Long-term care insurance is a specific type of health insurance sold in the U.S., Canada, and the U.K. This insurance product helps people cover the cost of long-term care beyond a predetermined period. Long-term care insurance covers the types of care not covered by traditional medical plans, Medicare, or Medicaid.
Those who are in need of long-term care are not necessarily sick in the way that people may think. Instead, they are usually unable to perform basic activities of daily living. These activities include eating, bathing, walking, and dressing.
While people who need long-term care are thought of as elderly, this is not exclusively so; although roughly 70% of people over the age of 65 require long-term care, about 40% of everyone who receives long-term care is between the ages of 18 and 64.
- 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 periods of 180 to 360 days.
- Critical care or critical illness insurance offers coverage for those that 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.
Even though long-term care covers people with a variety of issues from different age groups and backgrounds, it may not be the best insurance option for some people. Long-term care insurance premiums have been steadily increasing for several years. Even at these higher premiums, insurance companies that offer this type of insurance are rejecting applicants after probing more deeply into their health histories. Due to these factors, people may need other options for long-term care coverage. The following are four alternatives to long-term care insurance that provide good coverage for those in need of long-term care.
Short-Term Care Insurance
Short-term care insurance, also known as convalescent insurance, is a policy that offers between $50 to $300 per day of health care coverage for 180 to 360 days. Since there is no long-term commitment for the insurance companies, the premiums are normally less than traditional long-term care coverage options.
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. Those under the age of 85 are normally eligible for this type of 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 health care for slightly over one year if short-term care insurance is taken out after that 20-day period.
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 Life Insurance Co.'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 female 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 Life Insurance Co. 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.
Unfortunately, people who are seeking long-term care coverage through critical care or critical illness insurance are not able to receive coverage if the issue is from past diagnosis. Rather, coverage is only valid if the injury or illness is recent and previously unknown.
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 long-term care riders. Thanks to the Internal Revenue Service (IRS) changes, 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 he can use specifically to pay for the care he needs.
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, his 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 away for five to 10 years.
Deferred Annuities for after Retirement
Long-term care can be preplanned through the use of a deferred fixed annuity. If people take into account they have a 70% chance of needing long-term care after retirement, 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 from New York Life Insurance. When that person reaches a designated age (72 if the annuity is in a qualified retirement account) then he begins 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 set aside to pay for the necessary expenses. A deferred annuity does not cover any long-term care needed prior to retirement.