy may not suit you.


Features and Benefits of Long-Term Care Insurance You Should Know About

Like any insurance product, long-term care insurance can get complicated. There are many definitions, features, and benefits to know to ensure you get quality coverage. Here are a few things to look out for:

  • Renewals and Cancellations – Long-term care policies are guaranteed renewable, meaning the insurance company must renew your policy each year so long as you pay the premiums. As the policy owner, you can cancel the coverage anytime by notifying the insurance company. The insurance company can increase premiums on policies, but only if the increase is for an entire class of insureds and it is approved by the state's Insurance Commission.

  • Non-forfeiture Benefits – This is an optional benefit offered by the insurance company to guarantee that you will receive some of the benefits for which premiums were paid, even upon cancellation or lapse of the policy. The longer you pay premiums, the larger the non-forfeiture benefit. Since you can reject this benefit, policies with the non-forfeiture feature are more expensive than those without it.

  • Waiver of Premium – This policy provision allows you to stop paying premiums while receiving benefits.

  • Inflation Protection – Hopefully, it will be years after you purchase a policy before you need long-term care services. However, over time, costs for services could increase significantly. This is especially true when you buy coverage at a younger age. Inflation protection helps you maintain the purchasing power of your original contract benefit.

  • Elimination Period – Similar in theory to a deductible, this is the time between being eligible medically for your policy to kick in and when benefits start paying out. The elimination period may be 0, 30, 60, 90, or 180 days. Therefore, if you had a policy with an elimination period of 30 days and you became eligible medically to trigger your policy, you would have to wait 30 days from that day to start accruing benefits from the insurance company. This means you would receive your first check 60 days after your qualifying date (at the end of the first month you qualify). Typically, the longer the elimination period, the lower the premium.


In addition, many different types of care are included in long-term care services. These include:

  • Homemaker/Companion – This service allows you to live in your own home and helps you complete household tasks that you cannot manage alone, such as cleaning the house, cooking meals, or running errands.

  • Home Health Aides – This service allows you to live in your own home, and the aide cares for you when you need more extensive personal care than family or friends can provide, including helping with your activities of daily living.

  • Adult Day Health Care – Offers a break to caregivers who may otherwise be working around the clock with you. This may also include individuals needing supervision who live with family members and may not need assistance 24 hours a day. This community-based center is for older adults who need help or supervision during the day but not 24-hour care. It may provide health and therapeutic services as well as social activities.

  • Assisted Living Facilities (aka Residential Care Facilities in California) – These facilities provide living arrangements, along with personal and health care services for those who need assistance with activities of daily living. The level of care provided is not as extensive as at nursing homes. Still, they offer a more intermediate level of long-term care than at-home and nursing home care.

  • Nursing Home Facility – These are designed for those who need more supervision and care than in an assisted living facility. They offer residents personal care, living arrangements, supervision, medication management, therapies, rehabilitation, and skilled nursing care 24 hours a day.  Skilled nursing care involves care that can only be performed safely and correctly by a licensed nurse, doctor, or therapist.


Long-term care insurance may exclude entirely or partially certain conditions from coverage. Policies typically exclude pre-existing conditions, certain mental and nervous disorders, and care provided by family members or loved ones.


Alternatives to Long-Term Care Insurance

While long-term care insurance can be a fantastic option for many, these policies are not for everyone. For one, these policies are expensive. According to the American Association for Long-Term Care Insurance, the average annual premium for a healthy couple, both age 55, with a maximum lifetime benefit of $800,000 for their needs at age 85, can expect to pay around $5,000. If you have a lower to moderate net worth or little room for additional spending in your budget, the premiums could be challenging to keep up with, especially if the premiums increase over time. Also, unlike annuities and certain life insurance policies, long-term care insurance does not accumulate a cash value. Lastly, the underwriting process can be confusing, complicated, and time-consuming. Because of this, many insurance companies choose not to underwrite these policies, making it more difficult for you to find the right insurance company that will.


With that being said, alternative insurance products and hybrid solutions have been created to offer alternatives to long-term care insurance while still meeting the needs for those services.


1. Life Insurance Policies with Long-Term Care Riders

Several options are available to those with life insurance policies to cover long-term care costs. This can be through:

  • Accelerated Benefits – A provision of specific policies that lets you take a portion of the life insurance payout while you are still alive to meet qualifying medical expenses. Doing this reduces your policy's death benefit by the amount you withdraw.

  • Life Settlements and Viatical Settlements – These involve selling your life insurance policy to a third party in exchange for a cash payment that is less than the policy's death benefit but generally more than the cash surrender value. However, this does mean that your beneficiaries will no longer get a death benefit from the policy.

  • Borrowing – You could access cash to pay for long-term care by borrowing from the policy's accumulated cash value.


Rather than relying on these methods, a long-term care rider can be included when you purchase certain life insurance policies. By purchasing this rider, you will either receive a payout for long-term care (which may reduce the policy's death benefit), or your beneficiary will receive the full death benefit if you do not use the long-term care rider.


2. Annuities With Long-Term Care Provisions

Annuities are an insurance product that allows you to grow your assets tax-deferred in a cash accumulation account and, later, convert the cash account to a periodic income stream. This may make sense if you do not want to pay the monthly premiums for a long-term care insurance policy and, instead, have a sum of money you have allocated for potential long-term care expenses. That sum can be placed in an annuity with a long-term care rider. That money will provide a higher long-term care benefit if you need it, or the annuity will pay the value of the cash account to your named beneficiaries upon your death if long-term care expenses are not needed.


