Before you start researching LTC insurance policies, first determine if you are a good candidate.
Individuals with a net worth less than $300,000 or greater than $3 million may not need to consider LTC insurance—if this is you, consult a fee-only financial advisor to see what approach is best for you.
There are a large number of options with LTC insurance. Each option requires analyzing your unique situation, but the following are general guidelines that will help determine what your policy should contain.
How Long the Coverage Should Last
In the insurance world, this is the “term” or period of coverage. LTC policies can last one year, two years, or for the rest of your life. The longer you want coverage the more expensive the policy. If you can afford it, a policy that lasts for life (i.e., full coverage until you die) is obviously best. Medical advances are pushing the limits of longevity. In fact, the 85+ population is expected to see tremendous growth. From 4.3 million in 2000 to 18.2 million in 2050—a 323 percent increase. The centenarians—those 100 or older are expected to rise 1000 percent over the same period! You will want a policy that will support you for as long as possible.
If the cost of getting a policy that lasts for life is too expensive, you have to make a more difficult decision. Should you get a two-year policy? A four-year policy? Should you get policies with the same period of coverage for both spouses?
Take these factors into consideration:
- Age – Is there a big difference in age between you and your spouse? It might make sense to purchase a longer-term policy for the older spouse and a shorter-term policy for the younger spouse. Chances are the older spouse will require LTC first. This will protect the assets of the younger spouse who will need the use of them for a longer period of time. Also, with the money saved on the younger spouse’s shorter-term policy, you might be able to purchase a life insurance policy on the older spouse. At the older spouse’s death, the proceeds of the life insurance can be used to either fund a new LTC policy for the surviving spouse or be used to pay for care directly.
- Sex – Women live longer than men. As a result, women are typically their husband’s first caregiver. LTC insurance is also sometimes called “woman’s insurance” because women greatly outnumber men in nursing homes. Consequently, women should generally obtain LTC coverage for a longer period than men. A minimum term for women is four years, and a minimum term for men is two years.
- Medical History – Take a look at both spouses’ individual and family medical history. You are looking for important signs that may help you determine who might need care longer. Does heart disease run in your family? Cancer? Alzheimer’s? Some conditions, like a heart attack, tend to require less LTC while Alzheimer’s can require ten years or more of care.
- Support Network – Although not ideal, consider the care that can be provided by an informal support network of friends and family. If both spouses have the same support, this won’t be a factor in determining who should get a policy with longer coverage. However, there are often differences between spouses’ networks. One spouse may have children from a previous marriage or siblings who can provide support and the other spouse may not. One spouse may be active at their place of worship and the other may not. If you determine that one spouse is deficient in the support of friends or family, it may be appropriate for them to have a longer-term policy.
- Availability of a Pooled Account Policy – Depending on your state, you may be able to get a pooled policy. A pooled policy is one in which you have a pool of LTC money available to you. For example, if you have a two-year policy paying at $150 per day, you would have a total of $109,000 (365 days x 2 years x $150 per day) of LTC dollars for as long as you live even though your policy is for two years. If you needed coverage for two years and the cost per day was $100, at the end of two years you would still have $36,500 remaining to pay for additional care.
Daily Benefit Amount
LTC is expensive and in some cities it is more so than others. Determining how much daily benefit you need is slightly more difficult than it may seem. You can’t just get a policy that covers the cost of care today. I recommend getting a policy that keeps up with the rising cost of LTC inflation (see below for a more detailed description of inflation protection options).
Unfortunately, most policies rise at a maximum annual rate of 5% even though LTC costs are rising at an average of 6% per year. For example, if care in your city costs $160 a day, in 15 years it will cost $383 per day. If you purchase a daily benefit of $160 a day with a 5% compound inflation protection, your daily benefit will grow to $332 per day in 15 years. Under this scenario, you would be out of pocket $51 per day or nearly $19,000 per year.
