With the progress of medical technology, people are living much longer than ever before. The number of Americans age 65 and older are increasing more rapidly than the rest of the population. The number of those at 85 years or above is growing even faster and they are spending more time in nursing homes and other care facilities. The help from Medicare and Medicaid programs may not sufficient to meet all the health care needs in old ages. A long term care insurance policy provides coverage for this risk. ...Show details

According to some studies, the average lifespan of a person born today will be about 10 years more than the one born in early 1950's; 75 versus 66 for a male and 80 versus 70 for a female. Even with the help of Medicare during the old age, one still has to pay for a portion of the health care services. Since the number of working years has not significantly increased to earn for a longer duration and save for the old age health care expenses, one needs to plan in advance and save more for the care during old age. This increased longevity coupled with the tightening of Medicaid eligibility by Congress is causing people a lot of anxiety. ...Show details

The cost of long term care which includes nursing home care, assisted living, and home health care is rising at a rate close to twice the rate of overall inflation. The current average cost of one year in nursing home runs to about $70,000 while average hourly rate for a home health worker is about $18-$20 per hour, which can add up to $35,000 - $40,000 annually. It is believed that a 65 year old retiring today, may need about $200,000 for the next 10 to 15 years for health care expenses on top of the Social Security and Medicare benefits. Traditional healthcare plans and Medicare generally do not cover these expenses. For example, Medicare supplemental policies issued by private insurers do not provide coverage for extended care. This is why, you need to consider buying a Long Term Care Insurance (LTCI). Additionally, Medicare does not cover most of the services offered by LTCI and Medicaid is somewhat restrictive. Besides, there is also a tax incentive. The tax deductible limits for LTCI premium varies from $270 to $3,400 depending upon the age.

Long term care insurance offers financial support in paying for necessary long term care services such as:

  • Nursing home care (NHC)
  • Assisted Living Communities (ALC) for assistance with activities of daily living defined by HIPAA (Health Insurance Portability and Accountability Act) e.g. bathing, eating, dressing, toileting, transferring/mobility etc.
  • Home Health Care services (HHC)
  • Adult Day Care (ADC)

HIPAA requires the long term care policies to be guaranteed renewable. What it means is that if during the policy, the insured person develops a serious condition, the insurance company can not deny the renewal of the policy. The only exclusions to this policy are the illnesses arising out preexisting conditions, war, attempted suicide, etc. However, it does cover Alzheimer's disease. ...Show details

The other requirement is that it cannot be used as an investment vehicle i.e. it should provide any cash surrender value or other money that can be paid or borrowed. It must also not provide any refunds and the dividends from the policy can only be used to reduce future premiums. Lastly, it cannot be used to pay or reimburse for expenses that would be paid or reimbursed under Medicare.

A typical coverage under a LTCI policy includes: ...Show details

  • It provides a specified amount of money per day for a designated period, subject to a waiting period deductible. Both of these depend on the policy you buy. The maximum amount payable per day varies from company to company and from policy to policy. Some companies offer the daily amount up to $400. The designated period could also vary from 1 through 5 or 6 years, or it could be for life in some long term care policies.
  • Alternatively, one could buy the insurance for a pool of money rather than specifying a time limit, and the benefits are payable from a single lifetime maximum number of dollars applicable.
  • Generally the home care expenses are covered to the maximum of 50-60% of daily care expenses at nursing home.
  • Respite Care pays for providing the family members rest or vacation from their care giving responsibilities.
Depending on the covered benefits, there are 3 basic types of long term care insurance.
  1. Expense Reimbursement This type of long term care insurance pays for the cost of all 4 types of care listed above upto a maximum limit in the policy.
  2. Daily Indemnity This type of long term care insurance limits the specific benefit amount per day.
  3. Cash Benefit If the policy holder of this type is unable to perform two activities of daily living or has a cognitive impairment, the provider will write a monthly check for a given amount and the policy holder can hire anyone to provide help.
Here are some more features related to the benefit duration and benefit amount. ...Show details
  • The amount of benefits per day varies in the range of $50 to $400. You could also opt for an inflation adjustment too.
  • Duration of benefits is another variable to choose from. It could be certain number of years or for the lifetime.
  • Elimination (deductible) period is another parameter. This is the number of days that you pay out of your pocket before the benefits kick in. This is also called as Waiting Period. A 20 day waiting period is a common choice because Medicare's 100% coverage stops on 20th day.
  • Other features include things like facilities only services, home/community care, level of care etc.

