While the Beatles asked, “Will you still need me, will you still feed me when I'm sixty-four?”, the real question is who will care for me when I can’t care for myself? And then, who will pay for it? Many costs related to aging are covered partly or fully by Medicare, but most long-term care, whether in the home or in a facility, is not. Thus, the search for the best – and most affordable – solution begins.
If the solution is long-term care insurance, that search hopefully starts way before the care is needed. That type of insurance is virtually impossible to get unless you are healthy, and the premiums are much more affordable if the insurance is purchased when you are closer to age 50. Let’s look at all the details and available options.
We envision ourselves being fit and capable of caring for ourselves until we go to bed one night and don’t wake up. Unfortunately, that’s not likely to be the story for over 50 percent of seniors over 65 who will need some form of long-term care, at an average cost of nearly $140,000, according to Consumer Reports.
Care can take many forms. Custodial care, the most common, helps us with daily tasks and duties but does not require someone with medical training. (At an average daily rate of $70, that represents more than $25,000 per year.) Intermediate care may require some nursing or rehabilitative care, but not 24/7. Skilled care, the costliest, is prescribed by a doctor and provided by a skilled nurse or therapist 24/7.
The type of care needed tends to be progressive and can be provided in many different venues: at home, at an adult day care facility, in assisted living, in a nursing home and, eventually, in hospice care. Some facilities provide a continuum, from independence to full dependence, with ever-greater services offered at an ever-greater cost.
Since these costs are rarely covered by Medicaid, Medicare or health insurance, several insurance companies market long-term care insurance. This will be an add-on to your health insurance, not a replacement for it. Long-term care insurance is only activated once two or more of a senior’s ‘activities of daily living’ (ADLs) can no longer be performed independently. Those include bathing, grooming, toileting, eating, walking, household tasks and others. However, the policies also include waiting periods, usually 30-180 days, during which the policy does not cover the cost of providing the needed services, and they must be paid out-of-pocket.
Long-term care insurance is costly. Wealthy seniors can afford to pay the cost of needed care directly. Seniors with limited budgets can afford neither the insurance, nor the cost of care, and fall back upon what Medicaid provides. Seniors between those two extremes – and who are interested in long-term care insurance – must look carefully at when to buy, what to buy and how to use that insurance, if at all.
The cost of third-party care as we start losing our ability to care for ourselves can drain savings very quickly. Most seniors who need care will need it for less than two years, but 15 percent of 65-year-olds will face the financial consequences of paying for more than five years of disability.
Ideally, we will have family members and loved ones who can provide services early on but, eventually, assistance will be needed. Long-term care insurance is often part of one’s retirement planning. The earlier in life a policy is purchased, the lower the premiums will be: insurers assume premiums are likely to be paid for a longer period before the service is needed if it ever is.
The benefits of having a long-term care insurance policy in place include knowing:
- your long-term care costs will be covered;
- you can remain in your home, with assistance, for longer than you could without the assistance;
- your medical needs will be met;
- you will not be a burden on your children or family members, and will not deplete their savings; and
- you will receive the appropriate level of care, making your later years more comfortable.
These benefits bring a tremendous sense of relief and peace of mind.
For most seniors, an ideal transaction is one that is affordable and easy. In the case of long-term care insurance, the major filter will be the cost charged for the combination of benefits you request. Next come the ease of enrollment, the selection of coverages, the flexibility in waiting periods and how supportive the company’s customer service is in answering any questions or concerns.
Other factors include the variety of optional benefits available, how benefits are accessed, the limits to coverage and the number of years the coverage will last once activated.
We all hear how expensive long-term care is, but it doesn’t really hit home until someone we know and love needs it. Then the sticker shock hits: skilled care at $250-300 per day means more than $90,000 per year. Once we realize how quickly our (or a loved one’s) care could go through our savings, buying insurance becomes an immediate consideration.
Before contacting any reputable insurers, a series of factors should be understood.
Timing: Experts recommend shopping for long-term care insurance somewhere in the 45-55 age range because that will lower the monthly premiums. Also, you must be healthy when you buy the policy. However, remember that you will be paying those premiums much longer before the care is typically needed. Even if that early age window was missed, coverage is available but at premiums that escalate markedly as you move through your 60s and into your 70s. Eventually, coverage may not even be available. One source says that 25 percent of applicants between 60 and 69, and 44 percent of applicants between 70 and 79 are turned down.
