Health insurance

Confusion about who pays is common: Nearly half of adults age 65 and older incorrectly think Medicare would pay if they needed a long stay in a nursing home, according to a survey from the nonprofit KFF, formerly known as the Kaiser Family Foundation. In the same survey, 90 percent of adults said paying for one year of nursing home care would be impossible or very difficult for them or their families.

The gap between potential needs and ready money is where long-term care insurance comes in. But it’s not the only solution.

“Everyone needs a long-term care plan,” says Ryan Graham, a managing adviser at Altfest Personal Wealth Management in New York City. “That doesn’t mean everyone needs long-term care insurance.”

Data the National Association of Insurance Commissioners (NAIC) collected from insurers shows that in 2022 traditional long-term care policies covered about 6.1 million Americans. The number includes people who bought the policies decades ago.

These traditional LTC policies work much like policies for auto or home insurance: You pay premiums, usually for as long as the policy is in effect, and make claims if you ever need the covered services.

Because the premiums are ongoing, they can, with the permission of state regulators, rise over time.

But if you stop paying the premiums before the need arises, you usually lose the coverage. And if you never use the coverage, the insurance company keeps and invests your money to pay for other people’s claims and earn profits.

“It’s use it or lose it,”

What is a hybrid policy?

The majority of long-term care policies sold since 2010 combine coverage for long-term care with another benefit, usually life insurance or, less often, an annuity, according to the Congressional Research Service. These are known as hybrid or linked-benefit policies. Combination policies covered nearly 900,000 Americans in 2022, according to NAIC.

While in some cases, you’ll pay an ongoing monthly premium for such policies, many work like this: You pay one lump sum or a fixed amount broken into several annual payments, eliminating the risk of rising premiums.

In return, you get long-term care coverage, along with some amount of life insurance that will go to your heirs if you never use the long-term care benefits. The life insurance payout is reduced or eliminated if you do use long-term care benefits.

The policy may also allow you to take back your full payment within the first few years if you decide you no longer want the coverage.

The hybrid policies “address a nagging concern for a lot of people, … which is that I could pay into this thing for years and never need it,” says Christine Benz, director of personal finance at the Chicago-based financial services firm Morningstar. One way or another, you get a benefit.

But that guarantee costs you. Hybrid policies are more expensive than traditional.

And the life insurance payouts tend to be modest unless you attach long-term care to a larger, more expensive permanent life insurance policy.

How does long-term care insurance work?

LTC policies may limit what conditions they cover. For example, denying care for alcoholism, drug addiction or war injuries is not unusual.

A preexisting condition, such as heart disease or a past cancer diagnosis, may not stop you from getting a policy. But the policy may not cover care related to that condition for some period after it goes into effect.

Generally, you are eligible for benefits once you can no longer perform a set number of the so-called activities of daily living — such as bathing, dressing, eating, using the toilet, getting in and out of bed and chairs, and managing incontinence — or become cognitively impaired.

One more hurdle to clear: a waiting period that starts when you first need or use care. Benefits most commonly start after 90 days, but you might pay higher or lower premiums to adjust the waiting, or elimination, period.

Once coverage kicks in, it’s typically capped at a certain amount daily or monthly, up to a lifetime maximum or a certain number of years. Different amounts may be allowed for care in your home, a nursing home or elsewhere. You pay more for higher benefit levels or for benefits that rise over time to protect you from inflation.

For example, a policy that pays $200 a day for five years and grows benefits at a compounded 3 percent a year will cost more than one that pays $100 a day for two years with no inflation protection.

Once you are getting benefits, premiums typically are waived.

The bumpy history of long-term care insurance

The earliest LTC insurance policies, sold in the 1980s, covered only nursing home care. But through the 1990s and early 2000s, insurers started covering home care services, assisted living, adult day care and other options. Some promised lifetime benefits.

Insurers underestimated how much they would pay in claims and overestimated how much they would earn in investments. The result: They got into financial trouble and, with the permission of state regulators, substantially raised premiums on existing customers.

