Few financial products are as misunderstood as long-term care insurance. These policies are complicated and expensive and cover a risk that most of us would rather not think about: the need for help with personal assistance in frail old age or if you become disabled as a younger adult. But they can be a critical piece of your retirement planning, and if you are in your 50s or 60s, long-term care (LTC) insurance is a product you should at least consider. Here are some questions to help you decide.
Will you need long-term care? Almost seven of every ten of us will need some sort of personal assistance after age 65, and we'll need that help for an average of about three years. For many people, however, the assistance needed will be relatively modest, can be provided by family members and might not be covered by LTC insurance anyway. That's because to qualify for LTC benefits you must need help with at least two of five "activities of daily living," such as getting in and out of bed, bathing, dressing, eating or going to the bathroom.
What's more, you'll need it for an extended period, since policies typically don't cover the first 90 days of care. On the other hand, 20% of seniors will need care for five years or more, and 5% will spend more than $100,000 of their own money on this assistance.
Will the government pay? There is lots of confusion about government coverage of long-term care. Medicare may pay for limited nursing assistance after you have been hospitalized. But neither traditional Medicare nor Medicare Advantage managed care nor Medicare Supplemental (Medigap) will pay for long-term services for someone with chronic disease.
Medicaid does pay for this assistance. But to qualify you need to have very limited financial assets (less than $2,000 in most states) and limited income (this varies widely among the states but is rarely more than a few thousand dollars per month). In addition, while all states have Medicaid home-care programs, they often are severely underfunded, have long waiting lists or provide limited services. Thus, if you can't pay or don't have insurance, your only government-funded option may be Medicaid in a nursing home. And in an era of budget-cutting, Medicaid benefits may become less generous.
What's your net worth? If you have limited income or less than $200,000 in assets, don't buy private insurance. Medicaid will provide a safety net for you. And remember, if you purchase at 60 you'll likely need enough retirement income to keep paying premiums for 20 years—and those premiums are certain to increase over time, perhaps outpacing your ability to pay.
If you have a nest egg of $2 million or more, you probably can cover any care you will need out of pocket and can skip buying LTC insurance.
If your wealth is somewhere in between, you could self-insure for long-term care costs by filling a dedicated pot of money (beyond what you'll need for regular retirement living expenses) that can be used for care if needed and otherwise can go to heirs. But that requires the discipline to put aside extra money each month for years.
When should you buy? At 45 you can expect to pay about $100 a month for a policy that pays $200 a day for three years. If you wait to 65, you'll probably pay about $250 a month and are more likely to be rejected for coverage because of your preexisting health history. But you'll pay for 20 fewer years. For most people the sweet spot for buying may be in their mid- to late 50s.
How much coverage should you buy? Let's say you've decided to buy. What kind of policy should you think about? LTC policies are typically defined by how long they pay benefits and how much they pay each day. So you might see a policy that covers, say, $150 a day for three years. Policies also come with a deductible, sometimes called the elimination period. This is typically 90 days, which means the insurance will not pay for the first three months of your care.
The average cost of a nursing home now exceeds $200 a day and in some areas tops $300. Home health aides hired through an agency cost about $20 an hour. The Society of Actuaries estimates that an average man will face a period of severe disability of about 18 months, while for women it will approach three years. Think about how much of this you can fund yourself. Do you want a policy that covers all of your daily needs, or do you want to self-insure for part? Do you have a family member who will provide some care or will you have to pay for all of it? As always, the more generous the benefit, the higher the premium.
Watch the fine print. Some policies will pay up to the daily amount but won't allow you to carry over unused benefits. So if you have a $200-a-day policy but care costs only $80, you lose the difference. But with other policies—sometimes called pool-of-money coverage—you won't lose untapped benefits. Thus, when you buy a $200-a-day, three-year policy, you are really purchasing $219,000 in benefits ($200 x 365 x 3).
Should You buy inflation protection? Absolutely. If you buy a policy at 55, you are unlikely to claim benefits for 25 or 30 years. Over that time the value of your benefit could easily erode by two-thirds or more. You'll pay higher premiums, but consider buying a compound annual inflation rider of at least 4%.
Is a group policy a better deal? If you can buy group coverage through your employer, it may—or may not—be a better choice than buying on your own. Shop around. Employers rarely help pay premiums for LTC policies, as they do for health insurance. So you'll pay the full amount either way. And unlike health policies, group long-term care rates can be more expensive than individual ones. That's because group policies often require only limited underwriting and so carry more risk for insurers. On the other hand, if you have health problems, a group policy purchased through your employer may be the best deal available to you.
Do combo products make sense? Some insurers offer annuities or life insurance with a long-term care rider. These so-called combo products, which attempt to add a long-term-care component to an annuity or life insurance, are worth considering, especially if you have a high net worth. They can provide flexibility and assure some income for a surviving spouse if it turns out you don't need long-term care. But these policies can be complex and often come with very high fees. Another alternative is longevity insurance—an annuity that pays out only after you turn 85, when you are most likely to need long-term care. In general, basic annuities are a better buy, especially for men, than stand-alone LTC insurance.
What if your insurer folds? There has been tremendous consolidation in the industry over the past decade, and you should consider the possibility that the company you buy from today won't be around when you go to claim years from now. If your carrier goes out of the business, your policy may be transferred to another firm. In the worst case, most states have special funds to protect you. However, those funds have never been stress-tested.
Should you buy? The answer, for a large group of middle- and upper-middle-class boomers: It depends. Unlike health and auto insurance, which everyone either should or must have, LTC insurance is a financial product that works for some but not for others.
Consider your own tolerance for risk. And ask yourself why you're buying. To make sure you get needed care in old age? To protect assets for heirs? To make sure you're not a burden on your kids? The answer could go a long way to helping you decide what, if any, type of LTC product to buy.