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Long-Term Care Insurance: An Evolved and Essential Part of Your Financial Plan

June 14, 2022 Author: Tess Downing, MBA, CFP®, Complete View Financial


Planning ahead for the care you’ll need when you can no longer care for yourself is one of the most necessary parts of a comprehensive financial plan. It combines two of the most important factors of risk management: ensuring your needs are met in the way you want them to be, and that funding is there to pay for them.

The aging of boomers has changed the landscape for many aspects of financial plan, and long-term care insurance (LTC) has evolved to keep up. Living assistance options have grown and changed for the better, and there are more stages and levels of care. It’s a complex topic, but we’ve broken down the big things you need to know about, to get you started.

Understanding Living Assistance Options

As people age, they may require long-term healthcare and assistance ranging from more independent seniors who need some help at home with basic daily needs such as bathing, dressing and meal preparation to those who need more extensive aid including adult day care and transportation. Some seniors may require more comprehensive, ongoing care in a nursing home, assisted living residence or other facilities.

In fact, 70% of people who reach their 65th birthday depend on some long-term care during their golden years, according to a study from the Urban Institute and the U.S. Department of Health and Human Services.1

Independent Living, Assisted, and Nursing

  1. Independent living: Refers either to a senior who is aging in their home on their own or with family. The arrangement generally works best for an independent older adult who can obtain sufficient help to manage day-to-day living. In-home caregivers can provide basics such as cleaning, meal delivery, and other activities of daily living (ADLs). This arrangement may also necessitate home repairs or modifications to ensure safety, such as installing a wheelchair ramp, bathroom grab bars, or a medical alert. The costs may be relatively low, but the senior may need help from family and friends.
  2. Assisted living: These facilities typically provide a wide range of services. They are best suited for older adults who can live independently but still require a modicum of assistance. These communities are usually staffed 24/7 and provide meals, medication management, bathing, dressing, housekeeping, and transportation. Most facilities feature a group dining area and common areas designated for social and recreational activities. The cost can be high; nationally, the monthly average is $4,500 for a private one bedroom. The fees depend on the level of daily help required and the type of living space.
  3. Nursing home/skilled nursing facility. This choice is appropriate for seniors who require 24-hour supervised care, including meals, activities, and health management. These facilities also are optimal for seniors with severe or debilitating physical or mental illnesses who are not self-sufficient. These facilities have a licensed physician supervisor on staff who monitors each resident’s care and a nurse or other medical professional who is almost always at the facility. Some nursing homes even have specialized services for Alzheimer’s or dementia memory care patients. The costs are quite high for this level of care: nationally, a semi-private room in a nursing home is $7,908 per month on average, and a private room is $9,034 per month.

Long-Term Care Insurance Starts Where Medicare Stops

Unfortunately, Medicare does not reimburse you for long-term care. The one exception is paying for a percentage of skilled care after a hospitalization for an injury or illness. Another option, some Medicare Advantage plans from private insurers, have narrow, supplemental coverage for services such as meal delivery or transportation to doctors’ visits. However, it will not pay for most long-term care.

Basically, long-term care insurance picks up the baton where health insurance, disability, and Medicare end. Long-term care provides coverage for a range of services that are not included in a regular health insurance plan, such as routine bathing and dressing, along with other daily activities.

These policies will also help pay for the expenses due to a chronic medical condition, a disability, or a disorder such as Alzheimer’s disease. Most policies will reimburse you for the care provided in a variety of places, including:

  • Your home.
  • A nursing home.
  • An assisted living facility.
  • An adult daycare center.

Long Term Care Policy Options

  1. Hybrid policies: These plans offer an insurance death benefit on the policy’s unused portion. Most long-term care policies offered now by insurance companies bundle coverage for long-term care with another benefit, such as life insurance or an annuity. These plans are known as hybrid or linked-benefit policies.

The insured customer pays one lump sum or several payments each year with these plans. In return, the insured receives long-term care coverage with features like those featured in traditional policies and some life insurance. The life insurance will be bequeathed to the customer’s heirs if the long-term care benefits go unused. The policy may permit the insured to take back the full payment within the first few years if the person decides they no longer have use for the coverage.

One caveat to keep in mind is that hybrid policies generally cost more than traditional policies. Also, the life insurance payouts tend to be small.

