Jun 1, 2022

What is Long Term Care Insurance?

Manny Cominsky

As more and more Americans reach retirement age, and continue to live longer and longer lives, planning for long term care has become an increasingly important part of retirement planning. While many people know to plan for retirement more generally, doing things like putting away funds in their 401(k) or other similar retirement plans, fewer people think specifically about saving for their long term health and care needs. But while people may not like thinking a lot about their long term care, many will still need it as 7 out of 10 adults will require long term care at some point in their lifetime. And given the sometimes very high cost of long term care, assisted living costs, for example, can average roughly $4,300 dollars per month depending on the level of care required, it’s important to make sure that you will be able to afford the care you need if and when the time comes. One very effective way to make sure you are financially covered for long term care is long term care insurance.

What is long term care insurance?

Long term care insurance is a type of insurance designed to cover long-term support care services. As we’ve covered in a previous blog post, while many people might assume that long term care only involves care in a nursing or assisted living facility, long term care actually refers to a wide range of services, including for those who receive health care and support at home, at adult daycare centers, and at nursing and assisted living homes. Oftentimes, particularly where the long term care is limited to more routine daily activities like assistance with bathing or preparing food, long term care is provided at home either by family members or a visiting care service. 

Long term care insurance is so important because traditional, employer-based insurance plans generally do not cover long term care insurance. Rather, traditional health insurance plans primarily cover hospital and doctor bills, and do not cover long term daily care. Relatedly, Medicare only covers long term care in the most limited of circumstances, and can basically be understood to provide no long term care coverage. Specifically, Medicare will only cover skilled care in a nursing home for up to 100 days while you recover from a medical condition or procedure (a far more limited scope than most people with long term care needs). 

How does long term care insurance work?

At the outset, while it’s never too early to start thinking about, and planning for, your long term care needs, most sources will recommend that you do not look to purchase long term care coverage until you are in your late 40’s or early 50’s, although others recommend not beginning the process until you are 60. As with all decisions around long term financial planning, when you decide to purchase coverage (as well as the coverage you purchase) is a question best handled for your specific circumstances by an investment or financial professional.

That being said, once you have decided to get long term insurance coverage, an insurance company will generally make you fill out an application regarding your health status, which often includes providing medical records to the insurance company and answering various questions (sometimes in an interview with the insurance company). In addition to making your application, you will also choose the amount of coverage that you wish to pay for, with insurance companies generally capping the daily amount that they will spend on coverage. As covered in more detail below, these two variables - your health status and the amount of coverage you would like to receive - make up the bulk of how much your long term care insurance will cost (in other words, what your premiums will be each month).

Generally, your long term care insurance will start to kick in and you will become eligible for benefits when one of two things occurs: (1) you can no longer accomplish 2 out of 6 “activities of daily living” (or ADL’s in the vocabulary of long term care insurance), or (2) you suffer from dementia or another serious cognitive impairment. Most policies define ADL’s as some combination of: eating, bathing, dressing, using the bathroom, treating incontinence, and moving around the home, particularly getting in and out of bed and chairs. 

Once the insurance company has determined that one of these conditions has been met, which again generally includes some sort of examination and disclosure of medical records, they will then approve your proposed plan of care. Unfortunately, most policies will not begin to pay right away and you will have to front the costs of treatment. However, most policies begin to make payments roughly 30-90 days after care begins. 

How much does long term insurance cost?

As noted above, the main variables in the cost of your long term care insurance are likely to be your health status and the amount of coverage you are seeking. The more coverage you seek, as well as the older or more complicated your health status is, the more expensive your long term care insurance is likely to be. However, insurance companies often take other variables into account as well including gender and marital status (women generally pay higher premiums than men as statistically they tend to live longer, while married people generally pay lower premiums than single individuals). With all of these variables in mind, people generally can expect to spend roughly $1,500 to $3,000 a year for long term care insurance, although it is important to note that these rates can change after you buy a policy. 

While long term care insurance can certainly be expensive, there are some additional financial benefits outside of the main benefit of having your long term healthcare covered. First, some long term care insurance plans allow you to claim a deduction on your state and federal income taxes. While only some plans will meet the specific thresholds, it’s important to check with your insurance provider and see if your plan applies. Next, some policies will allow married couples who both buy a policy to pool their coverage, so that one spouse can draw funds from the combined pool should they need some additional coverage. 

Many long term care insurance plans allow for spouses to pool their coverage to provide long term care for one another.

As with all major financial decisions in life, it’s best to seek the advice of a financial advisor or investment professional when evaluating the best ways to pay for your retirement, and should you need it, your long term care. While long term care insurance can be a very effective way to help pay for your care, it’s important to consider what is best for your own particular circumstances. Not only do different people have different financial situations, they also may have differing required levels of care based on things ranging from the nature and extent of any chronic conditions to the amount of family members living in the area who can provide help. Generally, many factors will go into determining what your long term care needs are, and it’s  best to seek the advice of a financial or investment professional before making any major decisions. 

If you want to learn more about retirement and aging more generally, reach out to us at info@sunboundhomes.com. We’re always happy to help with any questions you may have. 

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