This is why it is important to get the inflation protection AND to pad the daily benefit amount. How much you pad the amount will depend on how old you are. The younger you are the more you will need to add to the daily benefit. Use this guide below:
Age 50-60: Add approximately 25% to current daily benefit amount
60-70: Add approximately 15% to current daily benefit amount
Over 70: Add approximately 5% to current daily benefit amount
For example, if you are 55 and live in an area where the average cost of LTC is $160 per day, you would buy a policy that provides a $200 daily benefit. If you are 63 and live in an area where the average cost of LTC is $130 per day, you would buy a policy that provides a $150 daily benefit. Semi-private nursing home room rates are less expensive, so if you don’t mind sharing a room, you might be able to save some money in premiums.
The elimination period, also called the waiting period, functions like a deductible on your auto policy. Instead of requiring you to pay a certain dollar amount before coverage kicks in, a LTC policy requires you to pay for a certain number of days of coverage. It is important that you understand that the elimination period is only satisfied when you pay for a certain number of days of care. In other words, if you know you will need LTC and try to save money by having friends and family take care of you, the elimination period won’t start until you actually start paying for the care.
Elimination periods commonly found on LTC policies are 0, 30, 60, 90, or 180 days. The shorter the elimination period is, the more expensive the policy. A zero day elimination period seldom make sense. Depending on the cost of the policy and the LTC budget, 30 and 90-day elimination periods are best. Avoid 180-day elimination periods if possible. Based on the skyrocketing costs of care, the cost of paying for five months of care (30 day versus 180 day) in 15 or 20 years when you need the coverage can be $50,000 or more. Usually the difference in the premium between a 90, or even a 30, day elimination period is not enough to make it worthwhile chance to take.
Choosing the right policy involves sorting through a lot of complicated advice. However, nearly all experts agree on the need for inflation protection, or “compounding.” Compounding protects you from the rising costs of LTC. If nursing-home care costs $150 a day in your city, what will it cost in 10, 15, or 20 years when you need it? Will it still be $150 a day? Not likely. LTC costs have increased dramatically in recent years (approximately 6% per year) and are expected to continue to outpace general inflation. The $150 per day nursing home cost will be $360 in 15 years! If you have a policy that covers $150 a day but doesn’t increase each year, you will be out of pocket $210 per day when you need the coverage. Over several years, such a deficit in your policy will cost you staggering amounts of money.
If you are young when buying the policy, inflation protection is even more important. It’s also important to get a policy that doesn’t place a cap on the daily benefit. For example, some policies will stop increasing your daily benefit after you reach a certain age or when the benefit doubles. Avoid these policies. Just because you turn 80, or through compounding, your daily benefit is twice the original value, doesn’t mean the cost for LTC suddenly stops increasing. Bottom line, you want a policy that will pay for your LTC today and in the future.
LTC policies have four common methods of inflation protection.
It’s important to understand the differences in these methods because the first type is definitely better than the others.
1) Compounding Inflation Protection. This method provides an annual increase in your daily benefit amount by a set percentage—typically 5%. This is computed automatically and without an increase in your premium. This is the preferable method but it can be an expensive rider—sometimes increasing the cost of the policy by 50% or more. The 5% inflation protection increase is not based on the original daily benefit but on the value of the benefit the year before. For example, if you buy a policy with a $150 daily benefit and have a 5% compound inflation protection rider, in year ten the daily benefit amount will have increased to $245. If you are age 65 or younger, opt for a policy with compounding inflation protection.
2) Simple Inflation Protection. This method functions in exactly the same way as compounding protection, except that the annual increase is a set dollar amount. Typically, the simple inflation protection amount is 5%. If you purchased a $150 daily benefit, the policy would increase by $7.50 per year automatically. In year 10, the daily benefit amount would be $225. If you are age 70 or older, a simple inflation protection rider may be appropriate for your policy.
3) CPI Inflation Protection. If you buy a policy with this method of inflation protection, your daily benefit will increase annually based on the rise in the Consumer Price Index (CPI). The problem with this method is that while the CPI generally rises less than 5% per year, nursing home costs are increasing at approximately 6% per year. You may find that your policy is not keeping pace with the rising costs of LTC. If you are age 70 or older, a simple inflation protection rider is preferred. If it is too expensive, an automatic inflation protection based on CPI may be okay. If you are younger than 70 however, this will not be the right method for you.
