Long-Term Care Insurance

Does it still make sense?

Nearly 70% of people age 65 today can expect to receive some form of long-term care, with 20% needing it for five years or longer.

If you knew there was a 70% chance of something bad happening to you in life, would you try to protect yourself against it? You probably already protect yourself against far less likely scenarios, such as getting into a serious car crash or having your house catch fire. It makes sense that you would protect yourself from the financial consequences of needing long-term care as well. You don’t want to be a burden on your children or see your financial security wiped out along with the college fund you were hoping to setup for your grandchildren. If you’re not convinced, let’s take a look at exactly what those financial consequences would be:

AVERAGE ANNUAL LONG-TERM CARE EXPENSES

In 2015, the average annual cost of a private room in a nursing home was about $91,000 per year. Alternatively, if you don’t need the intensive care of a nursing home, you may instead end up in an assisted-living center paying on average about $43,000 per year. Another option would be to receive the care you need in your own home. If that were the case, you would have to pay, on average, $20 per hour for a home health aid worker to visit you. If you needed 30 hours per week of assistance, you would end up paying about $31,000 per year.

These expenses could go on for two, three, five years, or more and amount to hundreds of thousands of dollars. Are you prepared to cover these costs with little or no notice? Do you want to be a burden on your children or grandchildren?

WHAT ABOUT UNCLE SAM?

Most people find themselves in need of long-term care when they are over age 65 and retired. That means, when the time comes, they will most likely be receiving health insurance coverage from Medicare. The Medicare program is funded by the federal government. Unfortunately, Medicare provides only modest long-term care support—100 days. It is structured to cover only short-term services for conditions that are expected to improve so you can return home. Additionally, Medicare pays only for “medical acute care,” which is restricted to doctor visits and hospital stays. This means the largest, and often most essential, part of long-term care, such as help with bathing, feeding, and getting around the house are all left to you and your family to arrange and pay for.

Medicaid is the other publicly-funded program that can help pay for long-term care. It is a joint federal/state program that provides medical care to people in financial need. The good news about Medicaid is that it is structured to provide the kind of long-term care most people need, going beyond the medical acute care Medicare is restricted to. The bad news is that Medicaid can only be tapped after you have diverted most of your income to the long-term care provider, as well as spent down your countable assets to as low as $2,000.

DON’T LOOK BACK: GIVING IT AWAY INSTEAD OF SPENDING DOWN

You may be wondering why you can’t just transfer your assets to your kids or grandkids if you need long-term care, then qualify for Medicaid. The problem is the five year look-back penalty. Most transfers made within five years of applying for Medicaid will count against your eligibility even though you no longer own the assets. You will be subjected to a penalty period. Here’s how it works: Suppose three years ago you transferred $90,000 to your grandchildren to help pay for college tuition. This year, you are diagnosed with Alzheimer’s disease and enter a nursing home. You meet the income and asset limits for Medicaid, but you will be disqualified since the $90,000 transfer occurred during the five year look-back period. Only transfers made beyond five years will not have an impact on your Medicaid application.

The rules of Medicaid eligibility are complex and have slight differences from state to state, but all require you to prove an immediate financial need before you are allowed to participate in the program. The program was designed to help only those with severe financial hardship, so you have to practically exhaust your savings in order to become eligible. You can think of Medicaid as an insurance policy that kicks in when you have spent everything else. For most people who have spent their lives saving for retirement and to pass something on to the people they love, this won’t provide the peace of mind they need.

NOW WHAT?

You are left with only two other possible methods of paying for long-term care services:

  • Paying out of your pocket
  • Paying through an insurance policy

Given the option, most people would prefer filing an insurance claim versus losing a significant portion of their life’s savings. With that in mind, let’s take a look at what insurance-based solutions there are for paying for long-term care.

LONG-TERM CARE INSURANCE – NOT WHAT THE DOCTOR ORDERED

A long-term care insurance policy is usually the first tool you will look at to protect your savings and to make sure you do not become a burden on your loved ones. A well-structured long-term care policy can be a great thing to have if someday you should need it. The first obstacle you are going to have to overcome is proving you meet the medical and age eligibility requirements. A person may be denied the opportunity to purchase a policy if they have a pre-existing condition, or otherwise complicated medical history. This means that the people most likely to need this coverage at some point in the future are the ones who are most likely going to be rejected for the coverage.

The second obstacle is cost. Instead of refusing to provide a policy, the insurance company may deem a potential customer high-risk and charge them a high premium. Even if you are thoughtful enough to be considering long-term care insurance when you are young and healthy, many policies do not allow you to lock in a premium rate for the rest of your life. People who bought traditional long-term care have seen their premium rise dramatically over the years. Many were forced to allow their policies to lapse, so they lost the coverage they spent years paying for when they needed the protection the most.

Long-term care insurance is also a “use it or lose it” proposition. If you do not end up needing long-term care, you will have paid years of premiums without any type of real asset. Most people would prefer to pay to own a home instead of just renting one. When it comes to most long-term care policies, all you’re doing is paying rent.

In addition to the difficulties of obtaining and keeping a policy, the long-term care insurance industry is getting less and less competitive. Many insurance companies are pulling out of the long-term care market. Today, there are very few companies offering this type of insurance, down from over 100 companies a decade ago. Accordingly, companies are able to raise premiums and reduce coverage.

An insurance policy is supposed to provide peace of mind. 

Long-term care insurance may take away one list of worries, but it is possible that it can easily create another! Luckily, there are several Life insurance-based options available if you are looking to protect your assets while guaranteeing high quality long-term care if and when you need it.