Guide to Long-term Care Insurance

What is long-term care insurance?

Long-term care insurance (LTCI) is a type of insurance policy that provides coverage for the costs associated with long-term care services. Long-term care refers to a range of services and support provided to individuals who are unable to perform basic daily activities due to chronic illness, disability, or cognitive impairment.

Importantly, long-term care is custodial care, not medical care. As a result, medical insurance does not provide benefits for long-term care costs.

This care can be provided in various settings, including nursing homes, assisted living facilities, or even in one's own home.

Long-term care insurance aims to help individuals cover the high costs of long-term care, which can quickly deplete one's savings and assets. It provides financial protection and helps individuals maintain their independence and quality of life while receiving necessary care.

When does long-term care insurance kick in?

A policyholder will be eligible to receive benefits from a long-term care policy when they can no longer perform two of six activities of daily living (ADLs) or if there is severe cognitive impairment expected to last more than 90 days.

The activities of daily living are:

1. Bathing
2. Dressing
3. Feeding
4. Toileting
5. Transferring
6. Continence

What about Medical insurance? Medicare? Medicaid?

Medical insurance, including standard health insurance plans, typically does not cover long-term care expenses. Medical insurance is primarily focused on covering medical treatments, procedures, and hospital stays related to acute illnesses or injuries. Long-term care, on the other hand, is considered custodial care.

Medicare has limited coverage for long-term care services. Medicare may cover short-term skilled nursing care or rehabilitation services in a nursing home following a hospital stay, but only under specific conditions and for a limited duration. Medicare does not cover custodial care, such as assistance with activities of daily living (ADLs) or long-term stays in assisted living facilities or nursing homes.

Medicaid provides coverage for long-term care services for individuals with limited income and assets. This is a last resort after assets (cash, investments, home equity, etc.) have been liquidated.

Why is long-term care insurance important?

1. Financial protection

Skilled nursing and long-term care are expensive and could be a significant drain on a household’s assets. While a couple may have a sizable nest egg to safely cover their standard living expenses, travel, et cetera in retirement, a long-term care need could deplete a significant portion of those assets and leave a surviving spouse with inadequate savings.

This risk is particularly acute in the event of an early cognitive diagnosis or long-term care need.

2. Preserving Independence and Easing Family Burden

Long-term care insurance allows individuals to maintain their independence and quality of life by providing coverage for services that assist with daily activities, such as bathing, dressing, and eating. It enables individuals to receive the necessary care in their preferred setting, whether that's their own home, an assisted living facility, or a nursing home.

Without long-term care insurance, the responsibility of providing this type of care often falls on family members, who may need to juggle their own personal and professional commitments. Having long-term care insurance can alleviate the financial and emotional burden on family members, as it provides funds for professional caregivers or covers the costs of assisted living or nursing home care.

3. Mental Accounting and Getting Help When Needed

For those with sizable nest eggs, an alternative to long-term care insurance is to “self-fund” long-term care costs. This could mean earmarking a specific account for long-term care expenses or simply foregoing insurance because you have the means to cover long-term care costs.

A risk to this approach, even in the presence of sufficient assets and savings, is not getting help or delaying professional care when long-term care is appropriate. The healthy spouse may take on the long-term caregiver role longer-than-necessary or indefinitely, rather than use the funds set aside for long-term care.

By purchasing insurance, you are likely to get long-term care assistance as soon as it is required.

What is the cost of long-term care services?

The cost of long-term care varies by the type of services and location.

Types of long-term care services include:

• In-Home Care – "Hands-off" care like assisting with cooking, cleaning, running errands, or "Hands-on" care including assisting with bathing, dressing, eating, medication, and more
• Community and Assisted Living – Adult daycare centers providing breaks to caregivers and facilities that provide assistance with the activities of daily living.
• Nursing Home Facilities – For individuals with a greater need of supervision and care, providing room and board, supervision, medication, therapies, and 24/7 skilled nursing care.

