How Does Long Term Care Insurance Work?


Although it might seem impossible to visualize, you will likely need help later on in your life. It is up to you to pay for it.

Long-term care insurance can be a way to plan. Long-term care is a term that refers to services not covered by regular insurance. This includes help with daily routine activities like dressing, bathing, and getting in and out from bed.

Long-term care insurance policies can help you cover the cost of care if you have a chronic condition, disability, or an illness such as Alzheimer’s. Many policies will cover care provided in many places such as:

  • Your home.
  • A nursing home.
  • A facility for assisted living.
  • A center for adult day care.

Long-term care costs are an important part any long-term financial plan, especially for those in their 50s and beyond. It is not a good idea to wait until you are in need of care before purchasing coverage. If you have a chronic condition, you won’t be eligible for long-term insurance. Long-term care insurance is most commonly purchased by people in their 50s and 60s.

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Your situation and your preferences will determine whether long-term care insurance is right for you.

Why should you buy long-term insurance?

According to 2020 data from Administration for Community Living (part of the U.S. Department of Health and Human Services), nearly 70% of 65-year olds will require long-term support services or care. On average, women need care for 3.7 years while men for 2.2.

Long-term care is not covered by regular health insurance. Medicare will not come to your rescue either. It covers short stays in a nursing home or limited home care if you need skilled nursing or rehabilitation. Custodial care is not covered by Medicare. This includes supervision and assistance with daily tasks.

You will have to pay the cost of long-term care if you don’t have any insurance. Medicaid is a federal and state program that provides health insurance for low-income people. However, you will need to exhaust all your savings before you can receive assistance.

If you are low-income and have little savings, long-term care insurance may not be feasible for you. According to the National Association of Insurance Commissioners, experts recommend that you spend no more than 5% of your income for long-term care insurance.

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What is the popularity of long-term care insurance

Since 2000, the number of long-term care insurance providers has dropped by a significant amount. According to 2020 data from National Association of Insurance Commissioners, there were slightly more than 100 insurance companies selling policies in 2004. Today, about a dozen of these insurers are selling policies.

A mass exodus of the market was caused by the uncertain cost of future claims and low interest rates after the 2008 recession. Low interest rates are bad because insurers invest their customers’ premiums and rely on them to make money.

Market dynamics are changing. Genworth, one the largest carriers left, stopped selling individual long-term care insurance through brokers and agents in March 2019. Genworth sells policies directly to individuals and groups through its own sales department.

How long-term insurance works

Fill out an application to purchase a policy for long-term care. You may be asked to provide medical information and interviewed by the insurer either over the phone or face-to-face.

You can choose the coverage that you need. Policies usually limit the amount you pay out each day, as well as the amount that you receive over the course of your life.

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After you have been approved for coverage, the policy is issued and you start paying premiums.

You are eligible for long-term care benefits if you are unable to do two of the six “activities daily living” (ADLs) on your own, or have dementia or another cognitive impairment.

Daily activities include:

  • Swimming.
  • Care for incontinence
  • Dressing.
  • Eat.
  • Toileting (getting on and off the toilet).
  • Transferring (getting into or out of a chair or bed).

If you have a medical emergency and wish to file a claim, your insurance company will review the information and send a nurse to evaluate you. The insurer must approve the care plan before approving a claim.

Most policies require you to pay out-of-pocket for long term care services for at least 30 days before your insurer begins paying you. This is known as the “elimination time.”

After you are eligible for benefits, and often after you have received paid care during that time, the policy will start paying you. Most policies cover up to a daily maximum for care, until you reach the lifetime maximum.

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When both spouses purchase policies, some companies offer shared care options. This allows you to share the entire amount of coverage so that you can draw on the benefits of your spouse if your policy limits.

Long-term care insurance costs

Rates you pay will depend on many factors, including:

  • Your health and age: The more expensive a policy will cost you, the older you get and the more serious your health issues are.
  • Gender: Because women live longer and are more likely to make long-term care insurance claims, they tend to pay more.
  • Marital status: Premiums for married couples are lower than for singles.
  • Insurance company: Different insurance companies will charge different prices for the same coverage. It is important to compare quotes from various carriers.
  • Coverage: Higher coverage means you will pay more. This includes higher daily and lifetime benefits, cost of living adjustments to protect inflation, shorter elimination periods and less restrictions on the type of care covered.

According to the 2020 price index of the American Association for Long-Term Care Insurance, a single 55-year-old male in good health can expect to pay $1,700 per year for long-term insurance with an initial pool benefit of $164,000 and an average cost of $1,700 per year thereafter. These benefits increase each year at 3% and reach $386,500 by age 85. A single 55-year old woman can expect to pay $2,675 per year for the same policy. For a couple of 55-year-olds, the average premium is $3,050 per year.

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One caveat: Prices can rise after you purchase a policy. They are not guaranteed to remain the same throughout your life. Many policyholders experienced increases in their rates over the past few years, after insurance companies requested permission from state regulators to raise premiums. Because overall claims costs were higher than expected, they were able to justify raising rates. The rate increases were approved by regulators because they ensured that insurance companies had enough money to pay claims.

Long-term care insurance offers tax advantages

If you are able to itemize your deductions, long-term care insurance may offer tax benefits. This is especially true for those who are older. Some state and federal tax codes allow you to count part or all long-term insurance premiums as medical expenses. These are tax deductible if the threshold is met. Your age will affect the maximum amount of premiums that you can deduct.

Only premiums paid for tax-qualified long term care insurance policies are considered medical expenses. These policies must comply with certain federal standards to be tax-qualified. If you aren’t sure, ask your insurance company if the policy is tax-qualified.

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How to purchase long-term care insurance

You can either buy directly from an insurer or through an agent.

A long-term care policy may also be available at work. Many employers offer the option to buy coverage through their brokers at group rates. You will need to answer certain health questions to be eligible for this coverage. However, it may be easier to get it than if it were purchased on your own.

Compare prices by getting quotes from multiple companies for the exact same coverage. This applies even if you are offered a discount at work. You might be able to find lower rates elsewhere, even if the group discount is not applicable.

American Association for Long-Term Care Insurance recommends that you work with an experienced agent in long-term care insurance who can sell products from at most three carriers.

The association’s 2019 price comparison revealed that rates vary widely between insurers.

Understanding state “partnership” plans

To encourage long-term planning, most states offer “partnership” programs that allow individuals to work with long-term insurance companies.

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It works like this: Insurers agree to offer policies that meet certain quality criteria, such as cost-of-living adjustment for inflation protection. If you have exhausted all your long-term care benefits, and want to receive Medicaid assistance, you can buy a “partnership” policy. This will allow you to protect more assets. For Medicaid eligibility, one person must have assets of $2,000 in order to qualify for most states. You can be eligible for Medicaid faster if you have a long-term care partnership plan. For every dollar of long-term care insurance you have paid out, you can keep the dollar you would have to pay to qualify for Medicaid in most states.

Check with your state’s insurance department to find out if your state offers a long-term partnership program.

When you are creating a long-term financial plan, you should consider the cost of long-term healthcare. Ask a financial advisor if long-term care insurance might be the right choice for you.