Insurance is familiar to most of us. We know about auto insurance, health insurance, homeowners and renters insurance, and life insurance. What many people overlook, however, is something equally important: long-term care insurance.
Although it may be far from your mind right now, the time to consider long-term care insurance is before you need it. As people get older, we find that we simply don’t get around like we used to. Eventually, many of us will need some assistance with the tasks of day-to-day life.
More than 70 percent of people in the U.S. over the age of 65 will eventually need long-term care assistance. Seniors are most likely to need long-term care. The majority of residents in assisted living facilities are 85 years of age or older. But up to 40 percent of long-term care claims are from people under 65.
What does long-term care insurance do for you?
Long-term care insurance pays for the cost of personal care in the event that you become unable to perform some basic functions of living. These include eating, dressing, bathing, and walking. This care may be provided in the home, in a nursing home, or an assisted living facility.
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Why should you consider long-term care insurance?
Long-term care insurance is crucial for many people. Assisted living care is expensive and the cost keeps rising. The cost of a private room in a nursing facility in 2016 was $7,700 per month. Meanwhile, the cost of an in-home health aide averages $19 per hour. Long-term care without insurance could easily deplete an individual’s savings. This could end up being a retirement planning mistake that will ruin your savings.
A common reason people buy long-term care insurance is to protect a spouse from financial ruin. The high costs of long-term care could leave a spouse in dire financial straits.
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Can you just have your relatives take care of you?
Can you rely on your children or other family members to take care of you? Eighty percent of long-term care is provided by unpaid caregivers at home.
However, caregiving is time-intensive and exhausting for the caregiver. The caregiver makes significant sacrifices. They must expend personal resources. The person might have to give up or cut back on employment, He or she might even move to be close to you. Would your relatives be prepared to make this sacrifice? Sixty-seven percent of people plan to have a relative provide long-term care, but haven’t asked.
What are the different types of long-term care insurance?
If you’re thinking about LTC insurance, there are many choices. Some people need help for just a few hours per day or week, such as assistance with medications or physical therapy. Others need more extensive support, either in their homes or at an assisted living facility. Those with debilitating illnesses may require round-the-clock care in a nursing facility.
Long-term care insurance policies vary widely. You can choose the types and level of care available, the amount paid out per day, the waiting period before the policy takes effect, preexisting health conditions, and whether the payouts are adjusted annually for inflation.
There may be group policies available through your employer or an organization you belong to. You should carefully examine the terms and limitations of group policies. Sometimes employer-provided coverage ends at retirement or at a certain age.
Another variable is the duration of care. Many people believe that once people need long-term care, they will need it for many years. In fact, the average length of a nursing home stay is about 2.5 years. Only 10% of people who enter a nursing home stay there for five or more years. Thirty-eight percent of nursing home residents are eventually discharged to go home or to another location.
When should you think about purchasing long-term care insurance?
Long-term care insurance is least expensive when you are relatively young and healthy. The most common age at which LTC insurance is purchased is the mid-fifties to age 60. The annual cost of LTC insurance for a 55-year-old couple in 2012 with a $150/day benefit, three year benefit period, and 3% annual inflation adjustment was $2,080 to $4,824. For a 60-year-old couple in 2012, the average cost for the same insurance was $2,794 to $5,637.
Would Medicare help with any of your long-term care expenses?
Medicare and Medicaid can help pay some of the costs. If you are eligible for Medicare benefits, it will cover up to 100 days of skilled care per benefit period in a nursing home. Medicare pays the full cost for the first 20 days, and then you make a copayment for the remaining 80 days.
Medicaid is a state-run program for lower-income residents. It includes some long-term care provisions, which depend on the state you reside in.
Therefore, if you are eligible for Medicaid in your state, you may not need to purchase LTC insurance, since Medicaid may cover it. Many people who have some savings pay for long-term care out of pocket, until their savings draw down and they become eligible for Medicaid.
Conversely, if your assets exceed a certain level, such as around $2 million, then LTC insurance may also not be right for you since you may be able to finance the costs of care yourself.
Should you purchase long-term care insurance?
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The decision of whether to buy long-term care insurance is a personal one. It depends on your and your family’s individual situation. It can be an important part of an overall retirement strategy. But you need to consider your savings and income, and your retirement goals. Long-term care insurance can be expensive, and premiums increase dramatically with age.
It’s possible you might not need LTC insurance. A survey in 2005 found over thirty percent of people aged 65 never need long-term care during the remainder of their lives. This includes 42 percent of men and 21 percent of women.
So even if you purchase LTC insurance, you may seldom or never use it. Once paid, the premiums are gone, whether you use the insurance or not. Statistically, if you purchase a LTC policy at age 60, the chance that you’ll use it is 50 percent. Most residents of long-term care facilities are age 80 or over. So if a person buys a policy at age 60 that costs $5,000 per year, they will pay $100,000 for something they may not use for 20 years, if ever.
What are some alternatives to long-term care insurance?
In addition to LTC insurance and self-financing, there are other options for financing long-term care. Some life insurance policies include an accelerated death benefit provision. With these, you can receive part of your death benefit while you’re living. These help to meet expenses such as long-term care.
You can also buy an annuity that covers long-term care. For example, you could obtain an annuity with a long-term care rider. Like a regular annuity, you pay a lump sum upfront. In a certain number of years you begin receiving monthly payouts. If you need long-term care, however, the rider would pay double your regular monthly payout for a certain number of years to help cover your LTC costs.
Another alternative would be to invest your savings. Investing in stocks and bonds over time may produce the sum you need to pay for assisted living care. That depends, of course, on the performance of your investments.