Long term care insurance is a type of insurance designed to cover the cost of extended care services that are not covered by regular health insurance or Medicare. It helps pay for care in a nursing home, assisted living facility, memory care unit, or at home when a person can no longer perform basic daily activities on their own due to aging, illness, or disability.
Why long term care insurance exists
Regular health insurance and Medicare cover acute medical care — the treatment of illnesses and injuries. They do not cover the ongoing personal care assistance that many people need as they age such as help with bathing, dressing, eating, and moving around. This type of care — called custodial care or personal care — can be extremely expensive and can quickly deplete a lifetime of savings.
Long term care insurance was created to fill this gap by providing a source of funds specifically for extended personal care needs.
What long term care insurance covers
Most long term care insurance policies cover care provided in a variety of settings including:
- Nursing homes and skilled nursing facilities
- Assisted living facilities
- Memory care facilities
- Adult day care centers
- Home care provided by a paid caregiver
- Home health care provided by a licensed healthcare professional
- Hospice care in some policies
The specific services covered depend on the terms of the individual policy. It is important to review any policy carefully to understand exactly what is and is not covered.
How long term care insurance benefits work
Long term care insurance policies pay benefits in one of two ways:
- Reimbursement policies — the most common type, these policies reimburse you for actual care expenses up to the policy’s daily or monthly benefit limit. You pay for care and then submit receipts to the insurance company for reimbursement.
- Indemnity policies — these policies pay the full daily or monthly benefit amount regardless of actual care expenses. They provide more flexibility but are typically more expensive.
Benefit triggers
Long term care insurance benefits are triggered when the insured person meets certain conditions defined in the policy. Most policies use one or both of the following triggers:
- Activities of daily living — ADL — trigger — benefits begin when the insured person is unable to perform a certain number of activities of daily living without assistance. Activities of daily living typically include bathing, dressing, eating, toileting, transferring — moving from bed to chair — and continence. Most policies require inability to perform two out of six ADLs to trigger benefits.
- Cognitive impairment trigger — benefits begin when the insured person has a severe cognitive impairment such as Alzheimer’s disease or dementia that requires substantial supervision to protect their health and safety.
Key policy features to understand
When evaluating a long term care insurance policy pay attention to the following features:
- Daily or monthly benefit amount — the maximum amount the policy will pay per day or per month for care. Choose an amount that reflects the current and projected cost of care in your area.
- Benefit period — the length of time benefits will be paid. Common options include two years, three years, five years, or unlimited lifetime benefits. The longer the benefit period the higher the premium.
- Elimination period — similar to a deductible, the elimination period is the number of days you must pay for care out of pocket before insurance benefits begin. Common elimination periods are 30, 60, or 90 days. A longer elimination period results in lower premiums.
- Inflation protection — a feature that increases the benefit amount over time to keep pace with rising care costs. Inflation protection is highly recommended especially for younger buyers whose benefits may not be needed for decades.
- Shared care rider — available for couples, this rider allows spouses to share their combined benefit pool. If one spouse exhausts their benefits they can draw on the other spouse’s benefits.
How much does long term care insurance cost
The cost of long term care insurance depends on several factors including age, health status, the benefit amount, benefit period, elimination period, and whether inflation protection is included. General guidelines:
- Premiums are significantly lower when purchased at a younger age — typically in the 50s — than when purchased later
- A 55 year old in good health might pay $1,500 to $3,000 per year for a policy with a $150 per day benefit, three year benefit period, and 90 day elimination period
- A 65 year old purchasing the same policy would pay significantly more
- People with certain health conditions may be declined for coverage or charged higher premiums
Long term care insurance premiums are not guaranteed to remain level — insurers can and do raise premiums on existing policies with state approval. This is an important consideration when budgeting for long term care insurance.
Alternatives to traditional long term care insurance
Traditional long term care insurance is not the only option for funding long term care. Alternatives include:
- Hybrid life insurance and long term care policies — these policies combine life insurance with a long term care benefit rider. If you need long term care the policy pays benefits. If you die without needing care the death benefit is paid to your beneficiaries. These policies address the concern that you may pay premiums for years and never use the long term care benefits.
- Annuities with long term care riders — some annuity products include a long term care benefit that can be used to pay for care if needed
- Short term care insurance — a less expensive alternative that covers care for shorter periods — typically up to one year — and may be available to people who cannot qualify for traditional long term care insurance
When to buy long term care insurance
The best time to purchase long term care insurance is generally in your mid-50s to early 60s when:
- Premiums are lower than they will be at older ages
- You are more likely to be in good enough health to qualify for coverage
- You have enough time to pay premiums and build up coverage before you may need it
Waiting too long to purchase long term care insurance can result in significantly higher premiums or being declined for coverage due to health conditions. However purchasing too early means paying premiums for many years before benefits may be needed.
Is long term care insurance right for everyone
Long term care insurance is not the right solution for everyone. It may be most valuable for people who:
- Have significant assets they want to protect from long term care costs
- Do not have family members available to provide care
- Want to have choices about where and how they receive care
- Are in good health and can qualify for coverage at reasonable rates
People with very limited assets may be better served by planning for Medicaid. People with very substantial assets may be able to self-insure — meaning they have enough savings to pay for care without insurance.
Key terms to know
- Long term care insurance — insurance designed to cover the cost of extended personal care services
- Custodial care — non-medical assistance with daily activities such as bathing, dressing, and eating
- Activities of daily living — ADLs — basic self-care tasks used as benefit triggers in long term care insurance policies
- Elimination period — the waiting period before insurance benefits begin, similar to a deductible
- Benefit period — the length of time a long term care insurance policy will pay benefits
- Inflation protection — a policy feature that increases the benefit amount over time
- Hybrid policy — a policy that combines life insurance or an annuity with long term care benefits
- Shared care rider — a policy feature that allows spouses to share their combined benefit pool
Sources
- American Association for Long-Term Care Insurance — aaltci.org
- National Association of Insurance Commissioners — naic.org
- Medicare.gov
- USA.gov
This article is for general informational purposes only and does not constitute legal or financial advice. Insurance products and rules vary by state. Consult a licensed insurance professional for guidance specific to your situation.