Is Long-Term Care Insurance Still a Good Idea?

Long-term care insurance application.

Financial advisors have long advised their clients to consider long-term care insurance. It’s been a solid recommendation. Nursing home care has always been expensive, and in recent years, the cost has become astronomical: annual costs of $100,000 for a private room. Assisted living, which offers a lower level of care than a nursing home, costs in the neighborhood of $45,000. What’s more, those expenses aren’t tax-deductible, and they are not covered by Medicare.

Long-term care insurance covers the cost of a nursing home or assisted living facility. It may also cover in-home care or adult day care if needed. And there’s a pretty good chance that you will need some type of care as you get older. According to the U.S. Department of Health and Human Services (HHS), about 70% of people who are 65 today will need long-term care.

The average length of stay in a nursing home is three years, but 20% of people who need long-term care will need it for more than five years. If you’re a woman, the likelihood of needing long-term care goes up even more, since women tend to live longer than men.

Remember, those statistics are for long-term care only, not assisted living or in-home care. Factor in the need for some level of care, and the chances of your needing to pay for assistance go even higher. In light of this, why wouldn’t you purchase long-term care insurance? Well, there is one reason. Just like long-term care, long-term care insurance has gotten very expensive.

A policy that cost about $1500 per year twenty-five years ago costs around $6500 today. Many people appreciate the value of long-term care insurance, but are hesitant to lay out such a significant sum for insurance they may never need. And unlike some types of insurance that guarantee your premiums will never increase after you purchase the policy, long-term care insurance premiums may go up even after you commit to a policy.

Even so, having long-term care insurance could be in your best interests, depending on your age and health history. There are different types of policies, which offer different advantages. Which type (if any) is right for you?

Traditional and Partnership Long-Term Care Insurance Policies

A traditional long-term care insurance policy operates in a pretty straightforward manner. Many insurers offer you the option of paying your premiums on a monthly, quarterly, or annual basis, as you prefer. Depending on your policy, your benefits may or may not be indexed for inflation. Naturally, the more benefits your policy offers, the higher your premium will be.

Typically, you can begin drawing on your benefits when a doctor establishes that you need help with two or more activities of daily living (ADLs), such as bathing, dressing, eating, toileting, and transferring from a chair or bed.

What happens if your need for help with care outlast your policy benefits? At that point, you might qualify for Medicaid assistance in paying for care—but not until you’ve “spent down” all but $2000 of your assets and have a limited amount of income. At that point, you qualify for government benefits.

By creating an incentive for people to buy long-term care insurance, the hope is that those people won’t need to apply for Medicaid—or at least, won’t need Medicaid benefits as soon or for as long.

In order to stem the growing tide of nursing home residents who did not purchase long-term care insurance, exhausted their own savings, and began to draw Medicaid benefits, states created “partnership” long-term care insurance. The Long Term Care Partnership Program is a public-private partnership between private insurance companies and states, with the goal of reducing dependence on Medicaid. By creating an incentive for people to buy long-term care insurance, the hope is that those people won’t need to apply for Medicaid—or at least, won’t need Medicaid benefits as soon or for as long.

The incentive to purchase partnership long-term care insurance is that you don’t have to “spend down” as much in assets to ultimately qualify for Medicaid if you eventually need it. You are allowed to keep additional assets in the amount of the benefits you can claim under your long-term care insurance policy. For example, if your policy allows $250,000 in benefits, you can keep that same amount in assets after exhausting your policy benefit, and still qualify for Medicaid.

The downside to partnership policies is that they can be very complex, and are often significantly more expensive than traditional policies. Which type of policy is right for you will depend on your circumstances.

A Third Option: “Hybrid” Long-Term Care Policies

There’s also a third type of long-term care insurance policy: the so-called “hybrid” policy. Hybrid policies eliminate one risk that exists with both traditional and partnership policies: if you don’t file a claim, you receive nothing in exchange for your premiums. Given the increasing cost of those policies, that’s a daunting possibility.

With a hybrid policy, if you cancel the policy without having received benefits, you receive a portion of your premiums back. If you die without having filed a claim against the policy, your heirs get that money, so the long-term care insurance functions as life insurance.

The drawback to hybrid policies is that at least initially, premiums may be even higher than for traditional or partnership policies. However, that problem is mitigated by the fact that, over time, money you paid out will either come back to you (in the form of benefits paid out or a rebate) or to your heirs.

The bottom line is that long-term care insurance is probably still a good idea, if a costly one. To make sure you get the best value for your premiums, consult with an experienced elder law attorney before settling on a policy. We invite you to contact our law office to schedule a consultation.

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