A buyer’s guide to protecting yourself for future care costs
No one wants to think about needing care as we get older, much less about the cost of that care. But, in reality, we may eventually need help managing our daily living — and we will need to pay for that assistance.
Long-term care insurance provides an answer. The insurance policies cover some non-medical personal care services — such as bathing, dressing, using the bathroom, and transferring in and out of beds and chairs — as well as some residential care costs, such as assisted living, memory care, adult day services, respite and hospice care.
There are several types of long-term care insurance policies on the market, falling into two major categories: traditional and linked-benefit policies.
- Traditional long-term care policies function like auto or homeowner’s insurance policies. They offer a fixed set of benefits that you select upfront. The policies have no cash value.
- Linked-benefit policies combine long-term care benefits with life insurance. If you need long-term care, the insurance policy is triggered. If you end up not needing long-term care, your heirs receive the life insurance benefit after you die.
“If you’ve looked at long-term care insurance in the past, it’s time to look again,” says Linda Smith, marketing director of Lutheran Home, a residential care community in Arlington Heights. “These are not your parents’ policies,” she says, referring to the hybrid linked-benefit policies that are now more popular than traditional long-term care policies.
Buying a policy
But insurance policies come with a caveat: No one can predict what kind of long-term care you’ll need as you age.
Individuals need to decide if they want to pay substantial annual premiums when they are younger — usually starting around age 55 to 65 — to potentially receive future benefits when older. Or if they don’t opt for insurance, they’ll need to pay care costs out of pocket if they need home care or residential care in the future.
Understanding long-term care insurance cost and eligibility can help you determine if a policy is a feasible option for you. The average annual premium for a 55-year-old couple is $3,050, according to the American Association for Long-Term Care Insurance’s 2020 Price Index, although premiums vary based on eligibility and coverage.
Deciding whether to purchase long-term care insurance is a personal decision, says Joan Van Allen, a Rockford-based financial adviser with investment firm Edward Jones. “I recommend carefully exploring all your coverage options because there’s no one right answer for everyone. And get help. These are complex products. You need a plan that supports your financial and long-term care goals.”
If you choose not to buy insurance, there are two main alternatives: pay care costs with personal savings or rely on government programs like Medicaid (available if you fall below a certain income threshold) or veterans benefits (available to veterans and their spouses).
Medicare does not pay for most long-term care services. Personal care or non-medical care are only covered in very specific circumstances, such as after a hospital stay or when you have a terminal illness and qualify for hospice services.
Knowing the costs
If you plan to pay privately for long-term care, know that the expenses can add up, depending on what you will need at that point in life. If you don’t have insurance, it’s important to work with a financial adviser to save money to pay for eventual home care or residential care costs. “We usually estimate based on needing two to four years of care, depending on a person’s family history and what else is going on in their life,” Van Allen says.
The average annual cost for a home health aide in the Chicago area is over $57,000 per year, and a private room in a nursing home facility costs more than $111,000 per year, according to the 2019 Genworth Cost of Care Survey.
Whether or not you purchase long-term care insurance, you’ll need additional personal savings to pay for out-of-pocket care during the elimination period (the waiting period until coverage kicks in) and for costs that exceed your policy’s limits.
“The biggest misconception I see is that long-term care insurance will pay for everything, forever. Long-term care insurance is meant to offset the cost of care,” Smith says.
If long-term care insurance is an affordable option for you, “Don’t wait too long to compare your options,” says Van Allen, noting that premiums get more expensive as you age. Both Smith and Van Allen suggest looking in your late 50s or early 60s and making a decision before turning 65.
With some long-term planning, you can successfully put together a plan to deal with long-term care costs.
Long-Term Care Glossary
Because long-term care insurance costs and terms vary widely, it’s a good idea to get several quotes. Comparing the following plan features can help you make the best decision.
When comparing policies, be sure you’re comparing apples to apples by calculating the maximum potential benefit of each policy. To do that, multiply the future monthly benefit by the coverage duration.
Activities of daily living (ADL). Policies may require that you need help with two or more ADLs, such as bathing, eating or using the bathroom. Compare how each policy defines ADLs and how ADLs are considered in triggering coverage.
Annual premium. The yearly cost of the insurance.
Coverage duration or benefit period. The number of years the policy covers.
Coverage trigger. How a plan determines when long-term coverage begins. Look for policies that are triggered when medically necessary (not only after a hospital stay).
Elimination period. How long you will need to pay out of pocket before coverage kicks in.
Inflation rider. Additional protection that increases your benefit by a fixed amount each year.
Initial cost (if any). Some annuity and life insurance products require a deposit or initial cost to be invested and later returned over a fixed period of time or over the policy holder’s remaining lifetime.
Reimbursement rates. The daily, weekly or monthly maximum reimbursement rates for services.
Type of care covered. Look for policies that cover a wide range of long-term care services and supports, including home care, memory care, adult day services, respite, assisted living and hospice. Some policies even cover home modification or caregiver training.
Type of payout. Compare how claims are paid. Is the full monthly benefit paid as a fixed cash amount, or are actual costs reimbursed after the policy owner pays out of pocket?