Elimination period: Not all long-term care policies go into effect immediately, once triggered, although some may. Often, after a doctor has confirmed that you require the services, there is a waiting period (usually of 30-180 days) that you need to cover financially before the insurance company starts paying. The shorter the waiting period, the higher the monthly premiums. The most typical length seems to be 90 days. How much money you have in savings that can be spent on the interim care will be one factor in defining the elimination period.Note that many policies have no waiting period before they start covering in-home custodial care.
Daily benefit: The amount you will be reimbursed each day is one of the most important factors in defining a long-term care insurance policy. You will have to pay whatever the care costs beyond what you select as a daily benefit. If possible, you should select a figure that covers what you think it will cost, such as $300 per day.
Term: Not all long-term care insurance policies cover you forever. Some have set terms, the most typical being between three and five years. Since the average stay in a nursing home is around 2.5 years, three years may be long enough, although you would not want to outlast the term and be forced to pick up 100 percent of the costs again.
Cap: Some policies will pay for your care for as long as you need it, but most will have some sort of cap. It may be the combination of the daily benefit and the term, say $300 per day for three years, or it may be a simple dollar amount.
Inflation protection: The cost of long-term care will rise over time as a function of inflation. Therefore, a policy fixed at a set amount, say $300 per day, may not be sufficient to cover the cost in 10-15 years when you finally put it to use. Most companies offer inflation protection. You must determine the rate of inflation you want to have protected, such as 3 percent or 5 percent, compounded. That rate may seem sufficient in today’s economic environment because the economy has been manipulated for some time, but inflation could turn out to be much higher.
Shared-care rider: This rider allows married couples to share the benefits purchased through a long-term care policy. Once one partner uses up his or her benefits and needs further care, the other partner’s benefits are available to be used. However, that means the second partner may have limited or no benefits later, if needed.
Premium: When designing a plan, either with your retirement planner or on your own, figure out what monthly premium would be affordable for the long term. It makes no sense to purchase a first-class policy if you cannot afford it later. You would be better off buying one with a lower premium (by shortening the term, lowering the daily benefit or removing inflation protection). One important detail: no matter how long you pay your premiums, the day you stop paying, your policy is no longer in force. You will not get a refund of paid premiums unless you had purchased a hybrid policy that is somehow linked to a life insurance policy. Doing your homework is critical.
Vetting: First, check with your state insurance department to ensure the company is licensed to write policies in your state. Then check A.M. Best’s Financial Strength Rating (FSR) of the insurance company, as many companies have failed or left the long-term care market in recent years. Insurers that failed were not absorbed into other companies, so it is unlikely the responsibility for coverage was passed on elsewhere. Those insured seniors simply lost all the paid-in premiums and were left without coverage. This instability, plus long-term affordability with ever-increasing premiums, are the main hesitations people have in buying these policies.
Communications: Once a long-term care insurance policy is purchased, be sure to share its details with those who could be caring for you. Do not keep it a secret. They need to know about the policy and have the authorization to speak for you if needed. If dementia enters the picture, you may not be able to tell them. You may also forget to pay premiums, which would void the contract, so be certain a mechanism is in place between the insurance company and your assigned caretakers to advise them the moment a premium payment is missed.
Once these different topics have been considered, you are ready to contact several qualified providers of long-term care insurance. Costs can vary considerably from one provider to another. Be certain you have read the fine print of any contract before signing it to understand why the quoted premiums may have varied.
Two areas are priorities for seniors looking at long-term care insurance: age-friendliness and health-related value.
Age friendliness: The older you are when obtaining the insurance, the higher the premium will be and the more likely you will be declined as you move into your 60s and, most especially, your70s. As for the implementation of a policy, the insurance company will not be assisting with the selection of facilities, so the older you are, the more you will need the assistance of a loved one.
Health-related value: Eventual poor health is obviously the reason you have purchased such a long-term care policy and, as your health deteriorates, you will be grateful for the peace of mind of knowing your care is covered. However, the expectation is that you will be in good health at the time of purchase, so you cannot hold off buying a policy until you need it.
As explained above, the cost of long-term care insurance is based primarily on your age at the time you purchase the policy, the daily benefit you select, the length of the term over which you want coverage and the elimination (or waiting) period you select before the policy kicks in.
Broker World magazine recently reported that premiums have been escalating rapidly each year. For a typical long-term care policy, the average annual premium increased from $1,000 to $3,000 in the last ten years. However, as an average, that means policies could cost twice that amount. Seniors looking for quotes from insurers should also request each company’s rate increase history on long-term care insurance policies.