Costs for these services will vary widely by location. An excellent resource to research the costs of care in your area is Genworth’s Cost of Care website.

For example, the median annual costs for these services in Madison, WI in 2021 are:

How much does Long-term Care Insurance Cost?

Depending on your age, health, risk factors, and benefit options, long-term care insurance is likely to cost $150-$300 or more per month. (These figures are based on traditional, standalone, “pure” long-term care insurance. I will comment on other types of long-term care insurance later on.)

Factors that impact the cost of insurance include:

1.  Age – The older you are when applying for a policy, the greater your premiums are likely to be.
2. Health – Your overall health and pre-existing conditions may impact the cost of insurance. Insurers will go through an underwriting process, likely including a review of your medical history and a medical exam.
3. Benefit Options – The amount of coverage, length of coverage, inflation rider, elimination period, and other features will impact the cost of your policy.

A quick estimate could be obtained through Mutual of Omaha’s calculator.

For example, a 50-year old male in Wisconsin may pay $150 per month for a policy providing $4,000 of monthly benefits for a period of 3 years with a 3% inflation rider.

A 65-year old male may pay over $230 per month for the same policy.

What about premium increases?

Most traditional long-term care policies will not have guaranteed premiums, meaning your premiums may increase over time. This was a major problem with long-term care insurance in the early 2000s, as policyholders were subject to significant and often double-digit percentage increases for their policies. However, significant changes and regulations have been made to reduce this risk.

Why did long-term care premiums increase historically?

Long-term care insurance has only been around for about 50 years, and initial actuarial assumptions proved to be way off the mark. The most significant erroneous assumptions included:

1.  Lapse Rates – Actuaries assumed policyholders would allow their long-term care policies to lapse at rates similar to other types of insurance (like life insurance). However, policyholders held onto their policies at a far greater rate.
2.  Interest Rates – Prior to the 2010’s, and especially in the 70’s and 80’s, interest rates were far higher than they are today. Actuaries assumed insurance companies would be able to earn this high rate of interest on premiums.
3. Medical Advances – With advances in medicine, people are living longer and surviving previous life-threatening and life-curtailing illnesses, ultimately increasing claims for long-term care.

What has been done to prevent similar premium increases?

In response to these issues, rate stabilization legislation has been adopted by most states to help guard against a repeat of previous pricing errors. Key components of the legislation include:

1. Policies need to be priced to be stable for the entire duration of the policy series. And each state must approve all products and premiums before they are sold.
2. Lapse rate assumptions must be set near zero (in the first generation, insurance companies assumed many policyholders would allow policies to lapse).
3. Rules on how much profit (or lack thereof) insurers can price into premium increases. Essentially the insurance company must be losing money on these policies in order to increase rates.
4. Must assume a low-interest rate environment will persist.

Key Components of Long-term Care Insurance Policies

When exploring long-term care insurance policies, the following are key features of each policy:

1. Daily or Monthly Benefit

The maximum monthly benefit the policy will pay for long-term care costs. Most policies allow unused daily or monthly benefits to be rolled forward for future use.

2. Benefit Period

Often expressed in years, this is the maximum amount of time the maximum monthly benefit would be paid. Although policies will quote the benefit period in years, the monthly benefit times benefit period can really be viewed as a total pot of money available for your care.

For example, a policy with a $5,000 monthly benefit and 3-year benefit period can be viewed as a total pool of money of $180,000 ($5,000 per month for 3 years). If you only use a portion of the total monthly benefit, you can effectively stretch your coverage beyond the benefit period.

For this reason, it’s generally better to have a shorter benefit period with a greater monthly benefit vs. a long benefit period with a lower monthly benefit. A 3-year $5,000/month policy > a 6-year $2,500/month policy.

3. Elimination Period

The “deductible” on a long-term care policy is the elimination period, or the period of time you must wait between qualifying for long-term care and receiving benefits.

The greater your assets, the greater you can stretch the deductible, which can be 0, 30, 90, 180, 365 days, or more. An important point of clarification is to select a policy where you only need to meet the deductible once per lifetime (not multiple times in the event of multiple long-term care events).

