Wealth Advisory & Planning
March 04, 2022
Elder Care Planning: What You Need to Know About Long-Term Care Insurance
The world’s population is aging, and people are living longer. The U.S. Census Bureau estimates that every day until 2030, 10,000 baby boomers will turn 65 — making the topic of long-term care a timely one. Even the wealthiest Americans are concerned about the rising cost of long-term care. While many choose to self-insure, long-term care insurance (LTCI) is an option that preserves your assets while ensuring you have the necessary resources in your later years.
Here are some things to consider as you evaluate whether LTCI is right for you.
What is long-term care?
Long-term care refers to services and support required when you have a chronic medical condition, disability or disorder as the result of an accident, stroke, cognitive disease or general aging. Some people require 24/7 skilled care, while others need caregiver assistance to perform daily living tasks such as bathing, eating, dressing, toileting and getting in and out of bed or a chair.
Where can I get long-term care?
The services can vary from informal care delivered by family and friends to the formal services of home care aides, assisted living facilities or nursing homes.
Does my health insurance cover long-term care?
Most long-term care services and supports are not covered by traditional health care plans or government programs such as Medicare. Generally, Medicare will cover a skilled nursing facility for 100 days after an inpatient hospital stay. Throughout the 100 days, there are changes to the contribution amount.
What are my chances of needing long-term care?
The average 65-year-old has about a 70% chance of needing long-term care at some point in their lifetime. The U.S. Department of Health and Human Services estimates that while one-third of 65-year-olds may never need long-term care, 20% will need it for more than five years.1
Several factors increase the likelihood of needing long-term care, including:
- Advanced age
- Gender — women live longer than men and are more likely to need care
- Living alone
- Individual or family history of chronic health conditions like diabetes or high blood pressure
- Lifestyle risks such as poor diet or lack of exercise2
What does long-term care cost?
That depends on where you live, the type of care you need and how long you need it. In 2020 the national median annual cost for a private room in a nursing home was $105,850. In-home care from a home health aide was $54,912.3 Further, cost of care varies by state. For example, in 2020 the daily rate for a private room in a nursing home ranged from a low of $189 in Missouri to a high of $1,196 in Alaska. Also include the underwriting process as a variable to cost as well as the elimination period and cost of living adjustment.
How fast are long-term costs rising?
Between 2004 and 2020, the costs for facility and in-home care services rose on average of 1.88-3.80% a year.4
What are my options for paying long-term care expenses?
The most common are to self-insure or purchase a long-term care policy. More complex strategies, including annuities with an LTCI rider, charitable remainder trusts and reverse mortgage arrangements, can also be used to pay for long-term care.
Your Glenmede Relationship Team can help you evaluate which option is right for you in the context of your Goals-Based Wealth Management plan.
How does LTCI work?
LTCI reimburses you for long-term care costs incurred over a set number of years. Most policies impose limits on how long and how much it will pay, and how long you must pay out of pocket before the insurer begins to reimburse you. The trade-off between these variables affects premium costs.
What is the difference between standalone and hybrid LTCI?
Standalone LTCI operates much like a traditional health insurance policy. Hybrid LTCI is a life insurance policy that can be used to pay for long-term care.
Other differences include:
- Cost: Standalone LTCI is usually less expensive than hybrid policies. Premiums are paid annually and may increase over time. Generally, the initial premium quoted is fixed, but the insurance company reserves the right to increase the premium across a class of insured. Most hybrid policies require a single lump-sum premium, although some offer a fixed-term guaranteed premium structure.
- LTC benefits: Standalone LTCI benefits are usually more generous than hybrid benefits.
- Unused benefits: Standalone LTCI is a use-it-or-lose-it proposition. You forfeit your premiums and the amount of the unused benefits. Hybrid policies include a death benefit. If you do not need the policy to pay for long-term care, your named beneficiaries will receive a death benefit upon your death. If you do use some long-term care benefits, the payments may reduce the death benefit, but many policies will still pay a minimum death benefit to your beneficiaries.
Can couples buy joint LTCI coverage?
Yes. One joint policy is usually less expensive than two individual policies. With a joint policy, the number of benefit years is doubled, and each individual can draw from the policy when they need care. Each insurance carrier has its own rules about including nonmarried persons on a joint policy.
What does LTCI cost?
LTCI premiums vary by age, gender, your domicile, overall health conditions and the policy features you choose. According to the American Association of Long-Term Care Insurance (AALTCI), in 2021 the average cost for a single 55-year-old male purchasing a $165,000 standalone LTCI policy was $950 a year. A single woman of the same age paid $1,500 a year. By contrast, the average cost of a single-premium hybrid policy was $75,000.