Many companies stopped selling traditional long-term care insurance. Just a few companies sell the policies today with more limited coverage periods at higher prices.

Historically, 70 percent to 80 percent of people with traditional policies have seen premium increases, says Jesse Slome, executive director of the American Association for Long-Term Care Insurance (AALTCI). Companies selling newer policies have retooled them to avoid repeating that history.

To buy or not to buy: making choices 

Unlike health, home or auto insurance, “this is a policy you buy only once,” AALTCI’s Slome says. So before you make a choice, including whether to buy a policy at all, consider:

Your budget. If you already have trouble paying for food, medicine, utilities or other important needs, adding an LTC insurance premium isn’t a good choice, according to a guide from the National Association of Insurance Commissioners. A good rule of thumb: Premiums shouldn’t take more than 7 percent of your income.

Your assets. If you are looking at long-term care insurance as a way to protect your assets for heirs or yourself, it’s most likely to pay off if you have at least $75,000, not counting your primary home, the insurance commissioners say. If you have less than $30,000, you may pay more than that in premiums, the group says.

Your overall financial condition. Some people will look at their assets and spending and decide they can cover long-term care without insurance. Some may plan to sell a second home, downsize from a family residence or get a reverse mortgage to cover such expenses, according to advisers.

Others may set up a longevity fund to cover not only long-term care but also all the costs that come from living longer than average. One advantage of self-funding: total flexibility in how you spend your care dollars.

Your ultimate financial goals. How important is it to you to leave money behind? “Some people feel very strongly about leaving something for their families” and are highly motivated to buy insurance to protect their assets from a catastrophic yearslong need for care, Peapack’s Cirignano says. “Others are happy to bounce their very last check.”

The full range of insurance options. Talk with agents authorized to sell policies from multiple companies and with financial advisers who can put your options into the context of your overall financial plan.
“It’s really valuable to have some sort of third party who doesn’t have a vested interest in any one insurance company helping you navigate the process,” Morningstar’s Benz says.

Because states regulate insurance, your options can vary greatly depending on where you live. “Many of our clients in New York face limited choices and high pricing while someone in Arizona may have more options,” Graham says.

Your age and health. The older you are when you buy long-term care insurance, the more it will cost. Health problems also will make it more expensive or, in some cases, impossible to get coverage.
Turndown rates rise steeply with age. If you already have memory loss or trouble with daily self-care, you are unlikely to qualify.

Some insurers require a physical exam or medical-record review. Others conduct only health interviews via telephone.

In general, traditional policies have more stringent health requirements than hybrid ones. While experts used to suggest shopping for long-term care insurance by your early 60s, many now suggest starting in your 50s or even your late 40s.

Ways to pay for your policy. You may be able to cover premiums, tax-free, with money from a health care savings account, available only to consumers in certain health plans, Benz says. Or you can explore the tax advantages of exchanging an existing life insurance policy or annuity for a long-term care policy.

That’s a complicated process but a good deal for many people whose insurance goals have changed, she says.

Other options. Group policies offered through employers may be more affordable than individual policies, particularly if you have health problems. Buying individual policies as a couple, rather than as a single person, often reduces premiums.

Couples also may qualify for “shared care”: If one of them exhausts their pool of benefits, they will be able to draw from their partner’s pool.

And in most states, you can shop for a limited number of policies that participate in partnerships with the state’s Medicaid program. These partnership policies will allow you and your survivors to keep more of your assets if you ever need Medicaid. The protected amount is based on what your policy has already paid for your care.

Summary

It’s important to note that LTC insurance policies can vary widely in terms of coverage, limitations, and costs. The price of LTC insurance depends on several factors, including age at purchase, health status, the amount of coverage, and any additional options such as inflation protection. It’s typically more affordable to purchase at a younger age when you are healthier. As with any insurance product, it’s essential to carefully evaluate your personal needs, the features of the policy, and to consult with a financial advisor or insurance professional before making a decision.