Intro To Insurance: Long-Term Care Insurance
By Cathy Pareto
As our lifespans are extended, our family structures change and medical care improves, the need for long-term care will continue to increase. A great number of people over 65 will spend some time in a nursing home, assisted living or extended care facility. The cost of such care can quickly erode the assets of even the most well-prepared savers. The risk of outliving your money in this situation can be great, and one of the best ways to transfer this risk is to purchase long term care. (For background reading, see A New Approach To Long-Term Care Insurance and Failing Health Could Drain Your Retirement Savings.)
Long-term care (LTC) is defined as a need for assistance with some of the activities of daily living (often called ADLs). ADLs include functions that most of us perform each day, like eating, bathing, using the bathroom, dressing, transferring and maintaining continence. The need for assistance may be due to physical inability or mental impairment, such as memory loss, Alzheimer's or dementia.
The reason to buy long term care insurance is to protect your assets in case you need to pay for assisted living, home care or a nursing home stay. Long-term care insurance helps you pay for these services, which can be very expensive and, over time, can be financially devastating. A policy also ensures that you can make your own choices about what long-term care services you receive and where you receive them in advance.
Within the long-term care insurance contract, there are two broad levels of care outlined in the policy, including:
- Skilled Nursing Care: This is usually for someone with an acute condition that requires intensive medical attention for a period of less than 100 days. The two objectives of skilled care are to help the person with comfort and assistance if the situation is terminal or to assist the person during a recovery period.
- Hospice Care: This is the term used for the care provided to individuals facing a terminal condition, or who have less than six months to live. This care can be provided in a home or a facility.
- Non-Skilled Nursing Care/Custodial Care: This is for a person with a chronic condition from which he or she will not recover. This type of care is usually received at home or in assisted living facilities. This type of care lasts beyond 100 days, and even up to several years.
- Home Care: Pays for care in your home. According to "Long-Term Care Planning" (2007) by Allen Hamm, as of 2007, more than 10 million people received care at home and home care is projected to increase 178% by 2030.
- Facility Care: Pays for care in a facility, such as an assisted living community, adult day center, continuing care retirement community or nursing home.
- Respite Care: Pays for services that enable some relief (rest or vacation period) to family members providing care giving. This can be provided either in the home or at a facility.
Like other types of insurance policies, the cost of insurance coverage depends on the specifics of that coverage. Several factors can influence how much a policy may cost the insurer, including the place in which the care is received, the reason for care or severity of the patient/insured's condition, the geographic location of the care, the daily benefit amount, the elimination period, the time frame in which benefits will be paid, etc. One thing is certain: the actual cost for continued medical care is not cheap, with some nursing homes costing upwards of $75,000 a year for private rooms. The national average daily rate for nursing home care is $206 for a private room and $188 for a semi-private room ("Long-Term Care Planning" (2007) by Allen Hamm).
Who Needs It?
You may never need long-term care. But one thing is for sure: the need for care assistance dramatically increases after age 65. One study from the U.S. Department of Health and Human Services reveals that one in four people turning age 65 will spend one year or longer in a nursing home, and by the year 2020, 12 million older Americans will need long-term care. So, when should people consider buying LTC insurance and how are other assets considered? While anyone between the ages of 18 and 84 can probably buy long-term care insurance, if you are in reasonably good health, the younger you are when you acquire the policy, the cheaper it will be. On the flip side, the average age of people admitted to a nursing home is 83. That means you might pay for nearly 40 years before ever using the policy.
Types of Policies
There are a few types of policies available for consumers today. Most are known as "indemnity", "expense incurred", or "cash" policies. Indemnity plans are also called "per diem" policies that pay up to a fixed benefit amount regardless of what you spend (ie. you may spend more or less than the policy covers). Expense-incurred policies reimburse you for actual expenses incurred up to your fixed benefit amount, as defined by the daily benefit you purchased with the policy. With a cash-based policy, as long as the policy gets triggered by the ADLs, you will not be required to incur expenses to receive the benefits of your claim. So, for example, if you are being cared for by a relative (for free presumably), then you would still be "paid" even though you are not incurring expenses to receive care. (For more on LTC plans, see Protecting Your Income Source and Take Advantage Of Employer-Sponsored LTC Insurance.)
The purchase of LTC insurance should not be a stand-alone decision and must be incorporated with all other planning. When considering the purchase of an LTC policy, you may wish to consider purchasing optional benefits. One such option might be to buy a policy that is guaranteed renewable. You don't want to be surprised should your health decline one day that your policy is not renewable. You should also consider investing in an inflation rider to protect the purchasing power of whatever daily benefit you purchase.
Typically, those who apply for LTC are given the option to buy a 3% or 5% inflation rider using simple or compound interest. Of course, compound interest at 5% gives you the best inflation hedge, but also costs you more money. Additionally, if you think there is any possibility that you may not use your benefits, you may want to consider a "return of premium" rider. Finally, given that the average stay in a nursing home is about 30 months, you may want to consider a policy that will give you benefits for a minimum of three years (this is referred to as a policy's maximum benefit period).
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