Capstone Connections

Should You Buy Long-Term Care Insurance?

Key Points:

  • Long-term care insurance is an insurance product that covers the costs for assisted living facilities, nursing homes, home-health care, and more.
  • The benefits payable can vary, depending on the type of policy that you have.
  • The cost of long-term care insurance can be significant, but will depend on when you buy the policy, your health, and the amount of coverage you select.

Individuals age 65 or older are the fastest growing age group today and are expected to be over 25% of the population in the next 50 years.1 With an aging population comes an increased need for medical assistance. When coupled with advances in modern medicine and the resulting increase in life expectancies, people now require medical care for an even longer period of time. This increase in medical assistance will only mean an increase in future medical expenses for most families.

The costs of medical care can be overwhelming. The average annual nursing home costs are currently more than $82,000 per year for a semiprivate room and over $92,000 for a private room, with average stays around 24 months for individuals age 65 and older.2 Home health care can cost as much as $28 an hour for an aide to come to your house. Based on this figure, if you receive home health care for eight hours per day for five days a week, it could cost more than $4,400 per month.3 With costs continually rising, many of our clients are wondering if long-term care insurance (LTCI) is appropriate for them. To answer that question, we first need to answer the following set of questions: 1) What is long-term care and LTCI? and 2) What are the benefits and costs of LTCI?

What Is Long-Term Care and LTCI?

The term “long-term care” refers to medical assistance that people with disabilities, chronic illnesses, and/or other conditions need for a long period of time. This medical assistance includes the simple activities of daily living, which are defined as eating, bathing, dressing, toileting, maintaining continence, and getting in and out of bed/chairs. This type of medical assistance is normally provided by a nursing home, assisted living facility, hospice care, Alzheimer’s facility, home health care, adult daycare center, or respite care facility.4

LTCI is an insurance product that is purchased to pay for the costs associated with long-term care. It typically covers medical expenses that are not covered by your health insurance or government insurance plans, such as Medicare.

What Are the Benefits Payable Under a LTCI Policy?

There are three broad categories of long-term care policies available:

  1. Facility-only policy (i.e., nursing home policy): This policy only pays benefits if you are in a nursing home or similar facility.
  1. Home-health care policy: This policy provides benefits for services or care outside of an institutional setting.
  1. Comprehensive policy: This policy combines both facility-only and home-health benefits.

There are two main ways LTCI policies pay out benefits:

  1. Reimbursement basis: These benefits reimburse the insured for actual expenses up to the specified policy limits.
  1. Per diem basis: The benefit amounts selected in the policy are paid, regardless of the actual cost of care. For example, if you select a $200 daily benefit amount and the actual costs are only $150, you would still receive $200 of daily benefit.

To determine the period of benefits under a LTCI policy, it is necessary to look at the “elimination period”, the “maximum duration of benefits”, and the “pool of money” concepts. The elimination period is the waiting or deductible period. The policy will not start paying benefits until after the stated elimination period. After the elimination period, the policy will either follow a maximum duration schedule or a pool of money schedule.

The maximum duration of benefits is how long the policy will continue paying the stated benefits. After that period ends, the policy will terminate. The pool of money concept differs in that you are given a pre-determined amount of benefits, and once that amount has been paid out, the policy will then terminate.

What Are the Costs Associated With a LTCI Policy?

The most important factors in determining the cost of a LTCI policy are your age at the time of application, your health when you apply, and the amount of coverage you select. As a rule of thumb, the ideal time to purchase LTCI is between the ages of 52 and 64. Purchasing prior to this time might not prove as cost effective, considering the years of payment.  As an applicant’s age increases, however, so do the costs of the policy, as well as the chance of being declined for coverage.

Your health at the time of application is also a major factor. The poorer your health, the more expensive the coverage. Lastly, the amount of coverage you select will dictate how much your policy will cost. For example, a policy with $7,000 monthly benefit could cost around $2,700 per year for a 55-year-old male, in comparison to a policy with a $10,000 monthly benefit for that same person, which could cost upwards of $3,900 per year as of this writing, according to Matt Smith, insurance agent at Ralph Weiner & Associates, LLC.

Our Take-Aways

Long-term care insurance could be an important part of your overall financial plan. Similar to other types of insurance, LTCI has its pros and cons, and is very specific to a family’s situation.  If you have a family history of chronic illness, or you are projected to have limited assets in your later years, then a LTCI product may be right for you. However, given the high cost of LTCI policies, and the fact that it may only be used for a short period (29 months on average), the cost-to-benefit ratio of LTCI may be unattractive in some situations. Lastly, some families with substantial assets tend to find that they are essentially self-insured with cash flow to fund any needed long-term care expenses.

Sources
1NAIC and CIPR, The State of Long-Term Care Insurance: The Market, Challenges, and Future Innovations
2Bloomberg, 75 Must-Know Statistics About Long-Term Care
3Paying For Senior Care, Home Care Financial Assistance and Payment Options
4AARP, Understanding Long-Term Care Insurance

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