This is a tough question and requires a significant evaluation of your personal situation, type of services you might need and what portion of it could be paid by social security related benefits, not to mention the retirement savings you may have earmarked for health care. The Medicare website has a long term care planning tool with a comprehensive questionnaire to give you an idea about the amount of long term care that you are likely to come across. However, to get a rough idea, people in good health with an active lifestyle in their 40's should be planning on spending about $200,000 in long term care during their lifetime. This covers for about 5,000 hours of care with family and friends, about 500 hours of formal care at home by skilled caregivers, and about 600 days of assisted living or nursing care. ...Show details

Individuals who are fortunate enough to have a few million dollar worth of assets, may consider self insuring i.e. instead of buying a long term care insurance, paying on their own when needed. Lately, the most compelling reason to purchase LTCI is shifting from asset protection to concerns over the quality of Medicaid funded home care. A good LTCI policy can help avoid nursing home or even Medicaid, allowing the patients to avail home care as long as possible.

As you may guess, the cost of LTCI really depends on your age, health condition, insurance type and options/features. But here are some estimated premium ranges based on the age and option for inflation adjustment. For a 40 year old without any inflation adjustment, the premium is about $300 per year, and with a 5% inflation provision it could be nearly $700 per year. For a 50 year old person, the corresponding premium amounts could be about $400 and $900 per year respectively. For a 65 year old, they jump to about $1,000 and $1,200 per year respectively.

  • No forfeiture or refund provision on the policy (i.e. if the policy is canceled all the premium paid is gone).
  • It also tends to discourage younger people from buying the policy because unlike a life insurance policy, there is no cash value in the LTC insurance contract. This indirectly creates an adverse selection i.e. the insurance pool ends up with mostly old people who would need the long term care sooner. A smaller pool of people insured results in higher premiums.
  • Under the measure approved by Congress, consumers who purchase say $250,000 worth of LT Care benefits, could shelter up to $250,000 in assets and still be entitled to receive Medicaid if their insurance benefits run out.
  • Buy young, when premiums are less expensive. The age and health could mean annual premiums of more than $12,000. ...Show details
  • Women are much more likely to need Long Term Care insurance. According to the American Association for LTCI (AALTCI), LTC insurers pay $2.50 in benefits for claims from women for every $1 they spend for men. Consider the fact 72% of nursing home patients are women.
  • Avoid lifetime coverage; most consumers need only five years of coverage. According to AALTCI, 5% of all policyholders exhaust four years of benefits while among the five-year policyholders, only 1.5% exhaust their benefits.
  • Buy joint spousal coverage to get 20%-40% discounts on both individual and shared care insurance. The idea being that couples tend to care for each other. But couples should buy enough coverage to avoid the situation of one spouse exhausting all the benefits and leaving the survivor (more likely the wife) without coverage.
  • Buy inflation protection, as the inflation for health care far outpaces the overall inflation and avoid future purchase option (FPO) riders. Insurances with FPO start at lower premium but FPO makes it very expensive later on.
  • Look for Salvage. The Salvage feature (in most good policies) will extend the time it pays benefits if the policyholder hasn't used up every dollar of coverage.
  • The Pension Protection Act of 2006 has paved the way for hybrid insurance products which combine LTCI with annuities or life insurance. In such cases, the law allows for tax free withdrawals from annuities if they are used to pay for LTCI premiums. However, these withdrawals reduce the annuities' cost basis by the amount withdrawn.
  • The new generation of comprehensive LTCI policies offer care in foreign countries too.

Review your potential long term care need, benefits provided by Medicare and your financial situation. If you decide to purchase a long term care insurance, get a few quotes from some of the leading providers in this space. See the list below under options.

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