One of the main advantages of this method is that underwriting is much less rigid than traditional stand-alone long-term care and life insurance policies. This opens doors for those who may not qualify for other types of coverage. That said, most insurance companies have a minimum that must be contributed to the contract, so you must have a certain level of savings to afford these contracts.


NOTE: If you already have a traditional annuity and wish to change it to this hybrid product, you may be able to do a tax-deferred exchange. This is outside the scope of this blog post, so if you are interested, talk with your tax preparer and financial advisor to ensure the exchange rules are followed.

3. Deferred Income Annuities (aka Longevity Annuities)

These annuities are a contract between you and an insurance company. This contract will often be purchased for a lump sum (also called a single premium) in exchange for a guaranteed income stream for life. The income you receive from the contract depends on the premium paid, your age, your life expectancy, and the period over which the income will be paid. The advantage of this option is that you cannot outlive this stream of monthly payments, and the income payments are not designed exclusively for long-term care services – they can be used for anything.  


4. Short-Term Care Insurance

Short-term care insurance offers benefits for similar types of care as traditional long-term care policies, but for a shorter period of time – usually one year or less. Since there is a long-term commitment with the insurance company for long-term care insurance, it is typically easier to qualify for coverage, and the premiums for these policies are generally lower. Also, these policies commonly have short or no elimination periods, allowing benefits to initiate more or less immediately should you need them.


5. Critical Care or Critical Illness Insurance

These policies extend lump-sum cash payments if you are diagnosed with a qualifying severe illness (e.g., heart attack, stroke, cancer, etc.). If you are diagnosed with a serious illness, your medical health insurance plan may cover some health care costs, but not all. With the exorbitant prices to receive care for treating life-threatening diseases, these costs are usually more than any health plan will cover. The premiums for these policies are also generally less expensive than long-term care insurance. However, one caveat is that the benefits of these policies cannot go towards an issue from a previous diagnosis. Coverage is only valid if the illness is recent and previously undiagnosed. Also, because these policies come at a relatively low cost, the illnesses and emergencies that trigger coverage are generally limited.


6. Veteran Benefits

As a veteran of the U.S. Armed Forces, you may be eligible for certain veteran benefits, including nursing home care, assisted living services, and home health care. Generally, you can use these services if you are signed up for VA health care, the VA concludes that you need specific services to help with your ongoing treatment and care, and the service is available near you. To learn more about these services, visit the VA's website, contact your VA social worker, or call the toll-free hotline.


7. Reverse Mortgages

Reverse mortgages are a type of home equity loan that allows you to receive cash against the value of your home without having to sell it. You would continue to live in the home, retain title and ownership of the home, and will continue to be responsible for paying property taxes, homeowners insurance, and home repairs. You will receive the money as a lump sum, a monthly payment, or a line of credit. As the borrower, you do not make any monthly payments to repay the loan. Instead, the amount owed back to the reverse mortgage company is based on the loan payout plus interest and expenses on the loan. That amount comes due when the last borrower (usually the last remaining spouse) passes away, sells, or permanently moves out of the home.


There are several disadvantages to a reverse mortgage. Like many financial products, reverse mortgages can be complicated, and you may not fully understand what you are getting yourself into. Moreover, these loans are expensive, and there may be little to no equity left in your home to go to your beneficiaries.


Bottom Line

Assessing your long-term care needs requires planning. There are many factors at play, and there is no one-size-fits-all solution. These strategies and insurance offerings are complicated and should be analyzed with care. One thing is for certain: the best time to start planning is while you are healthy. If you wait until you are unhealthy, this could significantly reduce your options for coverage. If you get declined by one long-term care provider, this could hurt your chances of getting approved by others since the insurance companies typically ask if you have been refused coverage before.


The good news is that there is a strategy out there that works best for you. Whether it be self-insuring, utilizing Medicaid, purchasing a long-term care or hybrid policy, or some alternative, many tools are available to help you along the way. In all cases, the best thing you can do is to be proactive and discuss your needs with your financial professional to give you peace of mind and protect your financial well-being for the years ahead.


To discuss these questions and learn more about how Holzberg Wealth Management can help you achieve your financial goalscheck us out! You can schedule a complimentary, no-obligation call with us here.


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About the Author

Holzberg Wealth Management is a family-owned and operated financial planning and investment management firm based in Marin County, CA. As your financial advisors, we serve you as a fiduciary and are fee-only, so we never receive commissions of any kind. We help individuals and families like you in the greater San Francisco Bay Area and virtually nationwide with the financial decision-making process to organize, grow, and protect your assets.



** This writing is for informational purposes only. The author and Holzberg Wealth Management do not guarantee or otherwise promise any results that may be obtained from using this report. No reader should make any investment decision without first consulting their financial advisor and conducting their own research and due diligence. These commentaries, analyses, opinions, and recommendations represent the personal and subjective views of the author and do not constitute a recommendation, offer, or solicitation to make any securities transaction. The information provided in this report is obtained from sources that the author believes to be reliable. External links to third parties are being provided for informational purposes only. Holzberg Wealth Management is not affiliated with the third-party websites linked to, unless otherwise explicitly stated, and does not constitute an endorsement or approval by Holzberg Wealth Management of any of the third party’s products, services, or opinions.

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