Premiums for women are higher than for men because women live longer on average than men. They are typically 50 percent higher than for a man at the same age and with identical conditions.
A typical policy might have a cap at $200,000, monthly benefits of $5,000, with a 90-day waiting period for long-term care, but no waiting period for in-home care. According to one source, the premium for a policy purchased at age 60 will be 22 percent higher than at age 55, and 45 percent higher at age 65 than at age 60. The older you are, the higher the risk you pose to the insurer.
However, if you are married, you could save 15 percent or more on premiums compared with similar single purchasers because it is likely that the early costs of daily care will be delayed by the spouse providing some of the care.
Taxation of benefits is another cost to consider. With a ‘tax-qualified’ long-term care insurance plan, benefits will not be considered income. However, a ‘non tax-qualified’ plan could trigger taxable income. In some cases, part of the premiums could be deducted from your taxes. You should check with your tax advisor to understand the implications of each option.
In purchasing long-term care insurance, your initial evaluation criteria will include the cost, ease of enrollment, what the policy covers, what the waiting period is once you are declared ‘qualified’ for long-term care, and the access to customer service.
Cost: The monthly premium for a long-term care policy will vary with the factors defined above, which you are free to define as you wish. The most important issue is that the premiums must be affordable in the long term and can undergo increases with time. If you stop paying premiums, you will find the policy has been canceled, and you receive no refund of premiums paid in. Medicare does not cover these expenses; in fact, the premium will be in addition to your Medicare premiums.
Ease of enrollment: You will be enrolling while you are healthy, so it is not as if you will be doing so under duress or stress. Regardless, the insurance provider should make enrollment easy, which entails you understanding exactly what is covered, so you can make an informed decision.
Coverage: Different types of policy exist, ranging from in-home care through to assisted living. It is important for you – and your caregivers -- to know what is covered, so you can be proactive about researching what different options exist for facilities, long before the service is needed.
Waiting period: In-home care is often covered as soon as it is deemed needed by a physician. However, long-term care is often subject to a waiting period of 30 to 180 days, during which the costs are not covered by the insurance company, but by the individual.
Customer support: Assistance with administrative issues related to a long-term care policy may well be restricted to normal business hours, Monday through Friday. However, because of the sensitivity of the coverage, greater availability of customer service in urgent situations would be beneficial.
The cost of long-term care in the U.S. is a growing challenge as the Baby Boom generation moves through its late 60s and into its 70s. It is particularly problematic for mid-income seniors who have some investments and savings. Wealthy individuals can afford to pay the cost of such care without insurance, and Medicaid will provide care for the poor and those who exhaust their assets.
Some seniors will convert a standard life insurance policy through what is called a life settlement to pay for rapidly rising long-term care premiums. Life settlement is where a third party purchases the life insurance policy for a sum considerably greater than the surrender value of the policy. That party continues to pay the premiums until the insured dies, and then collects the face value of the policy. A life settlement frees up cash for the insured to pay for long-term care.
If seniors have sufficient equity in their homes, some will take out a reverse mortgage to cover the costs related to aging. The reverse mortgage holder uses the equity in the house as collateral and pays the homeowner a mutually agreed sum as a loan, also charging interest on what is paid out. While that may help to pay for in-home care, one consideration is that many reverse mortgages are only valid while you live physically in the home. Should you move to assisted living, the contract closes, and the amount paid out (plus interest) must be paid back. That obligation is usually met by selling the house. Any remaining equity is paid to the original homeowner or the homeowner’s beneficiaries.
The long-term care insurance industry is undergoing a much-needed revamping after pricing policies caused many companies to close or stop offering the insurance: from over 100 companies in the early 2000s, in recent years there were as few as a dozen. Two newer types of policies that address some of the issues are short-term policies and hybrid long-term care/life insurance policies.
Short-term policies, which are easier to qualify for and less costly, will cover a senior for up to 360 days. They pay for services in the home and in a facility. The downside is that coverage is only for one year, although that would cover many seniors’ experience.
As for hybrid policies, anyone who purchases long-term care insurance must consider what happens if premiums are paid for many years, and the insured dies without needing long-term care. All the paid-in premiums will be lost. One alternative is a ‘hybrid’ policy that combines long-term care insurance with life insurance. Whether the policy is paid in a lump sum or monthly premiums, if the policy is not needed, the heirs get a payout triggered by the life insurance portion when the insured dies.