4. Inflation Rider

The initial benefit amount you choose can be inflated annually through an inflation rider, which is highly recommended. Common inflation riders are 3% or 5%. Historical inflation for long-term care has been in the range of 3%-5%, but has differed based on the type of care.

5. Shared Care Rider

For spouses, individual policies may be linked to provide a bigger pool of coverage. If one spouse depletes their coverage, they can tap into the other spouses coverage. And if a spouse dies without using coverage, the other spouse can tap into the unused coverage, effectively doubling the coverage.

Other types of long-term care insurance policies – Hybrid Long-term Care Insurance

Traditional (aka Standalone) long-term care insurance has been the focus of this post. Traditional long-term care insurance is “pure” insurance, akin to term life insurance: If you have a need, the coverage is there. If you don’t, you “lose” the premiums paid.

While this risk-transfer is the simplest and often cheapest option for coverage, alternatives with additional features are available.

Hybrid Long-term Care Insurance is technically a whole life insurance policy with a long-term care insurance rider. Key differences between hybrid and traditional long-term care include:

1. Cash Value – Hybrid Long-term Care Insurance may build a cash value within the policy, which the policyholder may access if they decide to surrender the policy.
2. Shortened or Single-Pay Premiums – Hybrid policies may offer guaranteed premiums over 10 years or even in one lump sum, as opposed to lifelong, non-guaranteed premiums for traditional policies.
3. Death Benefit – If the long-term care benefit is not used, a death benefit could benefit a spouse or loved ones.
4. Cost – For these added features, the cost of these policies tends to be far higher than traditional long-term care insurance, as much as 2 to 4 times as expensive.

Similar to whole life insurance, it’s challenging to envision a compelling use case for hybrid long-term care vs traditional long-term care. A major selling point of hybrid long-term care policies is the return of premium benefit or cash value benefit and guaranteed premiums. However, we have already discussed the regulatory changes that have made traditional long-term care policy premiums more stable. And the benefit of a cash value is paid for (by you) through much higher premiums for hybrid long-term care.

When should you consider purchasing Long-term Care Insurance?

(Jokingly) The day before you need long-term care! Practically, in your 50s to early 60s is often considered a "sweet-spot" for purchasing long-term care insurance.

Why your 50s to early 60s?

1. Prior to your 50's - Very low odds of needing care

The younger you are, the less risk of needing long-term care services. As a result, purchasing insurance prior to your 50s is unlikely to pay off financially. However, if you have the excess cash flow to afford long-term care premiums, purchasing long-term care insurance may provide peace of mind and allow you to pay a lower initial premium.

2. Premiums do not significantly tick up until your 60's

The monthly cost difference between buying a policy at age 40 vs. age 50 is unlikely to be significant. Long-term care insurance premiums tend to really ramp up in your 60s to 70s.

Consider the following estimated quotes for a single male in Madison, WI for benefits lasting 3 years with a $5,000 monthly benefit:

Premiums really begin to tick up as you reach 60 and older. Once you reach age 60, not only are premiums likely to increase each year you delay purchasing insurance, but your risk of a long-term care need is also increasing.

3. Risk of Being Uninsurable

Long-term care insurance policies often require medical underwriting. As you age, the risk of a medical event that would make you uninsurable increases.

Below are the rates of applicant denials for long-term care policies:

Source: American Association for Long-term Care Insurance (aaltci.org)

Is Long-term Care Insurance right for you?

Ultimately, the decision of whether to purchase long-term care insurance is highly personal.

Financially, in the case of a limited pool of assets that you and a spouse are relying upon for retirement, long-term care insurance may be a near-necessity.

However, even in the case of significant liquid assets and the ability to “self-fund” long-term care expenses, purchasing insurance may still be appropriate. The comfort of knowing funds are earmarked for these needs and that you will receive professional help should the need arise could easily outweigh the cost of long-term care insurance.

---