Long-term care insurance is a specific type of health insurance that helps people pay for long-term care. It covers the types of care not included in traditional medical plans, Medicare, and for people not eligible for Medicaid. Even though long-term care insurance covers people with a variety of issues from different age groups, it may not be the best option for some.
The potential need for long-term care should not be overlooked. A majority of people will require it when they get older. Approximately 70% of people who turn 65 today will require long-term care at some point, according to the U.S. Department of Health and Human Services.
Long-term care insurance is expensive and not everyone is eligible, but these four alternatives can provide good coverage for those in need of long-term care.
- To avoid being rejected for long-term care insurance or paying higher premiums, individuals can look to alternatives.
- Short-term care insurance is one option, which is essentially long-term care insurance offered for up to a year.
- Critical care or critical illness insurance offers coverage for those who are diagnosed with serious illnesses, such as cancer.
- Annuities with long-term care riders or deferred annuities can be an alternative to long-term care insurance, potentially providing tax-free money when used for long-term care.
Long-Term Care Insurance: Affordability and Eligibility
Long-term care insurance can be expensive. It’s also generally most cost-effective when purchased before people turn 60. In 2020 the average annual premium for a healthy couple, both 55-years-old, is $3,050, according to the American Association for Long-Term Care Insurance.
Even at these high premiums, insurance companies that offer this type of insurance can reject applicants after probing more deeply into their health histories. Due to these factors, people may need other options for long-term care coverage.
1. Short-Term Care Insurance
Short-term care insurance, also known as convalescent insurance, is a policy that typically offers between $100 to $200 per day of healthcare coverage for one year or less. Since there is no long-term commitment for the insurance companies, the premiums are normally less than traditional long-term care coverage options. The average short-term care premium for a 65-year-old, for example, is $105 a month.
Since the premiums are lower and the coverage is only for a year or less, many applicants who are rejected by traditional long-term-care coverage may be accepted by short-term care insurance. These types of policies have short or no elimination periods, allowing benefits to start immediately for those in need.
With short-term care insurance, benefits normally reset. This means if someone files a claim but then recovers prior to receiving the full benefit, it is possible to file another claim in the future and receive coverage.
While this type of insurance coverage can help those who are rejected for long-term care insurance, the brevity of the insurance coverage makes it only a short-term solution to long-term care coverage. However, Medicare offers post-hospitalization rehab for up to 20 days, making it possible to cover healthcare for slightly over one year if short-term care insurance is used after that 20-day period.
Depending on the policy, only people under the age range of 85 to 89 are typically eligible for short-term care coverage.
2. Critical Care or Critical Illness Insurance
Critical care and critical illness insurance are two types of coverage that offer lump-sum cash payments to people who are diagnosed with cancer, stroke, heart attack, and other serious illnesses. Additionally, Aflac and Guarantee Trust Life Insurance Co., two major carriers, offer critical care and critical illness insurance with daily or monthly benefits for inpatient rehab and continuing care.
Aflac's daily benefits can last up to six months and Guarantee Trust's monthly benefits can last up to two years. Daily and monthly benefits aside, critical care and critical illness insurance are normally less expensive than long-term care insurance. For example, if a 60-year-old woman is looking for critical care or illness insurance, she can receive a $50,000 lump sum payment from a plan for as little as $100 a month.
Even a monthly benefit insurance structure purchased through Guarantee Trust can give someone in need of long-term care up to $2,000 a month for two years and only cost around $110 a month.
People seeking long-term care coverage through critical care or critical illness insurance are not eligible if the issue is from a past diagnosis—coverage is only valid if the injury or illness is recent and previously unknown.
3. Annuities With Long-Term Care Riders
For people who are rejected by traditional long-term care insurance providers, it is possible to take out an annuity with a long-term care rider. Money invested in an annuity with a long-term care rider can be used tax free to pay for long-term care as defined under the contract. This gives a person a stream of monthly payments they can use specifically to pay for the care needed.
Medical underwriting for this type of option is less stringent than traditional long-term care, giving greater freedom in how people use the care benefits. If it turns out long-term care is not needed, it is possible to redeem the accumulated value of the annuity. Upon the passing of the annuity owner, heirs collect on the funds, minus any withdrawals for long-term care.
However, annuities need to be purchased upfront, requiring a large up-front payment in return for monthly cash flow for a defined period. Annuities like these have minimum up-front premiums of $50,000, and the money is normally locked in for five to 10 years.
Those who are in need of long-term care are usually unable to perform basic activities of daily living without assistance, including eating, bathing, walking, and dressing.
4. Deferred Annuities
Long-term care can be preplanned through the use of a deferred fixed annuity. If people take into account that they have a 70% chance of needing long-term care after age 65, it is smart to hedge against future costs by putting money down prior to retirement in return for a promise an insurer will pay monthly sums beginning when a specific age is reached.
Say, for example, a person is 60 years old and decides to purchase a deferred annuity for $100,000. When that person reaches a designated age (72 if the annuity is in a tax-qualified retirement account) they begin receiving distributions. The distribution amount will depend on the type of distribution. Required minimum distributions require calculations from an Internal Revenue Service schedule. Other distributions will typically depend on the contract terms of the annuity.
A deferred annuity differs from an annuity with a long-term care rider because it is not designed exclusively for long-term care. Instead, this option can be used as peace of mind that if long-term care is needed after retirement, there is a monthly cash flow available to pay for the necessary expenses. A deferred annuity does not cover any long-term care needed prior to retirement.
The Bottom Line
A majority of people over age 65 will need long-term care at some point. Because long-term care insurance isn't for everyone, it's prudent to explore other options. Consider the above alternatives when planning ahead to pay the high costs of long-term care, should you need it down the road.