by Olivia A. Mussett, CFP®
A nursing home is a place we all hope we will never be and therefore, long-term care insurance is something we all hope we will never use. Many people decide to self-insure or simply reject the idea of a long-term care insurance policy altogether because they do not see the point in paying premiums year after year for a policy they will not likely receive benefits from. Most Americans do not know someone who has benefitted from a long-term care insurance policy and hesitate to purchase something they are unfamiliar with. The terrible truth is that 40 percent of people over age 65 will need two or more years of long-term care with half of those needing care for more than five years. At age 65, women have a 1 in 2 risk of entering a nursing home and men have a 1 in 3 risk.
According to an Age Wave study sponsored by Genworth Financial, retired Americans worry most about uninsured healthcare costs. The cost of long-term care can be devastating for the unprepared person. The average cost for nursing home care in Northeastern New York is $274 per day, or $99,876 per year. If the average stay in a nursing home is 2.3 years, this can amount to a cost of $157,826 in today’s dollars. To make matters worse, long-term care costs are expected to quadruple nationwide by 2030. Clearly, the odds resulting from inaction can be catastrophic and an unplanned long-term care need can quickly deplete one’s entire life’s savings, including retirement assets.
Still, there are those who decide against purchasing a long-term care insurance policy, thinking that it will never happen to them. They would be surprised to know that they have a 1 in 1200 risk of experiencing a $100,000 loss from a fire or accident in their home, a 1 in 240 chance of a $100,000 or greater liability suit resulting from an automobile accident, and a 1 in 15 chance of encountering major medical health care expenses of $100,000. Most likely, they have insurance to cover all these risks. They would be more surprised to know that their probability of encountering long-term care expenses is about 1 in 4 and yet they have opted not to insure against this greater risk! Generally speaking, I believe that long-term care insurance is an appropriate consideration when assets are at risk.
A common misconception is that Medicare, Medicare supplemental policies, and health insurance policies will cover all long-term care costs. THEY DO NOT. Consequently, many people do not prepare financially for this care and are left needlessly impoverished in the event of an extended illness or infirmity. Actually, Medicare will only cover hospital costs for up to 150 days and skilled nursing home care for up to 100 days, but with substantial co-payments and deductibles.
Long-term care insurance is the only protection in the event of a cognitive or physical impairment requiring long-term care services. It can provide dual protection: protection from depleting your assets and resources to pay the high cost of care as well as protection for your loved ones from the financial burden and stress of paying for your long-term care. Long-term care insurance is mainly purchased to receive care at home and avoid going to a nursing home in the event of a care need. In fact, 31% of new claims are for home-care services, 30.5% are for assisting living and 38.5% are for skilled nursing home care. The main reasons given by policyholders for purchasing a long-term care policy are to avoid becoming a burden to children, remain independent, protect assets and standard of living for spouse and heirs and to obtain, and be able to afford, the long-term care services of your choice, whether at home or in a facility
It is important to be proactive and to plan for long-term care well before you are likely to need it, when premiums are more affordable. The cost of a long-term care insurance policy depends primarily on the age of the applicant; therefore, the younger you are when you purchase a policy, the less expensive it will be. I recommend that clients purchase a long-term care insurance policy between the ages of 50-55. The average age of purchase of a long-term care insurance policy is 57. As health diminishes, the risk of being uninsurable increases. 23% of applicants between the ages of 60-69 are declined for health reasons, while 45% of applicants are declined between the ages of 70-79. Keep in mind that the cost of waiting just one more year can result in a 5%–15% increase in annual premiums for the life of the policy. Also, once health problems begin, obtaining coverage may be cost-prohibitive or simply impossible.
There are two main types of long-term care insurance policies: private insurance and Partnership Plan insurance. Private insurance is a contract between you and the insurance company. In exchange for premium payments, the insurer will pay for covered long-term care costs for a predetermined amount of time. A Partnership Plan is a contract between you, the insurer, and your state of residence, combining private long-term care insurance with Medicaid Extended Coverage. This program allows the policy owner to become eligible for Medicaid, while providing 100% asset protection, in the event that the policy owner’s long-term care needs exceed the period covered by his or her long-term care policy. Any income would still be required to be contributed to the cost of long-term care, though.
When considering the purchase of long-term care insurance, it is important to select a reputable insurer. Most people purchase a policy many years before they would collect benefits and you want to be sure that the company will still be in business then. As people are living longer, insurers have reassessed their exposure in current and new policies. Newer policies are now more expensive and older policies are experiencing rate increases. Rate increases lead to negative news headlines but actually only 1% of policyholders drop their coverage as a result. Clearly, existing policyholders understand the importance and value of owning a long-term care insurance policy. Also, keep in mind the most important components of a policy:
- Daily benefit: the daily maximum amount that a policy will pay for each day of care.
- Inflation adjustment: the annual increase of the daily benefit to offset inflation. Because long-term care costs tend to increase by 5% per year, 5% compound inflation is recommended.
- Benefit period: the number of years that the policy will pay for covered services.
- Elimination period: the length of time that you must be in a nursing home before the policy will pay for covered services. The elimination period is typically 0–100 days.
- Care benefits: nursing home, assisted living, and home care coverage. Most people would prefer to spend their last years at home with their loved ones.
Your retirement years can be all that you hoped for, full of relaxation and travel. This will require years of proper planning and disciplined savings and thinking about “what ifs.” What if one of us gets sick and needs care? What if I don’t want to go to a nursing home ever? It is important to plan for these “what ifs” with a long-term care insurance policy, an important component of the retirement planning process. It will provide peace of mind that you will have the freedom to obtain the care of your preference and not be a burden to your loved ones. Most importantly, after years of saving and planning for your golden years, it will ensure that your hard-earned assets will be protected and that you have done all that is possible to have the retirement of your dreams.
 Keeping Ahead of the Long-Term Care Domino, Journal of Financial Planning, Jim Grote, May 2011
 The Nursing Home Population May Increase Substantially. Friedland, R & Summer, L. Demography is Not Destiny, January 1999
 2004 National Nursing Home Survey
 Can Aging Baby Boomers Avoid the Nursing Home?, B Stucki and J Mulvey, American Council of Life Insurers, March 2000
 Making the Transition to LTC, T Sadler and D Newman, Life Association News, November 1993
 American Association for Long-Term Care Insurance