Long-Term Care Insurance: Planning for the Rising Cost of Aging
Clients with every level of household net worth are asking us about long-term care. Specifically, they want to know what it is and how much it costs. Inevitably, they want to know how they will pay.
Let’s tackle these questions one at a time, and learn a few strategies that allow you to shift the financial risk of long-term care off of your shoulders and onto an insurance company.
What is long-term care?
According to the National Association of Insurance Commissioners (NAIC) Shopper’s Guide to Long-Term Care Insurance, this type of medical care is meant to maintain your current medical state rather than correct or improve it. Long-term care services are typically provided by members of the family or by skilled medical professionals. These services can be performed in your home or by an aging services provider, such as assisted living, adult day care, hospice, or a nursing home.
In 2015 Medicare and You, the Centers for Medicare and Medicaid Services reports that 70 percent of today’s 65-year-olds will need long-term care at some point.
To qualify for care, an individual must be unable to perform two of the six activities of daily living — bathing, eating, dressing, toileting, transferring (moving into or out of a bed, chair, or wheelchair), and continence — or suffer from a cognitive impairment.
How much does long-term care cost?
Based on a 2015 survey by Genworth, a leading provider of long-term care insurance products, the cost of this type of care continues to increase annually, and each increase is getting larger.
|Type of Service||Location of Service||2015 National Median Cost||Increase From 2014||Five-Year Average Increase|
|Homemaker services — Service providing help with household tasks that cannot be managed alone; includes “hands-off” care such as cooking, cleaning, and running errands.||Home||$20 per hour||2.63%||1.61%|
|Home health aide services — “Hands-on” personal care, but not medical care.||Home||$20 per hour||1.27%||1.03%|
|Adult day health care (ADC) — Social and support services in a community-based, protective setting. Various models offer socialization, supervision, structured activities, and sometimes personal care, transportation, medical management, and meals.||Community||$69 per day||5.94%||2.79%|
|Assisted living facility (ALF) — Residential arrangements providing personal care and health services. The level of care may not be as extensive as that of a nursing home and is often an alternative to a nursing home.||Facility||$3,600 per month||2.86%||2.48%|
|Nursing home care (semi-private room) — A higher level of supervision and care than an ALF, including personal care assistance, room and board, supervision, medication, therapies, rehabilitation, and 24/7 on-site nursing care.||Facility||$220 per day||3.77%||3.53%|
|Nursing home care (private room) — Same as above with added privacy of a private room.||Facility||$250 per day||4.17%||3.95%|
Source: Genworth 2015 Cost of Care Survey
Cost of care can vary widely, depending on the geographic location where services are provided. For example, Genworth reports that a private room in a nursing home can range from $60,225 per year in Oklahoma to as high as $158,775 per year in Connecticut and an astounding $281,415 per year in Alaska.
Four ways to pay for long-term care
There are four methods to pay for long-term care: self-funding, family assistance, Medicare and Medicaid, and long-term care insurance.
Self-funding is essentially using your personal assets to pay the cost of care out of pocket. This plan is not viable for all families, and if the cost of care is greater than expected, this plan could leave a surviving spouse or other dependents in a difficult financial situation.
Family assistance means relying on your family members to perform the necessary care. This plan may sound reasonable, but it can lead to stress and strain on the family, and the required level of care may be beyond the capabilities of the family.
Medicare and Medicaid are a consideration for some families, but there are income and asset limits. Divesting your estate to qualify for Medicaid is not a realistic option. In fact, several states have enacted look-back provisions to prevent this course of action.
Long-term care insurance is a widely accepted solution that allows you to shift the financial risk of the cost of care off your personal balance sheet to that of an insurance company. Of course, premiums must be paid in anticipation of receiving future benefits, and those premiums can be anything but modest.
Traditional long-term care insurance
The most familiar type of long-term care insurance is what we would call traditional. A traditional policy comes with an initial daily ($500/day maximum) or monthly ($15,000/month maximum) benefit, a duration period between one and six years, an elimination period (the time between when care begins and when the policy begins paying for care) of 0, 30, 60, 90, 180, or 365 days, and the option to add an inflation feature (typically 3 percent to 5 percent compound inflation). Additional features for shared care (option for spouses to access other spousal policy benefits) and non-forfeiture provisions (if the premiums can no longer be paid, the policy may offer a reduced paid-up option, shortened benefit period, or a cash refund) are also available at an additional cost.
The long-term care insurance industry has contracted over the past 10 years, and that has only accelerated in the past few years. In 2005 there were about 100 insurance companies offering this type of coverage, but today, the number is roughly 10. Many reasons are cited for the high attrition rate. Some believe the industry simply got it wrong when predicting mortality rates, disability rates, nursing home and assisted-living use rates, and future interest rates. Over the past few years, insurance companies have requested premium increases for existing policy holders ranging from 10 percent to more than 100 percent. Increases depend on the policy features and type.
Hybrid long-term care policies
As a result of significant industry changes, insurance companies have turned from traditional long-term care policies to hybrid policies and consumers are looking seriously at these alternatives. These policies are life insurance or annuity contracts that have an access point for long-term care. To qualify, the insured must still be unable to perform two of the six activities of daily living or have a cognitive impairment. Once the insured qualifies for care and completes any required elimination period, the policy can be accessed to pay for qualified long-term care expenses.
For life insurance policy options, the insurance company is essentially accelerating the death benefit at a 2 percent or 4 percent monthly rate until the full death benefit is exhausted. For example, if the policy death benefit is $300,000, the monthly maximum for long-term care benefits would range from $6,000 to $12,000 per month; the $6,000 payable for 50 months (2 percent) and the $12,000 (4 percent) payable for 25 months. Some policies offer a residual death benefit if the original death benefit is all used up.
The life insurance policy option may give you some peace of mind that the premium dollars you pay will eventually result in a benefit, either for death or long-term care. With most of these policies, there is no inflation option, so by the time they are needed, benefits may not cover as much care.
Another hybrid type of life policy offers a lower initial death benefit with an extra bucket for long-term care. For example, the life insurance policy may have an initial death benefit and long-term care benefit of $300,000; however, there can be an additional $600,000 available for long-term care, but only after the initial $300,000 is exhausted.
A few annuity contracts on the market offer a long-term care bucket that is in addition to the premium contributed to the annuity. This does offer a second pool of benefits once the initial contract is exhausted.
How we can help
Which option is the best for you? The answer depends on your circumstances. We can help you through a planning process to understand how a long-term care event could impact your family’s income, retirement, legacy, and life planning. Preparing for a long-term care event has financial and emotional components that can affect you and your entire family.