Long-Term Care Insurance 101
These days, people are living longer than ever. A 2011 study by the Society of Actuaries found that, since the 1960s, life expectancy has increased between 1.5 and two years each decade.
It’s a good thing that more and more of us can expect to live well into our golden years. Yet, there’s a flip side that a lot of us don’t like to talk about: How healthy will we be when we’re 90?
According to the 2010 U.S. Census, 70.5% of Americans are disabled by age 80. Although it’s not fun to think about, we don’t want to be a tremendous burden on our loved ones if we wind up needing a nursing home or other long-term care.
That’s what long-term care insurance is for. And there are reasons you need to know about it well before the wrinkles set in.
Reasons to Consider Long-Term Care Insurance
In addition to sparing your family the expense of caring for a long-term disability, long-term care insurance can keep you from draining your savings and ending up fully or partially on Medicaid. That’s a good thing because, while there’s no out-of-pocket cost for Medicaid, the benefits are not extensive enough to cover many things that would affect your quality of life, like a private room at a nursing home. Medicaid benefits have also been cut recently, leading to cutbacks at nursing homes and influencing some providers to stop accepting Medicaid entirely.
With long-term care insurance, you would have more money to draw on, so you could pay for nicer care and wouldn’t be limited to providers that accept Medicaid.
Long-term care insurance can also help protect your assets and your family’s inheritance. For example, if, heaven forbid, you developed dementia, you’d likely need round-the-clock care. The Metropolitan Life Insurance Company found that in 2012, a semi-private room in a nursing home cost $222 a day, or $81,030 per year. A private room cost $248 a day, or $90,520 a year.
Just a few years of that could quickly deplete a middle-class couple’s savings, leaving little or nothing behind for future generations.
How Exactly Does It Work?
Long-term care insurance generally kicks in if you need help with at least two or three activities of daily living, like bathing, eating, using the toilet, dressing, walking and so on. If you’re dealing with a cognitive disability, your eligibility might be determined by a mental test score instead.
Once you’re eligible for benefits, most insurance plans pay a specified amount per day to cover the costs of dealing with that disability. That could mean a nurse helping out in your own home, an assisted living facility or a full-service nursing home. Some policies let you apply the per-day payment to any kind of care you like. Others only permit you to use the money for “qualifying expenses,” as defined by the policy.
Almost all long-term care insurance plans have a waiting period, or elimination period, when you must pay for your own care. Most plans’ waiting periods are 90 to 100 days, according to the American Association for Long-Term Care Insurance, but it can vary. A shorter waiting period makes the plan more expensive, because that means you have to cover fewer of your own expenses.
Once you are eligible for benefits, you will be paid a certain daily dollar amount (most people opt for a policy that offers $100-199 per day), for the term specified in your policy, which ranges from less than three years to a lifetime. If you live past the benefit period, you’re on your own. Not surprisingly, the more years and the higher the cost a plan covers, the more expensive it’ll be. Some plans reimburse you for actual expenses incurred, so if your actual daily or monthly costs are less than what your plan provides, you can extend your benefits until the pool of money runs out.
Because of all these rules, it’s vital to scrutinize each policy before you buy it, keeping in mind your specific needs. Nancy Anderson, a certified financial planner™ with LearnVest Planning Services, believes that even a basic policy with a short benefit period is helpful because it provides some protection against the tremendous costs of a disability.
Two Main Types of Long-Term Care Insurance
Most long-term care insurance plans are “tax-qualified,” which means benefits generally aren’t taxed as income, and you can claim your premium payments as a medical expense on your itemized federal income taxes.
There are also non-tax-qualified (NTQ) plans, though they’re falling out of favor. These are typically more expensive, but because they don’t have to meet certain provisions for tax qualification, they have less restrictive benefits rules: There’s usually no waiting period and there’s often a lower threshold for triggering benefits. Rather than taking a cognitive test or proving you have trouble with multiple tasks of daily living, you just need a doctor to state “medical necessity.” If you get an NTQ plan, make sure to choose one that allows your own doctor to decide medical necessity; otherwise, a doctor paid by the insurance company might deny that there’s a necessity.