It pays to buy LTCI while you are young and healthy. If that single male waits until he is 65 to buy LTCI, he will pay $1,700 a year; the single female will pay $2,700. Both will face increased risk of being declined for health reasons.5
What are the benefits of LTCI?
While most affluent individuals can afford to self-insure, some prefer to preserve their wealth for other things. Others just like the security of knowing their long-term care expenses are covered. Standalone LTCI also comes with modest tax advantages, as premiums may be tax deductible. For the self-employed, long-term care policies can be carved out for a select few owners and employees, unlike qualified plans such as 401(k)s that have discrimination restrictions. Premiums can be fully deductible as a business expense.
LTCI can help ease family concerns that they may need to step in as long-term caregivers, a role that can have significant financial and emotional implications for everyone. All these factors contribute to the peace of mind many wealth holders seek through advance elder care planning.
What are the risks of LTCI?
The biggest risk of standalone LTCI is that you might never need it. AALTCI data puts the odds of that happening at 50-50.6 For some, the idea of spending tens of thousands of dollars on insurance they may never use outweighs any benefits LTCI might provide. Another risk is that the surprise annual premium increases may create buyer’s remorse, and the policy is terminated having received no benefit.
Hybrid LTCI policies offset this risk by converting unused benefit amounts to a death benefit, although premiums tend to be higher than those for standalone LTCI.
Inflation is another risk. Annual standalone premiums can increase as you advance into your 60s and beyond.
Finally, the cost of future care may exceed policy coverage limits. Unless you purchase an inflation protection rider for your policy, you could face unexpected out-of-pocket expenses upward of $100,000 a year.
When should I buy LTCI?
Most experts agree the best time to buy a policy is when you are healthy and between ages 55 and 62. After that, the cost of premiums goes up dramatically.
What should I consider when evaluating an LTCI policy?
It pays to be a careful consumer before purchasing LTCI. Here are some key features to focus on:
- Carrier creditworthiness: Be sure the insurance company you select is financially sound and committed to the marketplace. AM Best, Standard & Poor’s, Moody’s and the AALTCI rate LTCI carriers on a variety of criteria.
- Benefit period: How long will the policy pay benefits? Look for a minimum of three to four years. Some plans offer unlimited benefit periods but have other limitations such as longer elimination periods or higher premiums.
- Elimination period: Most policies require you to pay out of pocket for some time before your benefits kick in, with 30-90 days typical. The longer it is, the lower your premiums will be. Be sure you understand how the policy calculates the elimination period.
- Daily benefit amount/maximum lifetime limits: How much does the policy pay per day of care? Most policies pay up to a daily limit for care until a maximum lifetime limit is reached. Daily limits and reimbursement can vary depending on where you receive care, so pay close attention to how the daily benefit is calculated and paid.
- Inflation protection rider: Some policies allow you to purchase a rider that automatically adjusts the daily benefit amount and maximum lifetime limit upward by a fixed percentage each year for a specified period. Your premiums will be higher, but the protection from rising care costs is significant.
- Shared versus nonshared benefits in joint policies: In a shared-care policy, the policyholders share the benefit period. Each individual can use the time they need as long as together they do not exceed the total years in the pool. In a nonshared benefits policy, each individual’s coverage is limited to half the total years in the benefit period. One person’s unused years cannot be transferred to their spouse.
LTCI can be a good option for individuals who want to shield their assets and know their future health care needs will be taken care of. As with many aspects of elder care, advance planning is important so you will have the necessary tools in place when you need them.
American Association for Long-Term Care Insurance, 2021, www.aaltci.org
Genworth Cost of Care Survey. Genworth, 2021, Cost of Care Survey
Genworth Cost of Care Calculator
1. 2021 U.S. Department of Health and Human Services. “How Much Care Will You Need?”.
2. Genworth. What is Long Term Care? https://www.genworth.com/aging-and-you/finances/what-is-long-term-care.html.
5. American Association for Long-Term Care Insurance, 2021. https://www.aaltci.org/long-term-care-insurance/learning-center/ltcfacts-2021.php.
6. Lifetime chance that someone who buys a traditional long-term care insurance policy at age 65 will use their policy before they die. Assumes they pay premiums until accessing benefits or die (American Association for Long-Term Care Insurance).
This presentation is intended to be an unconstrained review of matters of possible interest to Glenmede Trust Company clients and friends and is not intended as personalized investment advice. Advice is provided in light of a client’s applicable circumstances and may differ substantially from this presentation. Opinions or projections herein are based on information available at the time of publication and may change thereafter. Information obtained from third-party sources is assumed to be reliable, but accuracy is not guaranteed. Outcomes (including performance) may differ materially from expectations and projections noted herein due to various risks and uncertainties. Any reference to risk management or risk control does not imply that risk can be eliminated. All investments have risk. Clients are encouraged to discuss the applicability of any matter discussed herein with their Glenmede representative.