The Details: How Long-Term Care Works

  1. Amount of Coverage: When signing up for long-term coverage, you may have to decide how much coverage you will need in retirement, i.e., a more generous plan with higher limits on the daily and lifetime benefits and fewer limits on the types of care covered. Having someone come to the house a few times a week may cost $4,957, but a semi-private room in a nursing home is $7,908 per month.
  2. Triggering Activity: The first step in obtaining long-term care insurance is filling out an application and providing information about your health. The insurance company may want to view your medical records and interview you. Then you can choose your policy by selecting the amount of coverage you desire. Long-term care policies usually have a ceiling on the amount paid out daily in care, along with the amount that will be paid to you in your lifetime. After the firm issues your policy, you start paying premiums.
  3. Meeting Two out of Six Activities of Daily Living: With most long-term care plans, a specific event must occur before the policy’s benefits begin to kick in. You must have difficulty doing at least two activities of daily living or ADLs on your own. The activities are bathing, caring for incontinence, dressing, eating, toileting (getting on or off the toilet), and transferring (getting in or out of a bed or a chair). If you feel you meet the requirements for care, the insurance company will assess your medical documents and may ask a nurse to evaluate your health. The insurer must agree to your planned care before approving the claim.

The next step is to shell out of pocket for long-term care services for a set amount of time, usually 30, 60, or 90 days before the insurance company starts reimbursing your expenditures for care—known as the “elimination period.” Typically, the policy begins to reimburse after you are eligible for benefits and after receiving paid care for that period, so you have to submit your receipts. Most policies will only pay up to a daily limit for services until you attain the lifetime maximum.

Tax- and Cost-Effective Ways to Pay for It

There are methods to pay premiums tax-free, with funds from a health care savings account—though the option is only available to consumers in certain health plans. Funding a health care savings account saves on taxes while you are earning, allows for the contributions to be invested and grow tax-free, and withdrawals are not taxed.

Another way is to study the tax advantages of switching an existing life insurance policy or annuity for a long-term care policy.

Life Insurance With a Long-Term Care Rider

Instead of long-term care insurance, you can purchase life insurance with a long-term care insurance rider. This policy addition will slightly modify how your life insurance works. Basically, it enables you to use part or all of the policy’s death benefit for long-term care while you’re alive. This rider can help you pay for your long-term care expenses that are not covered by traditional health insurance doesn’t cover, including a home health care worker, along with the cost of a long-term care facility or a nursing home. However, an LTC rider doesn’t reimburse you for expenses covered by health insurance policies such as doctor visits, hospital stays, or prescriptions.

One advantage of the long-term rider is that premiums for a combo policy are locked in. In contrast, the provider can hike premiums annually with a stand-alone long-term care insurance plan.

How Much LTC Do You Need?

About 7.5 million Americans have some form of long-term care insurance, according to the American Association for Long-Term Care Insurance.2 The average annual premium for a 55-year-old couple is $3,050, according to the association’s 2020 price index. For a single 55-year-old man, the average cost is $1,700, while a 55-year-old single female has an average annual premium of $2,650. The initial pool of benefits is $164,000 each and reaches $386,500 by age 85 (a policy’s benefit amount or “pool of money” is calculated by multiplying your daily benefit by the number of days in the benefit period). This helps pay long-term expenses because is expensive and costs are only increasing.

According to the Alzheimer’s Association, the estimated cost for overall care in the final five years of life is $367,000 for people with dementia and $234,000 for those without.3 http://alz.org/media/documents/alzheimers-facts-and-figures_1.pdf?_ga=2.164115510.843081549.1603820988-665695041.1603820988 The average American will pay $172,000 for long-term care.4 Regular health insurance will not reimburse these costs, but long-term care insurance will.

The Earlier You Get It, the More Affordable It Is

It pays to consider purchasing long-term care insurance when planning for retirement. Waiting until you need to buy coverage is not advantageous because you may not qualify for a plan for several reasons.

Either you have a debilitating condition, and the insurance company will not approve your policy, or long-term care insurance companies will not insure applicants older than 75.

Your premium will probably be much higher as well: For example, if you live in New Jersey and wait until age 70 to purchase a policy that reimburses $250 a day for a private room in a nursing home for up to two years, your monthly premium will be 130% higher than someone who purchased it at age 50, according to Genworth’s long-term care cost calculator. Most people who want long-term care insurance should buy it in their mid-50s to mid-60s.

The Bottom Line

Long-term care insurance is crucial to plan for retirement and the golden years, especially with longer life expectancies. A long-term policy can provide significant benefits to help you achieve your financial goals, along with peace of mind knowing that you won’t be placing an undue burden on your family as you age.

  1. Richard W. Johnson. What is the Lifetime Risk of Needing and Receiving Long-term Services and Supports? Urban Institute and U.S. Department of Health and Human Services. April 3, 2019.
  2. Michelle Fox. Many Americans Will Eventually Need Long-Term Care. Here’s How to Pay for it. CNBC. October 17, 2020.
  3. 2020 Alzheimer’s Disease Facts and Figures. Special Report. On the Front Lines: Primary Care Physicians and Alzheimer’s Care in America.
  4. Michelle Fox. Many Americans Will Eventually Need Long-Term Care. Here’s How to Pay for it. CNBC. October 17, 2020.

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