4) Option. The last method allows you to increase your daily benefit at set intervals by paying additional premium. The additional premium is based on your current age, and not when you originally purchased the LTC policy. This can lead to hefty increases in premium for small increases in the daily benefit. This rider is better than nothing, but it is inferior to the other inflation protection riders.
Guaranteed Renewable vs. Non-cancelable
These two contrasting options aim to answer the questions, “Can the insurance company cancel my policy and will my LTC premiums increase?” A guaranteed renewable policy means that as long as you pay your premiums on time, the insurance company cannot cancel your policy—regardless of your health. It also means that while the insurance company cannot selectively raise just your premiums, it can (and most likely will!) raise rates for all policyholders.
A non-cancelable policy is more difficult to get but offers much greater protection. If you have this type of policy, as long as you pay your premiums on time, the insurance company cannot cancel your policy or raise your premium. There are few companies that offer non-cancelable policies, but their policies may be cost prohibitive or require a large single premium payment.
Requirements for Coverage to Begin
As discussed earlier, most policies require the loss of ADLs in order for benefits to begin. If you have a tax-qualified (TQ) policy, you must lose two ADLs for coverage to start, but there are non-tax-qualified (NTQ) policies that only require the loss of just one ADL. The additional cost of these policies must be weighed against the benefit of receiving coverage earlier. If you are predisposed to a condition—like arthritis—that may prevent you from performing one of the ADLs (like dressing), a NTQ policy that starts coverage with one ADL may be more appropriate for you.
Levels of Care
LTC policies come in different forms. The three basic policies are nursing-home care, home health care, and comprehensive LTC. The first two policies cover only nursing home costs and home health costs, respectively. The comprehensive policy covers home health care, assisted living, and nursing-home care.
Because it is impossible to determine what kind of care you will need, I recommend a comprehensive LTC policy. There was a time when the majority of policies sold were only for home-care and not nursing-home care. Those buying these policies were obviously optimistic, but also shortsighted. The overriding theme of LTC planning is to expect the best, but plan for the worst. You wouldn’t buy a health insurance policy that just covers urgent care clinics and not emergency rooms, so don’t make this same mistake when buying a LTC policy.
Typically you can get a nursing-home policy and add a home-health care rider to the policy. Although it can add 50% or more to the premium, it is usually worth the added cost. Determine if the home health care benefit is limited. Some policies are designed to pay only 25%, 50%, or 75% of your daily benefit if used for home health care costs. There is nothing wrong with this stipulation, you just need to be aware of the costs for home health care in your area and get a policy that will cover you.
There is one caveat with home-health care. If you live alone and do not have a local support network, the home health-care rider may not be worth it for you. Home health-care tends to work best when a spouse or family member can coordinate it and provide some level of care themselves.
A LTC insurance policy with a “premium waiver” rider allows you to stop paying premiums as soon as you start collecting LTC benefits from the policy. Do not buy a policy without this protection. Be alert, insurance companies are tricky with their policy wording. Some premium waiver riders do not begin until you require nursing-home care. In this situation, if you are receiving home health-care you will still have to pay your LTC insurance premiums. You don’t want to have to keep paying in that situation. Get a policy that allows you to stop paying premiums regardless of the type of LTC you are receiving.
The proceeding blog post is an excerpt from The Six-Day Financial Makeover: Transform Your Financial Life in Less Than a Week!, available now on Amazon.
About the Independent Financial Advisor
Robert Pagliarini, PhD, CFP®, EA has helped clients across the United States manage, grow, and preserve their wealth for the past 25 years. His goal is to provide comprehensive financial, investment, and tax advice in a way that was honest and ethical. In addition, he is a CFP® Board Ambassador, one of only 50 in the country, and a real fiduciary. In his spare time, he writes personal finance books, finance articles for Forbes and develops email and video financial courses to help educate others. With decades of experience as a financial advisor, the media often calls on him for his expertise. Contact Robert today to learn more about his financial planning services.